Lucian Cook of Savills presented a good talk at the IRPM conference today.

In his talk Lucian addressed the factors that will affect the residential housing market in coming months. A short list of the key factors appears below:

• Weak consumer confidence as a result of Minority conservative government
• Beware Millennials… Interest rates might go up !
• And if they do? What about the B2L market which is under increasing pressure.
• SDLT – the increases have had an impact on price growth and also reduced transaction volumes.
• Finally, we have never seen such significant government interest in the area – with the various consultations including those affecting the leasehold sector.

These are the factors affecting the market – there is fragile consumer confidence. Predictions are for subdued house price growth.

London has led the way but the North of the country and Wales are very slow in House price growth – there is effectively a two tier market with some outer lying prices being at pre credit crunch levels.

Lucian’s prediction is that Buy to let investment will to shift to the north as a result.

Interest payment are at historic lows. A 1% increase in interest rates would take us to the 30 year average.

So, are we too far off where we were in 2007 in terms of affordability?

House price seems likely to be be outpaced by rental growth.

Income yield will be more important.

14% capital growth over the next 15 years is the current Savills prediction.

Returns have been better on all previous comparable assets. Investment – and as per the report above it looks like higher yields will be possible in the North.

Transaction levels are at around 1.2 m transactions a year. 20% of all transactions are leasehold

B2L transactions are down by 27%.

Possibly a lot more cash transactions 1-3 is cash at the moment.

As interest rates rise we will see less debt funded landlords.

There are less amateur investors

The new kid in town is going to be build to rent – up by 36%

31,000 in the planning applications for build to rent are in the pipeline.

58% of those are in London, but it is likely that the rest of the country will follow.

Political interest is the key – MHCLG – now has a new housing minister in James Brokenshire … Theresa may has made housing policies personal favorite.

Gavin Barwell – is chief of staff having lost his seat and having been a former housing minister is now driving no.10’s policy forward on this.

Housing and leasehold is under the political microscope as never before.

‘Help to buy’ has made a big impact – up 80% on last year.

81% of this funding is going to first time buyers – but most are flats. But if the houses 15% on leaseholds.

But to the big news is that of all new houses 16% were leasehold and this is reflected in the so-called ‘leasehold scandal’ that has had a wider impact in regulatory reform and the consultation.

Almost all of these 16% leasehold houses are concentrated in north west and north Wales only. However it is this injustice that has provoked change.

There is therefore an impetus from government to deliver change. The market will be challenging – that is clear and also that there are likely to be significant changes ahead.

In terms of policy we are likely to see a shift in focus to planning targets aimed at small and medium sized investors and housing associations.

Mark Chick

23.5.2018

Below is a short note on the Court of Appeal decision in this case:

This is the much awaited decision of the Court of Appeal in the final round of the Mundy saga.

The right of appeal was confined to a point of law arising out of the Upper Tribunal (UT) decision. The Court clarified that the applicable test was the ordinary first appeals test. Mr Mundy had succeeded on obtaining permission to appeal on one ground and two more grounds were adjourned for consideration by the full court of appeal.

The Court set out the background to the key issue in Mundy, namely that pinning down relativity for the purposes of determining the amount of marriage value under Schedule 13 to the 1993 Act. It commented that ‘the holy grail would be a method of determining relativity that is both reliable and simple to apply.’ (para 13). The failure of the RICS working party to produce a standardised approach was remarked upon. Interestingly Jonathan Gaunt QC (who appeared for the landlords) chaired that group.

The court recited the historic, known issues with the Gerald Eve Graph. It was prepared using a set of settlements from around 1975 onwards agreed for the Grosvenor Estate.

In particular the Court looked at two of the transactions analysed in Mundy. Flat 3 and Flat 5. The UT had adopted the 2002 Savills enfranchiseable graph and made a deduction of 10% for Act rights.

The ground on which leave to appeal had been granted was the argument that the comparison between the value of the lease in the real world (with rights under the 1993 Act) and the value of the lease without such rights as shown by the Parthenia model was an illegitimate comparison. The legal effect of the Act prevents the valuer (and the UT) from having regard to any leasehold transaction in the real world where the lease attracts rights under the Act.

The court rejected this view. It said that it was a question of fact for the UT and not something that raised a point of law at all.

In addition, it was acceptable for the valuer to take real world items and make a comparison with adjustments. This is an accepted way of carrying out a valuation.

The court also looked at the so-called circularity argument. This is the idea that the Gerald Eve Graph has tainted all other market sales. The Court rejected this argument. The UT had considered the available evidence and had based its decisions on what it had considered the ‘least unreliable’ evidence. The court said that to describe the market as ‘corrupted’ was an overstatement. It was noted that markets sometimes behave irrationally, examples being the tulip mania and the South Sea Bubble. It was noted that ‘the open market may be a false market in that it is based upon false assumptions, but it is still the open market.’ (Lord Hoffman in Electricity Supply Nominees Ltd v London Clubs Ltd [1988] 2 EGLR 152).

The next point considered was the ‘no act world’ – the Court pointed out that the intention of parliament was to construe this narrowly. The flat itself is to be considered to be within premises to which the Act does not apply, but the restriction is not to apply to the world at large. No Act building would be a better short hand.

Finally, the Court concluded that the UT was entitled to state that the Parthenia model should not be used in its current form in any future cases. It is the function of the UT to provide guidance. ‘The UT was well within the scope of its functions in ruling out future use of the Parthenia model in its current form.’ (para 50).

The Court of Appeal recognised that at the invitation of the government the Law Commision is to consider the simplification of valuations under the Act, as the Court said, ‘It may therefore be that the holy grail will one day be found.’

Mark Chick

7.2.2018

Much vaunted by some as being the great white hope of leaseholders everywhere the much awaited decision of the Court of Appeal was handed down last week.

For those in the know the outcome was not a surprise. The Court upheld the decision of the Upper Tribunal rejecting the Parthenia Model and declined to grant leave to appeal.

What does this mean in practical terms? Effectively, ‘we are where we were’ so to speak, in other words, graphs are not the only way of determining relativity and in fact, comparable evidence, including where appropriate an adjusted treatment of the subject flat is to be preferred.

The Savills 2015 enfranchiseable graph is reliable – and a good place to start to them make a ‘no act’ adjustment.

The decision was also helpful in that it clarified the extent of the no-act assumptions. The court of Appeal clarified that we are talking about a no act environment in the building and in reference to the flat in question, but the wider world can be one in which the Act applies.

The decision will be disappointing to those who hoped for a big shift in relativity upwards (which would favour tenants) but the Court was careful to speak twice of the hunt for the ‘holy grail’ of relativity- a simple prescriptive method and it mentioned the inconsistent outcome of the 2009 RICS study on this and also noted that parliament had recommended referring the question of how to make the calculation of the price payable on enfranchisement simpler and ‘fairer’ to the Law Commission.

It is in this perhaps that the greater hope of leaseholders will lie.

No-one could expect the discussion of the outcome of this case to be seen in a vacuum given all of the other things going on in leasehold at the moment – not least Justin Madders MP’s private members’ bill and also the outcomes of the consultation and the proposed reforms to ground rents.

What is certain is that there are now some very interesting times ahead for leasehold this year so, as ever, watch this space.

Mark Chick

Sajid Javid has announced the results of the consultation on ‘Tackling Unfair Practices in the Leasehold Market’

The Communities Secretary has announced these new measures to cut down what he terms ‘unfair and abusive practices within the leasehold system,’ including a ban on leaseholds for almost all new build houses.

This comes as part of the Government’s desire to provide redress for those affected by the issues coming out of the ‘leasehold scandal.’

Changes will also be made so that ground rents will be restricted on new long leases – for both houses and flats.

The Government also says that it will make it make it cheaper and easier for existing leaseholders to buy-out their freehold – although how this will be brought into force is not clear.

These measures follow the recent consultation which has been much commented on and which received more than 6,500 responses.

There are estimated to be around 1.4M leasehold houses in total in England and Wales and hence the desire to be seen to ‘redress the balance’ and stamp out some poor practices on the part of developers involving leaseholds.

It has to be said that ready access to better quality advice might well have prevented some of these ills, – but with developers encouraging buyers to use ‘panel’ solicitors and people being unfamiliar with the potential issues with ‘sharp’ drafting – we have the current situation, which has led to the have led to the government’s approach to solving what has become a consumer issue.

This is very welcome news for buyers of new properties in particular, but the promised changes are stated to have some wider objectives, which may have benefits for other leaseholders.

A short summary of the proposals appears below:

• Legislating to prevent the sale of new build leasehold houses except where necessary such as shared ownership;

• Making certain that ground rents on new long leases – for both houses and flats – are set at zero;

• Working with the Law Commission to support existing leaseholders and make the process of purchasing a freehold or extending a lease much easier, faster and cheaper;

• Providing leaseholders with clear support on the various routes to redress available to them;

• A wider internal review of the support and advice to leaseholders to make sure it is fit for purpose in this new legislative and regulatory environment; and

• Making sure freeholders have equivalent rights to leaseholders to challenge unfair service charges.

Exactly how these will Be brought into force remains to be seen, but 2018 will be a busy year for leasehold and leasehold reforms.