“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur “
ARE YOU READY TO SELL OR PURCHASE YOUR LAND OR COMMERCIAL BUILDING IN PHOENIX, SCOTTSDALE, MARICOPA COUNTY AND PINAL COUNTY, ARIZONA, CLICK HERE AND PLEASE CALL ME. 520-975-5207 or email me walterunger@ccim.net
PAUL WINSTANLEY RESIDENTIAL INVESTOR September 12, 2017
Paul Winstanley explains the dilemma the government is currently facing
I, like most people, detest seeing people get ripped off, especially so in the residential property industry. While I am proud to be part of an industry who, through organisations such as the BPF and ULI, genuinely wants to raise standards, promote best practice and help solve our nation’s housing crisis, the market is, admittedly, far from perfect. As hard as the industry tries to protect itself and its reputation, there sadly remain fringe areas of activity which don’t operate with a reasonable balance between producer and consumer. The most recent facet of residential practice to have light shone on the darkest corners has undoubtedly been the world of ground rents. The government has recently launched a consultation with proposals to ban leasehold houses and limit ground rents to a peppercorn on flats as a reaction to unfair practices in this specialist sector which have seen some ground rents be charged at significant annual amounts and onerous rent reviews well in excess of inflation incorporated into leases.
During my 20 year career, ground rents have become big business – and when I say big business, I mean very big, institutional business. Long before build to rent lit the imagination, ground rents were an establishing institutional asset class. And what’s not to like? Solid income, excellent underlying collateral, known review patterns (many tracking the cost of living via RPI) and scalability through portfolio acquisitions and substantial blocks. Post 2007, institutions transformed the sector, owning a greater and greater proportion of freehold blocks across the UK. With more and more interest, values have risen.
The rise in ground rent values is bad though and all developers / investors are just taking advantage, right? Well, objectively, I would argue no, not really. The impact on the ground rent market of the rise of institutional involvement has some key positive benefits for apartment owners, landowners, developers and the housing market in general. To give a bit more detail:
- Apartment owners: So long as ground rent levels are reasonable, having more institutional, professional landlords with reputational risk to manage has to be a positive. Also, RPI linked reviews – whether 25, 15, 10 or 5 yearly, mean the consumer never pays any more in real terms for ground rent than on the day they purchased – rent becomes a known. For longer patterns, consumers even get a ‘discount’ in years where there is no review, as costs rise but rent doesn’t.
- Developers: The increase in the value of ground rents has assisted developers’ Gross Development Value and therefore potential profit (boo hiss I hear). Yet the flipside is that the additional revenue has assisted to make a number of schemes viable (particularly so apartment developments and schemes in the north). In hindsight, it is worth remembering that in many areas outside of London and the South East, the market hasn’t been particularly easy in the last 10 years, especially for new build construction.
- Landowners: The additional GDV attributable to ground rent value has aided landowners in achieving marginally higher land values. In amongst increasing development cost (CIL, DSLT, s.106 etc.) which have put downwards pressure on land prices, GRs have helped stabilise pricing to a degree. This makes it easier for them to make a decision to sell and enable new housing.
- The housing market: From a dispassionate ‘helicopter’ view, it is unhealthy to criticise developers for being profitable or landowners for receiving prices which tempt them to sell. The country needs more housing, needs landowners to sell and needs private developers to develop. Landowners and developers / housebuilders are not philanthropists (and nor should we expect them to be in a profit-led free market). We need to make sure all parties are motivated (albeit appropriately) to keep the wheels turning.
But, as ever, we can have too much of a good thing – and poor practice, even at the fringes, gives the sector a bad name. Should even more substantial ground rents with onerous doubling 5, 10, 15 year review patterns (i.e. above the rate of inflation) have been allowed to have been created? In hindsight, of course not – and I don’t think it is overzealous at all for the government to be seeking a solution to rein in the extreme edges of this market so as to protect long leaseholders from structurally depreciating assets.
The role of a freeholder is to act as custodian over a block and its communal space (or housing estate with communal land or facilities), a role that is vital in my mind for collective long leaseholder enjoyment. This level of responsibility should not be underestimated and does, in my opinion, justify the existence of a ground rent payment to a reasonable upper limit. A percentage of the value of long lease units (subject to minimum ground rent for lower value assets) seems a sensible cap.
And should rent review provisions track above long term RPI? This is very hard to justify since the principle of good ground rent investment is not to make long leaseholders materially worse off in the long term (although leases do obviously shorten over time). Property ownership (whether freehold or leasehold) should be about a finely balanced relationship which will endure over time. This protects capital values and imbues confidence in the market.
So the government is facing a really difficult conundrum. Interfere, and risk – through the law of unintended consequence – all the true benefits that ground rent investment bring to the market (a substantial risk given the marginality of development against the backdrop of the housing crisis, Brexit, stagnant house prices and general market malaise) or let unfair practices in fringe markets continue.
Clearly, there is a balance to be struck. Knowing how seriously all governments I have worked with take their task and role, I am confident we can all work together for a solution which removes the weeds whilst letting the flowers grow. Long leaseholders need protection from bad practice – which reasonable caps or limits would help – but the custodian role of the freeholder, with its responsibilities, should be compensated fairly. Asking anyone to take this role for free is, in my view, unviable.
The alternative is of course the predominance of commonhold – but that is another story. Watch this space for my views and experiences of split title freeholders in next month’s column!
About Paul Winstanley
Paul Winstanley FRICS is a Partner at Allsop. He is an experienced and highly regarded analyst who specialises in nationwide residential portfolio investment valuation and consultancy. He has particular expertise in computer modelling techniques required for large-scale investment valuations and is a recognised authority in the UK on the valuation of residential properties subject to tenancies. He specialises in residential fund valuations, large scale portfolio valuations, build to rent consultancy, ground rents and financial instruments linked to residential assets. Paul regularly speaks at industry events on valuation and other residential investment matters and is also an active member of the BPF Residential Board and Committee, ULI, IPF and is a Fellow of the RICS.
ARE YOU READY TO SELL OR PURCHASE YOUR LAND OR COMMERCIAL BUILDING IN PHOENIX, SCOTTSDALE, MARICOPA COUNTY AND PINAL COUNTY, ARIZONA, CLICK HERE AND PLEASE CALL ME. 520-975-5207 or email me walterunger@ccim.net
FROM ME:
Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also internationalClick here to find out what is a CCIM: https://en.wikipedia.org/wiki/CCIM
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Timeline of Arizona from 900 BC – 2017
ARE YOU READY TO SELL OR PURCHASE YOUR LAND OR COMMERCIAL BUILDING IN PHOENIX, SCOTTSDALE, MARICOPA COUNTY AND PINAL COUNTY, ARIZONA, CLICK HERE AND PLEASE CALL ME. 520-975-5207 or email me walterunger@ccim.net
Apartments: Construction, Planned, Prospective
Interactive Map :: 10+ Unit Apartments For Sale Greater Phoenix AZ
Apartments: Construction, Planned, Prospective
Interactive Map :: 10+ Unit Apartments For Sale Greater Phoenix AZ
WEEKLY APARTMENT CLOSING UPDATE THROUGH September 8, 2017 / Phoenix Arizona Metro.
WEEKLY APARTMENT CLOSING UPDATE THROUGH September 1, 2017 / Phoenix Arizona Metro.
WEEKLY APARTMENT CLOSING UPDATE THROUGH August 25, 2017 / Phoenix Arizona Metro.
WEEKLY APARTMENT CLOSING UPDATE THROUGH August 18, 2017 / Phoenix Arizona Metro.cc
WEEKLY APARTMENT CLOSING UPDATE THROUGH August 11, 2017 / Phoenix Arizona Metro.
WHY PHOENIX? AMAZING!!! POPULATION IN 1950 – 350 K PEOPLE; “NOW 5 MIL”. – “5TH. BIGGEST CITY IN USA”
DOT – LOOP 202 / SOUTH MOUNTAIN FREEWAY / PHOENIX AZ – UNDER CONSTRUCTION
ARIZONA FACTS – YEAR 1848 TO 2013
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
- The average age of the population is 34 years old.
- The health cost index score in this area is 102.1. (100 = national average)
- Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).
PHOENIX PROJECTED AS NUMBER ONE US HOUSING MARKET FOR 2017
LIST OF ECONOMIC DEVELOPMENT PROJECTS IN PINAL COUNTY, REVISED 2-14-17
Reasons to Consider me for Commercial Referrals – I have the Knowledge and Experience
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2016 Official Arizona Visitors Guide
Timeline of Phoenix, Arizona history
Facts of Arizona – year 1848 to 2013
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Kasten Long Commercial Group tracks all advertised apartment communities, including those advertised by other brokerages. The interactive map shows the location of each community (10+ units) and each location is color coded by the size (number of total units).
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
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Walter Unger CCIM
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Kasten Long Commercial Group
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