Jeremy McGivern of Mercury Homesearch London advises on the best ways to make a profit when buying leasehold properties in London.
I speak to dozens of people every year who only want to buy apartments in London but will only consider freehold, share of freehold properties, or apartments with 900+ year leases.
This is a massive mistake because it means that you are severely limiting your choice.
It is also founded on a lack of knowledge, i.e. leasehold properties are less desirable because they become worth less as the lease length becomes lower.
But this is not as serious as it first seems and if you understand how leases work then you can actually use this to your advantage as the more astute buyers do. Unfortunately, most people stick their head in the sand rather than finding out the facts.
Don’t worry, I am not going to go into the mechanics of extending a lease, but it is vital that you understand the following. Leases of c. 90 years are extremely valuable and, just as importantly, they do not devalue in the way most people assume.
Here is an example that I had drawn up for one of our clients recently by a leasehold valuation specialist I recommend. Our client was worried about acquiring a property with 159 years on the lease as he was sure that it would be worth far less than a property with an additional 100 years or even 800 years.
This was the surveyor's response:
“The difference between a lease of 159 years and 259 years is minimal because the only difference is in the reversionary interest, assuming no ground rent. The reversionary interest is essentially the value of the lease to the freeholder discounted over the period of the lease, as in 159 years the freeholder regains the property and can sell it or rent it.
To illustrate this here is an example of a flat at £1million:
The reversionary interest of the flat at 159 years is £427
The reversionary interest of the flat at 259 years is £3
From this example, you can see the difference is only £424. As the lease becomes shorter the value to the freeholder increases, but even at 100 years, the reversionary interest is only £7,604 (we have used a discount rate of 5% throughout).
Consequently, if you wanted to ‘buy’ a lease extension you have to compensate the freeholder for the fact he will not regain the lease for 90 years (this is the statutory lease extension period). The reversionary interest value at 159 years is £427 and if you acquire 90 years to get the lease to 249 years the freeholder’s reversionary interest drops to £5, so you would have to compensate them £427-£5=£422!”
As you can see from this, if the reversionary interest to the freeholder is £3 on a 259-year lease, then there is no real additional value to buying a 999-year lease either.
Indeed, buying a 23-year lease can sometimes be a very good investment if you know what you are doing although the risk is greater.
However, the basic purpose of this article is to highlight the fact that leases over 100 years (and over 82 years) are still very good purchases, so do not be deterred from buying an apartment because it is not share of freehold or a 900+ year lease.
For more information about London's property market phone or email Jeremy McGivern of Mercury Homesearch London via the contact details listed below.
Similar to this:
Development potential for rural tourism: leveraging luxury and sustainability
Myanmar as a foreign direct investment destination
Smart city Tokyo and what is ahead