June, 2023
If you’re looking to invest in property in London, it’s important to understand the difference between leasehold and freehold properties. While both types of properties have their advantages and disadvantages, the decision to invest in one or the other can have significant implications for your investment.
In this article, we’ll take a closer look at the differences between leasehold and freehold properties in London and explore the investment implications of each.
Leasehold vs. Freehold: What’s the Difference?
A leasehold property is one where you own the property for a set period of time, typically between 99 and 125 years. After this period has expired, ownership of the property reverts back to the freeholder. In contrast, a freehold property is one where you own both the property and the land it sits on outright.
While leasehold properties can be more affordable than freehold properties, they also come with a number of restrictions and obligations that can make them less attractive to investors. For example, leaseholders are typically required to pay ground rent and service charges to the freeholder, as well as obtain permission for any major alterations or renovations to the property.
Freehold properties, on the other hand, offer greater flexibility and control over the property. However, they can also be more expensive than leasehold properties and require more maintenance and upkeep.
Investment Implications
When it comes to investing in property in London, there are several factors that you should consider when deciding between leasehold and freehold properties. These include:
Questions for Investors
If you’re looking for a short-term investment, then a leasehold property may be a better option. This is because leasehold properties are generally more affordable upfront and require less maintenance and upkeep. However, if you’re looking for a long-term investment, then a freehold property may be a better option. This is because freehold properties generally hold their value better over time and offer greater control over the property.
2. What is your budget? How much are you willing to spend on maintenance and upkeep?
If you have a limited budget for maintenance and upkeep, then a leasehold property may be a better option. This is because leasehold properties typically require less maintenance and upkeep than freehold properties. However, if you have more money to spend on maintenance and upkeep, then a freehold property may be a better option. This is because freehold properties generally require more maintenance and upkeep than leasehold properties.
3. What is your risk tolerance? Are you comfortable with taking on additional risks associated with owning a leasehold property?
Leasehold properties come with a number of risks that are not present with freehold properties. For example, the value of leasehold properties tends to decrease as the lease term gets shorter. Additionally, leaseholders are typically required to pay ground rent and service charges to the freeholder, as well as obtain permission for any major alterations or renovations to the property. If you’re comfortable taking on these risks, then a leasehold property may be a good option for you. However, if you’re risk-averse, then a freehold property may be a better option.
4. What is your exit strategy? How do you plan on exiting your investment?
If you’re planning on exiting your investment in the short-term, then a leasehold property may be a better option. This is because leasehold properties are generally more affordable upfront and require less maintenance and upkeep. However, if you’re planning on holding onto your investment for the long-term, then a freehold property may be a better option. This is because freehold properties generally hold their value better over time and offer greater control over the property.
A closing note (the future of leaseholds?)
The UK government has launched a consultation seeking views on Law Commission proposals to allow more residential leaseholders in England and Wales to buy the freehold of their property or take over the management of their buildings ¹. The government has also pledged to give leaseholders in England the right to extend their leases by 990 years and end their ground rent payments once and for all ². The Leasehold Reform (Ground Rent) Act 2022 puts an end to ground rents for most new long residential leasehold properties in England and Wales ³. The Act will make home ownership fairer and more transparent for millions of future leaseholders ³.
It is likely that the leasehold structure will change as a result of these reforms. The government's aim is to make home ownership fairer and more transparent for millions of future leaseholders ³. The Leasehold Reform (Ground Rent) Act 2022 will put an end to ground rents for most new long residential leasehold properties in England and Wales ³. This will make it easier for people to buy their own homes and reduce the costs associated with owning a leasehold property.
How this would be impacted going forward, should the government change, is anyone's guess.
How we can help.
Whether you chose leasehold or freehold, The Fountayne Group is able to help you by providing professional block or apartment management services. For more information contact Steve Hughes at steve@thefountaynegroup.co.uk.