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!