The Global Rentier Economy is now on steroids.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Imagine buying a house with a 30-year mortgage only to discover months later that you have to pay rent on the ground upon which it is built. That rent can go up just about as high and as fast as the real owner wants it to. Plus, if you want to make any structural changes to the building you’ve bought but don’t own, you must first seek permission from the owner; if he or she concurs, you then must pay a hefty fee.
Absurd as this arrangement may sound, it is surprisingly common in the United Kingdom today. Banished from most advanced economies, including those with English common law like Australia, North America, or even Scotland, this archaic leasehold arrangement has in recent years wiped out the equity of thousands of people who mistakenly thought they were buying their own home.
When a house is purchased as a leasehold, the buyer, knowingly or not, is really no more than a tenant, albeit one with a tenancy agreement that typically lasts for up to a century. The freehold — the building as well as the land the property occupies — belongs to somebody else, usually the builder that sold the property, or an investment firm.
Leaseholds have been around in the UK for centuries and are commonly used for apartment buildings, where there’s some semblance of common land and building use. It didn’t used to be much of a problem as these annual payments leaseholders have to make to a freeholder were tiny. Sometimes they weren’t even worth collecting.
But in recent years, the terms of the leases have become increasingly onerous, with higher initial rents that then double every 10 to 20 years over the duration of the lease. Clauses like this are having a devastating effect on the equity of new home owners, who within days, weeks or months of buying their property realize they have virtually no chance of ever selling it on. After all, who wants to buy a property that you’ll never really own and on which you’ll have to pay a crippling rent?
This is happening not just with apartments but also new-build houses. In 1996 leaseholds accounted for just 6% of new builds; now they represent 16%. All too often, the new “owners” are not informed by the builder or their solicitor that they will soon be contractually bound to pay annual rents, often well into four figures. The Guardian recently reported on a home built by Taylor Wimpey for which a buyer paid £101,000 in 2010 but which is now unsalable, as ground rents are set to soar to £8,000 per year.
But the builder said it did not own the freehold.
This is a crucial part of the problem. Around 4 million — or 21% — of privately owned properties in England are leaseholds, and a growing number of the freeholds on those properties are owned by global investors, often domiciled in tax havens closely connected to the City of London such as the Cayman Islands or Jersey.
“Two hundred and sixty billion pounds worth of residential and commercial UK property is owned offshore where the ultimate beneficial ownership is hidden,” says Sebastian O’ Kelly, director of the Leasehold Knowledge Partnership. According to research by the satirical and current affairs news magazine Private Eye, the most popular location for registering a British property company offshore, with 22,155 registrations during a ten-year period, was the British Virgin Islands.
A couple of years ago, then British premier David Cameron, the son of a man who made his fortune operating a network of offshore investment funds that boasted of their ability to conceal funds from UK tax authorities, vowed that he would clean up the UK’s property market. This he would accomplish by exposing the use of “anonymous shell companies” – the sort of complex structures that were popularized by his globe-trotting predecessor Tony Blair – to buy up luxury properties, often in London.
Since then, precious little has happened. Now, the UK government is pledging that it will outlaw leaseholds on new-build houses while drastically restricting ground rents for apartments to a “peppercorn” value, thus wiping out their financial appeal for speculative buyers.
It will be a welcome change, though leasehold victims shouldn’t hold their breath. The last time a Tory government vowed to modernize and civilize the UK’s property leasing laws, way back in 1987, the result was the current legislation. More to the point, the current proposals will only affect future sales, according to Communities Secretary Sajid Javid. As such, those already trapped in a leasehold with no hope of escape will have to seek redress from the freeholder, whoever they are and wherever they be. By Don Quijones.
Oh the irony: EU capitals are trying to attract the very institutions that caused some of the worst financial scandals of the last ten years. Read… Did the City of London Just Press the Panic Button on Brexit?