Is Edinburgh the new London?

Private landlords always seem to suggest that the best place for properties is in the north, in towns or cities with good railway and other transport links. Could Edinburgh be one of these?

The average house price in the Scottish capital grew by over ten percent in Dec 2017 compared to the previous year. This means that if you bought a property with the intention of renting it out, not only would you be a further ten percent richer already, but you have the means to let out the property for higher rents. But how is that possible? Well, higher property prices mean that people will find it hard to buy. And this simply will drive up the housing market.

The value of the housing stock across the city grew by £7.5 billion over the same period – more than any other Local Authority district in the UK as a whole.

This figure was for lower-end properties – if you can call it that – that did not exceed two million pounds. The same, however, could not be said for the more expensive properties.

The £2 million-plus market was at its lowest level since 2004. This is quite unsurprising as a ten percent increase would add the price of a one–bed property on to an existing one. The Land and Buildings Transaction tax (LBTT), which would see £198,000 added on to the price of a transaction at this level.

There are certain areas in Edinburgh that rode the increase in prices. The southern hotspots of Grange, Morningside and Merchiston accounted for a total of 377 sales transactions last year.

Faisal Choudhry, head of residential research in Scotland for Savills, said: “Scotland has witnessed its strongest market since 2007, with price growth now outperforming London. Values will continue to rise due to a lack of supply and strong city economies. “In particular, Edinburgh’s residential market profile continues to excel. The lack of supply and strong domestic and international demand for property in the Capital is one of the main reasons behind a rise in prime values in Edinburgh City.”

If you have always thought of investing in property, but are put off by London prices, Edinburgh may be the new place to consider. The number of new build transactions in Edinburgh increased by 30 per cent last year.

The strongest growth in transactions last year was witnessed closer to the city centre, where experts said the redevelopment of the St James centre had attracted people towards the city centre.

This is another sign that city centres, with their transport links, remain attractive places to invest in.

Before you take the plunge in investing in property

Many potential investors are asking whether, given current market conditions, it is the right time to invest in property development. This is because property prices are falling in many parts of the United Kingdom and people are beginning to worry about the ‘credit crunch’ and the effect this will have on their family finances. To be able to answer this question it is important to understand the relationship between the UK economy and the housing market, consider short- and long-term trends and undertake a full assessment of market conditions. It is also important to consider possible benefits for investors of the current market position, especially in terms of the availability of bargain properties such as repossessions and failed buy-to-let investment properties. Once you have considered these issues you can then ask whether it is prudent to invest in property development at this time.

If you are thinking about investing in property development you need to have a thorough understanding of current and future economic and market conditions, and understand how they relate to the housing market. As we have seen in the United States, when the economy expands, lenders tend to extend too much credit and consumers are happy to accept this credit, usually because they have confidence in the housing market. This results in many people taking out larger mortgages than they can realistically afford, and leads to much greater borrowing on credit cards and hire purchase agreements. However, when economic conditions worsen, excessive borrowing means that people are unable to meet their payments, confidence in the housing market slumps, property prices begin to fall and homes are repossessed.

The International Monetary Fund (IMF) believes that the UK housing market will follow the US market, but on a two-year time lag. Experts fear that many homeowners in the United Kingdom who have overstretched their borrowing will suffer as a similar credit crunch begins and inflation rises. Indeed, recent figures indicate that the number of repossessions in the United Kingdom reached 27,100 in 2007, up from 22,400 in 2006 according to the Council of Mortgage Lenders (CML), and experts fear that this figure will rise to more than 45,000 in 2008. This has prompted the UK Government to begin talks with mortgage lenders to try to avert the crises and deal more favourably with homeowners who find themselves in arrears and facing repossession.

Some experts, however, think that the media in particular are over-emphasizing the financial problems being faced by the United Kingdom and that, in doing so, they are making a bad economic situation worse. Financial crises are always big news and the media has had some spectacular financial stories to report recently, including problems with rogue traders and bank collapses. Some people believe that this type of scaremongering could lead to people reducing their spending and saving money, which means that less money is spent and large amounts of money are removed from the economy. This can help to increase the likelihood of a recession and a property market crash.

One view is that buyers are being manipulated by stories in the media that do not reflect reality. This is because the media need to tell a story, but they also need to entertain, which often leads to a concentration of personal stories that do not reflect what is happening in reality. However, despite stories in the media not always reflecting reality, the media do have considerable influence on the public. Indeed, the Royal Institution of Chartered Surveyors (RICS) found in a recent survey that 23 out of 200 surveyors cited media gloom as having an impact on confidence in their local property market. If people are new to a particular market, such as property development, it is understandable that they will take note of the media when making investment decisions. However, you should balance this information with your own research.

The economy in the United Kingdom is suffering, and there is potential for a property market crash, but this does not mean that property development is not still a viable investment opportunity, as long as careful decisions are made backed up by thorough personal research.

If you are thinking about investing in property development, it is important to monitor inflation and interest rates carefully to make the most of your investment. At this present time, the UK inflation rate is well above the Bank of England’s 2 per cent target and above average for the European Union as a whole. Inflation determines the real return on any investment that you make and can have a major impact on the value of your investment in the future. This is of particular importance when viewing property investment as a long-term strategy. Therefore, you need to make sure that if you decide to invest in property development, your plans are not at the mercy of inflation and any future rises that may occur.

In the United Kingdom the Consumer Prices Index (CPI) measures changes in the prices of selected household goods and uses this to determine the rate of inflation. For more information about the CPI and for up-to-date figures, visit www.statistics.gov.uk.

When economic growth is strong more money chases fewer goods and services, which pushes up prices and leads to higher inflation, which is what we have seen over the past few years in the United Kingdom. When this occurs, interest rates are used to keep growth broadly in line with its long-run trend of around 2.5 per cent each year.

This is one of the reasons why interest rates rose in 2006 and 2007. Higher interest rates tend to discourage borrowing and encourage saving, which should slow the economy. Lower rates encourage borrowing and should have the opposite effect. This is one reason why we have seen the recent cuts in interest rates. Movements in interest rates affect the overall level of demand in the economy and so can have a powerful influence on the inflation rate. Although higher inflation rates tend to be good for borrowers and bad for investors, you need to consider this link between inflation and interest rates when making your investment. If you intend to take out a mortgage on a property, the real value of your mortgage could be reduced considerably in times of high inflation, so this could work in your favour, but only if interest rates are favourable. Therefore, if you have cash to invest it may not be prudent to invest all of it in property by buying outright when inflation is high. Instead, you could decide to borrow on the property, or you could look to other types of investment.

When doing this you need to consider the trends and prospects of other types of investment. Other assets, such as shares, can produce better returns than the property market, but this type of investment is much more volatile. In general, bonds and high-interest savings accounts will not provide as good a return as property has done over the last 35 years, but, in general, they are much safer options. If you are interested in other types of investment, you should seek the advice of an independent financial advisor.

To gain a better understanding of the trends and prospects of the housing market it is useful to look at how the market has performed in the past. Two useful house price surveys are produced by the Halifax and the Nationwide Building Society. The Halifax House Price Index was first produced in 1983. It shows that since then house prices have increased by 8 per cent a year, while inflation has increased by 4.5 per cent a year. The Nationwide house price survey began in 1973 and in that time house prices have increased by an average of 9 per cent a year. This compares to an average rate of inflation of 7 per cent a year over the same period. These figures show that house prices have beaten inflation over the last 25–35 years, and that therefore buying property has represented a good long-term investment.

Where investors can lose out is when they view their investment as a short-term strategy during times of market uncertainly. For example, in the five years from 1990 to 1995 house prices fell by around 10 per cent. Short-term investors who spent large amounts of money on properties and then tried to sell them lost out considerably during this time because prices were falling so quickly. However, in the 13 years since 1995 house prices have more than trebled in many parts of the United Kingdom. This means that, during this period, short-term property development strategies did prove to be very lucrative. Even people who bought properties that they sold on without doing any work were able to make a profit as prices were rising so quickly.

Currently we are experiencing another drop in the market. Therefore, there will be less opportunity for short-term developers to make a profit, whereas long-term developers can buy properties cheaply and keep hold of them until prices begin to rise again. If you are only interested in short-term development you must be very careful in your property choices if you are not to lose money on your investment.

Opinion is divided about whether we will experience a property market crash. Experts have predicted that house prices will fall over the next two years anywhere between 5 and 40 per cent. As we have seen above, short- and long-term fluctuations in the housing market have always occurred and it is inevitable that an adjustment to the housing market will take place after the boom of the last decade. House prices have more than trebled in certain parts of the United Kingdom over that time and it is impossible to sustain this type of growth.

In March 2008 the Halifax reported that house prices fell by 2.5 per cent, which is the biggest single drop since the property market crashed in 1992. However, these figures do not reflect the whole story, as this kind of drop is not occurring in all parts of the United Kingdom. Indeed, house prices are still rising in some areas, such as parts of London, the East Midlands and parts of the South West. However, as a potential investor you must be aware of the types of property that are rapidly losing their value and the areas that are dropping at a higher rate than others.

For example, over the past decade buy-to-let investment has become very popular for part-time, amateur investors. Unfortunately, many of these people felt that it would be an easy way to make a large profit without putting in the required amount of work, again fuelled by over-the-top success stories reported in the media. This has led to investors making inappropriate decisions about when, where and what to buy, and many have paid too high a price for a property that is difficult to let. Many of these investors are now getting the jitters, again due to media reports about a property crash. They, along with other buy-to-let investors, are trying to sell their properties. This has led to a number of similar properties appearing on the market at the same time, which has pushed prices down further and made the properties harder to sell. Although this is unfortunate for the people trying to sell, it creates more opportunities for potential buyers who can negotiate considerable price reductions. However, you must understand why the venture has failed in the past and make sure that you don’t make similar mistakes. This involves undertaking a careful assessment of the current and future rental market in the area.

With all the current and potential financial problems we are experiencing in the United Kingdom such as rising inflation, the increasing costs of mortgages and credit, and the rising cost of food and fuel, you are bound to be asking whether the present time is really the time to invest in property development. Investing in property development can no longer be viewed as an easy way to make a quick profit, especially given current market conditions. However, it can be a lucrative and fulfilling venture if you are prepared to put in the required work and conduct all the necessary research. The property market is facing uncertainly over the next few years, but wise investors and full-time professionals who are in for the long haul know that property investment is safe and secure if they treat it with the respect it deserves. As long as you are careful, do your research and make wise decisions, then the time can still be right to invest in property development. Indeed, recent movements in the market, fuelled in part by the media scare stories mentioned above, has meant that there are more bargains available, if you know where to look and know how to compete with other property developers.

At the moment it is a buyer’s market and there are plenty of bargains available. You need to undertake a careful assessment of your present and future finances when you think about investing in property development. It is important to consider these in terms of the amount you can afford to borrow, the interest rates you will have to pay and how these may rise or fall in the future. As the housing market begins to slow down, how will this affect your financial investment, over both the short and the long term? You must make sure that you do not put your family and your home at risk through unwise investment choices.

Short- and long-term trends need to be taken into account when you consider your investment strategy. Although short-term strategies may still work in areas where property prices are rising, they will not work in areas where prices are falling. You must bare this is mind when developing your investment strategy.

In conclusion, to invest successfully in property you must understand the relationship between the UK economy and the housing market, consider short- and long-term trends and undertake a full assessment of market conditions. While present market conditions may not be so favourable for property developers who wish to renovate and refurbish to sell on, there is still plenty of potential for developers who see their investment as a long-term strategy. If you are hoping to invest in property development, there are a number of different strategies that you can adopt, depending on your family circumstances and finances, your skills, the property market and the area in which you live.

Property Investment Appraisal

What exactly does the ‘appraisal’ of property mean? There are two distinct applications in mind. By ‘appraise’ we could mean

a. To fix a price for (an asset);
b. To estimate the amount, or worth or value, of (an asset)

The first of these meanings implies what is known, in the UK, as the valuation process or, in the US, as the appraisal process: the estimation of market value or the prediction of the most likely selling price. There is now widespread acceptance of the international definition of market value set out in the valuation standard of the International Valuation Standards Committee, commonly known as ‘the White Book’ (IVSC, 2005), which is now in its seventh edition.

This definition is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion.

Many nations also feel the need to have their own valuation standards, not least the UK, whose standards [maintained by the Royal Institution of Chartered Surveyors (RICS)] have been through a number of editions of what is commonly referred to as ‘the Red Book’. The latest edition (RICS, 2003) is the fifth and has adopted the aforementioned basic international definition.

There are even attempts to create regional standards (such as the European ‘Blue Book’, published by TEGOVA, The European Group of Valuers of Fixed Assets), and this has created some tension and rivalry between international, regional and national bodies, particularly in Europe.

However, there is now very little disagreement, if any, on the general wording of the market value definition, even if there are some differences in interpretation. These differences will continue to diminish as the property investment market becomes more and more international.

The second of the two meanings, the estimation of worth or value, is not necessarily market-based. Since 1995 this concept has been developed and institutionalised, having entered UK valuation standards in the 1990s as the ‘calculation of worth’, and now defined in the White Book under the term ‘investment value’.

The term ‘calculation of worth’ has now – happily – been dropped by the RICS in favour of the international definition.

The definition is as follows: the value of the property to a particular owner, investor or class of investor, for identified investment objectives. This subjective concept relates specific property to a specified investor, group of investors, or entity with identifiable investment objectives and/or criteria. This definition does appear to fudge a major issue, specifically whether worth or value is to an individual investor or to a group of investors. This has significant implications about how it might be assessed in practice, as the value to an individual and the value to a group may not be the same.

Individual investors are influenced by a set of criteria by which the value of an asset might be assessed. For example, their tax situation, the rate at which they can borrow, how much equity capital they have to spare, what adjoining assets they own and the strengths and weaknesses of their existing investment portfolio are all factors that may lead them to perceive value in a particular property.

Hence, while all investors may agree upon such important variables as the size of the asset being appraised, the cash-flow implications of the lease and the likelihood of achieving planning permission for a change of use, individual investors will always be subject to different motivations.

The distinction between value and worth can be important. Further, it is possible that a group of investors will use the same criteria and share the same characteristics, and would as a result attach a similar value to a property asset. Identifying the possible buyer group is very relevant to appraisal, which is therefore the process of identifying a mixture of objectively measured market variables and the prospective owner’s (or group of owners’) subjective estimates of other relevant factors.

We could use the term ‘appraisal’ to cover the process of estimating either market value (the prediction of the most likely selling price) or investment value (the estimation of worth to an individual or to a group of individuals).

We could therefore encourage the use of the term ‘market valuation’ or ‘valuation for pricing’ for the former, and we would prefer to use ‘investment value’ for the latter. We hope this will not cause too much confusion, but the possibility of confusion unfortunately exists, grounded in the fact that the development of property terminology has been influenced by the isolation of the property world from the securities markets.

There is no doubt regarding the meaning of valuation in the securities markets: it means the estimation of worth.

Pricing is a function that is carried out by buyers, sellers and market makers. The price of a particular company in the stock market is publicly quoted, and large numbers of identical shares in that company can be bought and sold. In property, however, there are no market makers.

The price at which a transaction will take place has to be influenced by an expert opinion – a ‘valuation’ – because there is both insufficient market evidence and insufficient homogeneity of product for traders to be able to fix prices. It is therefore to be expected that at any one time different views of worth will be held by different individuals and these differences will fuel market turnover.

In addition to the main concepts of market value and investment value, ‘sustainable value’ (mortgage lending value), a relatively new phenomenon used in the bank-lending process, has been developed in mainland Europe. It has found some favour, particularly within German banking systems, and the mortgage lending value basis has been adopted, along with market value, within the international banking regulatory process known as Basel.

The concept sustainable value has been subject to intense criticism, as of it does not conform to any recognised economic concept of value and the definition is virtually incomprehensible. The implications for investors can be damaging and may have had some impact on the German open-ended fund crisis of 2005/2006. But it is arguably of no merit and should be abandoned.

The stock (property) selection policies of both major and minor property investors often include an examination of the mismatch between estimates of market value and investment value in order to spot pricing anomalies, and any investor or advisor will benefit from a clear understanding of the difference between the market value of an asset and its worth to an investor or group of investors.

If there is a difference, is this evidence of poor-quality appraisal? It is widely believed that market valuations should primarily be accurate; that is, they should closely predict selling price.

Accuracy may therefore be a relevant and useful test of the quality of a market valuation. Investment valuations, on the other hand, should primarily be rational; they should be professional and expert reflections of a combination of objectively measured market variables and the prospective owner’s subjective estimates.

Building a Property Portfolio? Some considerations

The overall demand for private rented property is now stronger than ever, with the mortgage market restricted for purchasers and house price inflation, particularly in the south east, creating the need for high deposits which people cannot find. Lending has become far more stringent, owing to the onset of the credit crunch and the banks unwillingness to loan money, particularly to property investors. Essentially, accessing finance has become a big issue. The banks favour those with large cash deposits. This is the same in the buy-to-let sector as for domestic mortgages.

However, if finance can be arranged then the yields that one can expect from buy-to-let properties are high by comparison, currently standing at 6%. Of course, this depends on where the property is located. See overleaf for a table indicating the best buy to let areas in the UK. A yield is a portfolio’s annual rental income as a percentage of total value. The reason is that demand for private rented property is high, particularly as first time buyers cannot get a toehold in the market. They are instead turning to the private rental sector. Therefore, investing in property, for the longer term, as opposed to investing for short-term gain, is still a viable option.

Rental returns on buy-to-let are biggest in regional centres like Southampton, Manchester and Nottingham – where one in four homes are now privately rented. Property investors are looking way beyond London and identifying regions where yields are almost three times as high as in the capital. Cities offering the greatest yields – rental income measured against the property cost – include Southampton, Blackpool, Nottingham and Hull.

The latest data on buy-to-let returns, from lender HSBC, also shows the proportion of property in each area already owned by landlords. And in many of the top-yielding areas private landlords already own one in four properties, or more. Southampton, with rental yields of 8.73pc, currently tops the list for rental returns. Manchester, Nottingham, Blackpool and Hull complete the top five locations with the best rental yield at 7.98pc, 7.67pc and 7.47pc respectively.

In all of those areas, except Hull, private landlords already own one in five properties, or more. These areas also offer the characteristics that make for excellent buy-to-let investment, the experts say: relatively low house prices coupled with strong demand for rental property from large student and young professional populations.

The lowest yields were registered in areas such as London where recent price rises have been large and rapid, outpacing the growth in rents. In London in particular, there is a higher proportion of rental property than elsewhere, with 38pc of property in Westminster, for example, being privately rented.

Rental yields
Investment properties which are rented out receive an income from tenants. In order to calculate the gross rental yield the annual rental income is divided by the purchase price of the property (annual rent÷price) × 100 = Gross rental yield).

So, if the property was purchased for £75,000 (total) and the rent received is £450 per month the yield would be: £5400 (annual rent) ÷ £75,000 × 100 which equals an annual yield of 7.2. This is a very respectable return on your capital. Of course if you are a landlord then you will want to factor in the costs of being a landlord, such as maintenance, insurance, loan costs, empty periods etc.

Capital yields
If and when a property increases with time, this is known as capital growth. A simple example is if you buy a property for £75,000 and it increases by 25% there will be a capital appreciation of £18,750. It is a rule of thumb that low price properties might produce a high rental yield and low capital growth and vice-versa, although this is not always the case. Again, each case differs and many factors will play a part but as long as you know what you want then you should be safe with your investment.

If you are interested in averages, landlords receive £678 in rent each month as a national average. However, as always, averages don’t give the whole picture. Landlords in London and the South East collect the highest rents, with £1,079 and £816 respectively. In the west Midland rents average £678 and in East Anglia £676. Approximately 60% of this is spent on borrowing and management costs, leaving landlords with a healthy 40% profit on average.

With buy-to-let mortgage rates so cheap (at the moment) now is the time to expand your portfolio releasing equity and raising deposits to buy new properties. However, when expanding your portfolio it is important to be realistic and ensure that you invest in properties that can be sold on easily, as there may come a time when you need to get your hands on the capital that you have tied up. As with everything, property is a good investment as long as it is managed well.

Too many would-be landlords buy property and neglect it which has a negative impact on the environment and also a negative impact on the investment as a whole. A run down property will decrease in value and the possibility of renting it out for a full market rent will also diminish.

What kind of property is suitable for letting? Obviously there are a number of different markets when it comes to people who rent. There are those who are less affluent, young and single, in need of a sharing situation, but more likely to require more intensive management than older more mature (perhaps professional) people who can afford a higher rent but require more for their money. The type of property you have, its location, its condition, will very much determine the rent levels that you can charge and the clients that you will attract. The type of rent that a landlord might expect to achieve will be around ten per cent of the value of the freehold of the property, (or long leasehold in the case of flats). The eventual profit will be determined by the level of any existing mortgage and other outgoings.

If you are renting a flat it could be that it is in a mansion block or other flatted block and the service charge will need to be added to the rent. When letting a property it is necessary to consider profit after mortgage payments and likely tax bill plus other outgoings such as insurance and agents fees (if any).

Factors involved in residential property valuation

The residential market is imperfect. There is no central market place as a result buyers and sellers are relatively uninformed and even their professional advisors, valuers and agents, only have a limited knowledge of what is available for sale and of what is happening in the market.

Every house, flat, bungalow or other unit of residential accommodation is unique in some respect. Even a pair of semidetached houses differ as between right-hand and left-hand units.

This makes the task of valuation much more difficult than in those markets where there are standard units or products such as stocks, shares, gold, apples and cars. It is further complicated by the fact that there is no acceptable unit of comparison.

Residential property can occasionally be compared on the basis of a price per m2 (or sq ft) of floor space, but issues such as the number of bedrooms, reception rooms, car spaces, circulation space, views and the like can all vary between properties of precisely the same floor area, thus making the total unit of accommodation the only acceptable unit of comparison.

In the past the market had seasonal fluctuations, with greater activity and steadier, possibly rising prices, in spring and early summer, a quiet period in August followed by a mini-spur in September. These seasonal movements are less pronounced today but can still be detected. They can be different in different parts of the country and significantly different between London and popular holiday areas such as the Lake District. They can be affected by significant changes in market forces such as a change in mortgage interest rates.

In addition to seasonal movements, there are cycles of under-supply and over-supply and other movements of a migratory nature such as the desire to balance proximity to work with proximity to the country, and leisure activities with travel time and cost.

In most markets increases in effective demand against a fixed supply will lead to an upward movement in price. The upward movement in price encourages suppliers to produce more and for more suppliers to enter that market. In the residential market the response to such a shift in demand is slow.

It is argued that planning controls impede the supply of land and hence the supply of new houses coming on to the market. Even without such controls there would be a delay caused by the inability of the house-building industry to raise productivity in the short run. It is difficult for the market to respond precisely to match an increase in demand in an area because land becomes available in sizeable chunks and house-builders tend to be market followers, not market creators. The result is that an increase in demand in an area may in time be followed by an over supply.

The valuer’s task is to interpret the state of the market in an area at a point in time. Currently the residential market in the UK is experiencing a period of continuing price growth which is seen to be a reflection of: people living longer, greater single occupation of property, migratory growth in population and increased demand by individuals and investment companies to acquire property on a ‘buy to let basis’. The residential sector has been identified by many, at least in the short term, as a safe place for capital.

Over a number of years changes in consumer preferences occur which can be incorporated in new home design but are more difficult to incorporate in the existing housing stock. These style changes can shift the demand and hence value patterns of an area and must be monitored. The upper end of the market can be particularly vulnerable to these changes of fashion.

Residential property has a fixed location and can only be enjoyed at that location. The enjoyment of a property will depend upon general environmental factors and specific local factors. In the case of owner-occupation, the market reflects the relationship between employment opportunities, communications, general facilities of an area and the environmental factors. Growth in economic activity, more jobs and better pay, tends to cause a rise in values because of the relatively fixed level of supply.

Analysis of the economic opportunities of an area is essential if house buyers are to make sound house purchase decisions. Current concerns of global warming may begin to affect values in areas identified as liable to increased flood risk, coastal areas at risk and greater concerns by discerning buyers for environmentally sound energy efficient homes.

Total home demand has to be translated into effective demand. Effective demand is a function of the national economy and gross national product. The valuer needs to know and to consider what is happening to base indicators such as the level of unemployment, the way employment is changing, current wage levels, and the propensity of the population to save and to invest in their own homes.

The reduction in employment during the early 1990s caused by cutbacks and closures led in some areas to reductions in value both in real terms and in money terms. Money in bricks and mortar will not always be safe.

The housing market and levels of home ownership are closely connected with the availability of credit. Effective desire can only be translated to effective demand through the availability of credit, largely in the form of funds for mortgage loans offered by the building societies, the banks and the insurance companies. Availability of, and the cost of, finance are socioeconomic elements in the market-place, as are the loan terms of such organisations. Lenders are very competitive but changes in lending policy can increase demand. Thus increases in income multipliers or joint income multipliers can increase the number of potential buyers or their potential price range.

Credit for house purchase offered by banks and building societies is dependent upon two factors: the security of the property offered against the loan, and the financial status of the borrower. Very simply, the more one earns the more one can borrow. Thus in a housing market where demand exceeds supply higher salaries and wages will provide purchasers with greater purchasing power: this balanced against the fixed supply leads to higher property prices through competition between buyers. The cost of buying, the interest payable on house purchase loans (mortgages), is outside the control of the banks and building societies in that to maintain a flow of savings to sustain a flow of loans they have to compete in the money market. As a result, mortgage interest rates can rise and fall with the world’s changing view of the British economy and with changes in the Bank of England’s base rate. Many mortgage interest rates are linked formally or informally to base rate. A rise in base rate will generally give rise to an increase in mortgage interest rates and a fall to a fall in interest rates.

The government can influence the economy, finance and hence the marketplace. Governments set minimum standards for new homes, through planning control, building, energy and health regulations. These standards affect costs, which influence developers’ attitudes as to feasibility and influence the volume of new houses in the market-place. EU regulations may also influence market forces. The requirement for a statement as to the energy rating of a property may impact on the value of low rated properties in the same way as energy ratings have led to the disappearance of most non A rated electrical goods.

The government can and has influenced the market in other ways, such as by encouraging public sector tenants to purchase their homes, by imposing rent control and protection on the private rented sector, and by changes in taxation.

The general level of values depends upon the general and area-specific levels of economic activity, community income and wealth; the existing quality and quantity of residential property in an area; the rate of addition to that stock; the point at which a local market happens to be in a particular cycle, and the underlying confidence that people within and outside a particular area have in the economic future and prosperity of that area.

The fixed location of property means that the nature of the neighbourhood and the immediate surrounding properties are crucial factors in terms of buyers’ attitudes and hence in determining a value for a property within the level of values for that area.

A number of factors affect the attitude of buyers. These factors in turn determine whether an area at a point in time is considered to be desirable with rising values, acceptable with stable values, or depressed with falling values. A similar house in each such area could have very different values.

People need property, in this context people need somewhere to live. The size and composition of the population is an indication of the number and possible size of houses required by that population. But the residential market is a local market so it is important to consider the population within a definable area and to know its composition and the extent to which it is changing. Is it an ageing population, is it growing or declining naturally and/ or by migration into or away from the area? Demand characteristics can change both across the country and within local areas. Over recent years developers have become niche operators, seeking to satisfy current demand.

Market analysis identifies the need for, say, starter homes, single-person homes, family homes, luxury homes, retirement homes, student villages. Market analysis will also identify preferences in terms of type of accommodation, design, materials, construction, internal layout and facilities.

The socio-economic composition of a neighbourhood has a major impact on values. A socially deprived or underprivileged area will display that fact in the deterioration of the urban fabric, including the deterioration in physical condition of homes. Deprived means depressed, which signifies low incomes, multiple occupations and low values.

In time, however, a combination of other factors, including the architectural and historic nature of an area, may draw in a wealthier class who will gentrify or reinstate the properties to their original condition and turn such an area into a high value area. Such movements are observable but not always predictable.

In a similar way areas historically noted for housing the wealthier owner-occupier may go into decline as large units or large plots become a financial burden and are sold for conversion and multiple letting. In time the same area may revert back to single family ownership or be substantially redeveloped for low-cost housing or high-value housing, depending upon the level and nature of demand at a point in time when redevelopment is seen as the proper solution for a declining neighbourhood.

The level of vandalism and crime are regrettably indicative of an area’s undesirability. Such changes are partly attitudinal and, like a disease, can spread very rapidly If a community senses that no one cares about an area, in particular the authorities, then the residents cease to care. The result is decline, which is immediately reflected in falling property values.

Active residents’ associations and neighbourhood watch committees show concern by the community for their neighbourhood which can stimulate pride in an area and lead to rising values. The market and market values are obvious reflections of social desirability.

The extremes of social deprivation and social well-being coincide with the extremes of values to be found within a defined geographic area. The residential valuer must be alert to the potential for change and be aware that within broadly defined residential groupings there will be pockets of properties which appear to defy logic but nevertheless maintain high values in areas of low values or areas of low values in an area dominated by high values.

Once a change in an area is signaled the value movement tends to be fairly fast as the new socio-economic group moves in to replace the higher or lower socio-economic group.

These social features are closely related to the income profile of the population and the underlying economic activity of that section of the population that predominates in a given residential area. This is further reflected in market activity. Properties in desirable areas change hands quickly, with a minimum of properties remaining vacant. Properties in declining areas tend to remain on the market for longer periods, tend to become vacant and remain vacant, deteriorate, shift to multiple occupation, and may finally be condemned.

Local politics are a reflection of and a response to these changing social and economic forces. The future of a neighbourhood can be affected by the strength of the community in political terms. Strong representation can produce improvements to schools, health and community services and dictate the attitude of the authorities to that area. Small changes on their own have little impact, but in combination can strengthen a neighbourhood. Thus the attention of the authorities to street cleaning, refuse collection, repair and maintenance of roads and footpaths, street furniture, local schools etc will all become part of the environmental picture which impacts upon buyers’ attitudes and hence on their willingness to commit themselves to a purchase at a particular price.

Physical and environmental factors help to define the neighbourhood. Those areas which are, in physical terms, well maintained and environmentally most attractive are those which are likely to become socially most desirable and hence in time occupied by the economically stronger. This tends to create a community with political strength which becomes protective and perpetuates the status of the area.

Natural and man-made features may provide the boundaries to identifiable residential areas. In some cases there may be a spill-over effect, with values declining gradually from high value areas to low-value areas. In other locations there can be pronounced changes in value either side of a building or road. Roads, particularly motorways and main commuter routes, railways, rivers, lakes, village greens, sports fields, parks may all act as boundaries.

Proximity to one or another may give rise to higher or lower relative values depending upon the desirability or otherwise of being close to such a feature. There are rarely any hard and fast rules about the behavioural attitude of the residential property market. This is because it is often the combination of many factors that creates good or bad in the eyes of the buyer. Some river locations are highly sought after, others far less so given the current increased awareness of flood risk.

Motorways and railways may act as boundaries but the combination of ease of access, visual intrusion and noise, together with other environmental factors, will determine whether they add to, or take away from value.

Soil, subsoil, natural drainage, probability of flooding, micro-climate, topography and aspect are all physical factors which historically may have determined the desirability of building in an area and may still today have an impact on values. Proximity to the right schools, shops, libraries, golf courses, country club, leisure facilities, may add to value.

But on the other hand, proximity to anything likely to cause a nuisance such as factories, sewage-works, football grounds, bingo halls, discotheques or anything that might give rise to rowdyism and general misbehaviour will tend to depress values.

Communications to the rest of the area, surrounding public open space, motorway linkages and places of employment are all very important location factors. So too, is the existing quality of development, road patterns and standard of property maintenance in determining the good, the bad and the indifferent areas of a defined residential market. Nor would it be a complete story without mentioning the importance of pressure groups in the form of conservationists, environmentalists, ecologists and politicians.

All of these have an impact on the market for residential property. Thus at a given point in time these various forces will have combined together to create a particular level and pattern of values in an area. A change in one or more of any of the forces or components mentioned will alter the supply of, or the demand for, all residential property; or for a sector of the market or just for one specific property; the result being an increase in supply or a decrease in demand or a decrease in supply or an increase in demand and a corresponding change in prices and hence in values. It would be rare indeed for only one force to be moving, so interpretation of cause and effect can be very complex. The general economic climate together with the quality of different residential areas creates a pattern of values for a defined market. Within that market the valuer must now consider the site-specific qualities of a house and its physical condition in order to assess its market value.

Increasing numbers of buy to lets by cash buyers

According to Countrywide, nearly two thirds of the properties purchased by landlords were made using cash buyers. This is in contrast to the other third, which were completed using arranged mortgages. The value of properties purchased for the purpose of buy to lets totalled £31.5 billion, and of these, those made using cash payments accounted for a staggering£21.0 billion.

What can we glean from these financial statistics? The first we can deduce from the smaller percentage share is that some landlords are leveraging their existing properties in order to expand their portfolios. The one third of properties purchased are to have been based on buy to let mortgages, where perhaps an existing mortgaged property is remortgaged to release equity that goes towards a second property intended for lease. It reflects the thinking that buy to let is increasingly seen as a better investment than traditional bank investments. And while buyers are aware that a fall in house prices may result again in the future, they seem to be banking on the annual percentage gain to negate that loss.

Slightly more worryingly is the fact that two thirds of purchases were made outright with cash buyers. This highlights the fact that landlords are increasingly getting richer through the housing market, increasing their financial wealth considerably enough to afford such purchases in cash. And it points towards a worrying trend where those who have capital find it easier to accumulate even more capital, while thousands of young buyers are increasingly priced out, and have to resort to one of the following options:

Commuting to work in an area where salaries are higher and living in an area where the house prices are lower; this commute length is likely to increase as the property prices and rents increase;

Paying high rental rates and not being able to save for a deposit towards a house until significantly later in life, or not at all;

Having to make do with a lower standard of rental housing, to be able to afford to live in a particular area;

The figure of two thirds of landlord purchases by cash surpassed the three in five figure in 2011. In 2007, this figure was only two in five. In other words, the proportion of landlords buying in cash has increased by 26% in ten years, from 40% in 2007.

A favourable location for outright buy to lets is in the North of England and Scotland. While that may be good news for home owners, in that it drives house prices up as well as rentals, tellingly, the majority of purchases made are not made by people within the area, but by landlords outside of it. And this cannot be good news for the people who live in these regions. The ideal scenario for most people is to work in an area where salaries are higher, to have an income that outstrips living costs such as rentals or mortgages. But with landlords buying in Northern England and Scotland, turning it into an investment hotspot, the people in the area are trapped in a cycle of comparatively lower salaries and high prices.

Nearly four out of every five homes in the North East of England were bought by outright cash buyers, an astounding figure.

The trend was however reversed in the capital. It can be surmised that property prices in London were too high for many outright cash purchases. Landlords buying in London were the most likely to use a mortgage and London was the only region where statistically, two out of five purchases were cash-backed, well under the national average. Of course, this suggests that in some areas the proportion of outright cash buyers was even higher.

What inferences can we draw from the data? The first is that investment properties are on the rise. For estate agents, a registration with The Ombudsman Property Service is a sign that you work within a framework of established rules and regulations, which may be the distinguishing factor in determining if landlords choose to entrust their properties to you to manage or not.

Young professionals seeking to rent a property should choose one managed by a landlord or agent signed up to The Ombudsman Property Service. This means they are obliged to work to professional standards. You may get the offer of a cheaper rental property from a private landlord, on fairly informal terms, but accepting this may mean you have no means of redress when disputes arise.

The news that rental costs are increasing are not good. What can young professionals do in order to get on the property ladder? No one wants to be committed to a lifetime of renting, if they could help it, because while the ability to move from place to place and lead a bohemian lifestyle may seem idyllic in your twenties, having no roof over your head when you’re in your sixties is hardly a thrilling nomadic existence. And when you can see it coming from the vantage point of your forties and fifties, these thoughts will continually prey on your mind.

A recent report suggested young professionals could give up certain luxuries in order to accumulate enough capital to form a substantial deposit. The deposit for a London property is approaching £80,000 or £90,000. Taking the average annual salary of £26,000, minus rent, the average person would be in their forties by the time they got a foothold on the ladder. The report suggests that a foothold might be more quickly established if nights out, takeaway sandwiches and coffees were forgone, among other expensive luxuries like cigarettes. But it would be difficult to live a life that seems devoid of any entertainment, even though it may be a sacrifice the first time buyer may have to make.

The difficulty with reconciling what one wants from life with what one can afford is one of the difficulties we all have to overcome. Young people have aspirations of how they would like their lives to turn out, and aspirations of lifestyle that they have to manage. But perhaps the notion of doing without luxuries for a few years is a step too far, and those that have their eyes on the gulf between house prices and salaries have decided they cannot bridge the gap, or commit to closing the gap, and have decided to enjoy life and all its luxuries while they can.

The divergence between salaries and house prices has also inadvertently fuelled another trend. This trend is the currency of hope. Young professionals, unfortunately, are increasingly seeking an outlying factor to help them expand their savings enough to meet their dream property. An outlier is an event that lies outside traditional empirical data, what might call a one-off that defies evidence. An example of an outlier might be a lottery windfall. There is no past evidence that points towards a future win, but when it happens suddenly a sudden restructuring of the status quo results. Another outlier is perhaps an inheritance; a sudden unexpected sum of money would help make up the gap for a deposit. First time buyers are relying also on parental help. But there is also an increasing number of young professionals who are turning towards reality television, singing competitions and all kinds of sudden fame in the hope that it would suddenly lift them out of the existing situation, and provide some additional financial boost into their dream one.

Are others relying on property as their hope?

What the terms for different property buyers can reveal to you

There are many terms familiar to estate agents that come to categorise buyers. Take for example the term “first time buyers”. The term itself may or may not be accurate in the impression it conjures – it makes us think of a young couple with no children, but of course it could equally apply to a couple with children, or an older couple, or a single person who has been renting for a long time. So the term does not really paint a useful picture of the individual’s age. What it does, though, is give some inkling of the buyer’s position. A first time buyer has no previous property to sell and is hence chain free, and has that benefit on his side.

If an individual is identified as a “next- time buyer” in estate agent parlance that means he is hoping to move up, but the purchase of the next property may be complicated if there is an existing property still on the market. A next-time buyer, however, is likelier to have a more sizeable deposit, if the sale of the existing property goes to plan. Next-time buyers will be seeking properties with more rooms, possibly garden space, better schools around, because the move may be motivated by children, or the thought of preparing the nest for the arrival of children.

Empty nesters is a term that is increasingly common in usage. What is an empty nester? It is a couple whose children have left the family home and are hence looking to buy a different property – with a difference. While most people keep buying bigger properties as they go along, empty nesters are looking to downsize.

It makes sense to downsize in your latter years. Firstly, it frees up equity that can be used towards retirement. Secondly, the upkeep of a smaller property is easier, rather than one with lots of rooms. Thirdly, it means you do not need expend finances to keep heating unused rooms, just to keep away mould.

The government feels that empty nesters could make up one in five home buyers, and it would help relieve the housing crises if existing family homes were sold to growing families while grown families reverted to smaller homes. The empty nesters market is expected to grow and for that reason financial products catering to the elderly may be in greater demand; estate agents may also find it beneficial to have a greater number of downsizing properties on their books.

Valuing a residential property

The first aspects of a property to be considered by the layman are usually the location, the appearance and the physical condition. Where it is, what it looks like, its accommodation, services and condition are all important factors when considering value, but for the valuer the most important initial considerations are legal. This is because it is the legal title to property with all its encumbrances that is bought and sold. ‘Every man’s home is his castle’summarises most people’s aspirations for home ownership, to own something which is theirs and which is defensible against all-comers. In practice, the main line of defence is title; if the title is in any way limited, then solid walls may not prove to be the best defence.

In England and Wales the titles to be valued will either be freehold or leasehold, but it is also possible to own no more than an interest for life in a particular parcel of land.

The legal term for a freehold interest is fee simple absolute in possession. This just means that the whole estate, or any part of the estate can be transferred by the freeholder at any time, either during the owner’s lifetime or on their death by will or under the rules of intestacy.

A freeholder has the right to occupy and use the land, create lesser interests out of it such as long leases, periodic tenancies and life interests. In theory the Crown owns all of the land so a freehold interest is the closest that a person can come to absolute ownership of land. This is illustrated by the fact that if a freeholder dies without making a will and without any living relatives to inherit the land, then the title will revert to the Crown.

Although the freeholder has in theory absolute rights over the land, this ownership is secondary to other common law and statutory rights.

Civil and military aircraft can enter the airspace over a land, subject to limitations.

All gold, silver and coal belongs to the Crown who grant licences for the excavation of such minerals. Items of historic interest that are found on land may also belong to the Crown, but compensation can be paid to the owner of the land on which the items are discovered.

Ponds and lakes that fall within the boundary can be owned, but control and use of larger water bodies is strictly regulated. Ownership of river frontages may or may not include fishing rights and the riparian rights of others must be respected. Two other title restrictions require special mention.

First, on transfer of title it is possible for an owner to impose on a purchaser specific restrictions known as restrictive covenants. From a valuation viewpoint the most important are those covenants that restrict the use: development may be restricted to a specific number of houses, occupation restricted to family occupation, use may be restricted to public open space, and there may be restrictions on parking of caravans. These restrictions may remain enforceable for many years, but the right to enforce may be lost if the person enjoying the benefit of that covenant has permitted breaches to occur.

In other cases it may be necessary to apply to the Lands Tribunal under the Law of Property Act 1925 for the restrictions to be modified or discharged. Clearly such restrictions may hold values up where they help to maintain an environment, but they may also depress values where they prevent the land being used to its highest and best use in today’s market. Thus land suitable for building 10 houses may be restricted to one house by a covenant created in the 19th century.

Second, it was possible for a freehold title to be made subject to a rent charge. This entitled a party with no legal interest in the land to receive an annual payment. The Rent Charges Act 1977 prohibits the creation of new rent charges and contains provisions for the gradual extinguishment or voluntary redemption of such charges as currently exist (see Appendix IA). Rent charges will cease to exist from July 2037.

A freeholder is subject to the general laws of the land when it comes to determining what he can do with his land. There aver various acts that determine use of the land, such as the Town and Country Planning Acts, Environmental Protection Acts and the Building Regulations.

The police may also override the freeholder’s legal position to enter the property to enforce the law.

Freehold property also includes improvements to the land such as buildings and those things so attached to the land that they are held to be fixtures and so part of the land. The distinction between personal property that is movable and personal property which has been so attached to the land as to become a fixture is often very fine and has given rise to a branch of law known as the law of fixtures. In the residential market it has become the custom for questionable items to be listed as being included or excluded from the sale. The valuer will take the obvious fixtures into account in a valuation as they may add to the value of the property. Clearly an item such as a central heating boiler is a fixture, but it is less certain whether a built-in hob and oven in a kitchen will be classed as a fixture. When in doubt the valuer should make it clear in a valuation report which items have been included in the valuation of the property.

Until the passing of the Leasehold Reform Act in 1967 it was quite common practice for residential property to be sold on a leasehold basis and in the case of blocks of flats, house conversions, sheltered housing or whenever property management may be a major issue it is still common practice to sell on a leasehold basis with a share in a specifically created management company which owns the freehold.

In September 2004 a new form of land tenure was introduced. It is called commonhold and it is a way of owning freehold land. It is intended to be an alternative to the leasehold system for multi-owned, interdependent properties with common parts. Its most obvious application is to blocks of flats and apartments, but it could be used for developments of houses or mixed use buildings where there are communal areas. A commonhold association must be formed as a private company limited by guarantee. This owns the common parts and all individual unit owners are members of the association and so they can control those common parts. The individual unit owners will own the freehold of their unit.

A leasehold estate in property will be for a definite term. This is an important value factor.

Traditionally such leases in residential property have been for terms of 99 years or 999 years. But in addition to the covenant to pay rent there may be covenants to repair, insure, pay local taxes, to clean, to maintain grounds and gardens or to meet some or all such costs through a service charge levied by the landlord. In most instances these covenants impose a contractual requirement on the leaseholder to undertake everything that one would expect from a reasonable freehold owner of residential property. However, a freeholder has a choice of whether or not to paint the property, to clean the windows and to maintain the garden; the leaseholder will not necessarily have that choice. Further, the leaseholder may be specifically restricted in terms of the use and enjoyment of the property. There may be covenants about music after 11.30 pm, about hanging out clothes to dry, about erecting TV and radio aerials and satellite dishes and a requirement to obtain the freeholder’s consent for all alterations and for any sale (assignment) or further sub-leasing of the property. A licence fee may have to be paid to the freeholder whenever the freeholder’s consent is required under the terms of the lease.

A valuer when instructed to prepare a valuation must be satisfied by inspection and enquiry as to the nature of the title to be valued and any restrictions or other encumbrances that attach to the title. However, because of the time-limits imposed upon the valuer by many clients, valuations are often prepared on the basis of an unencumbered freehold or on the basis of minimum information relating to a lease. A valuer is valuing on the basis of information supplied and will naturally reserve the right to review that valuation if that information is subsequently found to be incorrect. Nevertheless valuers are trained to observe and should therefore account for the obvious, such as signposted public footpaths, unmade and un-adopted roads, shared driveways and shared areas in blocks of flats.

Some things to consider before investing in commercial property

Commercial property is property that is not designed or used for residential purposes, or for purposes associated with the primary industries such as agriculture and mining. The three main types of commercial property are offices (single office buildings and business parks), retail (individual shops, shopping centres, retail warehouses and supermarkets) and industrial (factories, warehouses and distribution centres). The remaining properties are those used for leisure (pubs, restaurants and hotels), sport, education, the provision of utilities and healthcare (hospitals and nursing homes).

The value of UK commercial property at the end of 2015 was £ 871 billion, about 10% of national net wealth, almost half of the value of government bonds and 40 % of the UK’s stock market. Within that figure of £ 871 billion, retail accounted for £ 360 billion (41%), offices £ 270 billion (31%), industrial £ 168 billion (19%) and other commercial properties £ 73 billion (9%). Commercial property activities employed almost 1 million people and the sector contributed about £ 68 billion (4.1%) to the UK’s Gross Value Added. (The figures quoted are taken from the Property Data Report 2016, produced by eight members of the Property Industry Alliance.) Although the residential property sector is over six times larger (by value) than the commercial property sector, the vast majority of residential properties are owned by private householders, so there is not as much scope for residential property investment as there is for commercial property investment.

About 45% of all commercial property is bought by owner-occupiers, who need land and buildings from which to conduct their business. Some of these occupiers want to buy a freehold or long leasehold interest in the property because they need certainty and complete freedom to deal with the property as the business dictates, but it does means that a lot of capital is tied up in the building. Other occupiers prefer to take a so-called ‘rack rent lease ’, where the occupation cost is paid, usually quarterly, over the period of the lease by way of rent, rather than all at the beginning. In recent years, particularly among the large food retailers, there has been a move away from freehold ownership through ‘sale and leaseback’, where the freehold interest in the property is sold to an investor (thus releasing capital for use in the operating part of the business) and the occupier takes a rack rent lease instead.

The other 55% of all commercial property is bought by investors, who buy property to let out to others so that they can make an income from the rent and a profit from any increase in the capital value of the property. Although the capital value of commercial property suffered a considerable fall in 2007 and 2008, it remains popular with certain types of investor because the average lease offers an income stream of about seven years. So the income return (or ‘yield’) from commercial property is reasonable (13.1% for directly-owned commercial property in 2015, better than UK equities and bonds). Over the 44 years prior to 2015, commercial property produced annualised returns of almost 10.9%, somewhere between gilts and equities (see page 18 of the Property Data Report 2016). Commercial property has tended not to track the performance of gilts and equities particularly closely, so including some commercial property in your investment portfolio is a way of diversifying and spreading risk. Moreover, by good management of tenants and/ or refurbishment of a tired building, a property investor may be able to enhance the value of the asset, even in times of economic downturn.

There are two ways to invest in commercial property, directly or indirectly. Direct property investment involves buying a property in your own name or in the name of a group company, letting it out, taking responsibility for managing it and selling it on when you no longer require it. Although you can employ surveyors and other professionals to assist you, this still uses up a considerable amount of time and effort. It also means that you have to find a considerable amount of cash, or a loan, or a combination of both, to fund the initial purchase. An alternative way is to buy shares or units in a company that invests in a range of commercial and residential property, such as a real estate investment trust (REIT) or an offshore property unit trust (PUT). These indirect property investment vehicles offer opportunities for smaller levels of investment, some taxation advantages, less management responsibility and, arguably, greater flexibility as it may be easier to trade units than to sell a property. However, indirect property investment is beyond the scope of this book.

So who invests in commercial property? According to figures in the Property Data Report 2016, overseas investors held the largest block of directly-owned investment property (28%); UK insurance companies and pension funds held 17%; UK collective investment schemes held 16%; UK REITs and listed property companies held 15%; and UK private property companies held 12%. Traditional estates and charities and private investors held 5% and 3% respectively. Some of the units in the UK collective investment schemes are bought by private individuals, but many are bought by the investors who also buy property directly. For example, in 2015 the UK insurance companies and pension funds invested £ 84 billion (2.8% of their total investments) in directly owned UK property, £ 57 billion (1.9%) in collective investment schemes and £ 37 billion (1.2%) in UK and overseas property company shares.

Buying a leasehold property? Understanding a bit more about leases

A lease is a legal term used in property law to describe a particular type of property contract. In many respects, a lease is similar to any other type of contract: it is a written agreement between two or more parties recording the basis on which the bargain between those parties has been agreed. Although, in practice, leaseholders may feel that they did not have much bargaining power when agreeing the terms of their lease, in law, the lease is a written record between the two parties reflecting their agreed relationship.

Usually, the leaseholder will pay the freeholder a sum of money (“consideration”) in return for the exclusive use of the property. This will be in addition to any other sums that the leaseholder may have to pay during the course of the lease. Such charges (of which service-charges – see Chapter 3 – are one example) will themselves be governed by the terms of the lease.

The usual parties to a lease are the lessee (the leaseholder) and the Lessor (commonly the “freeholder” or “landlord”). In some cases, tripartite leases include the management company too. These are commonly set up by the developer in new-build blocks of flats as a method of securing the management for as long as possible. If the lessees are dissatisfied with the management of the building, tripartite leases make it more difficult to change the management. Ultimately, this would be a lengthy and potentially costly process. Finally, there are some buildings where a separate lease has been granted to the managing agents of the common parts alone. Situations such as these can also cause difficulties for the leaseholders when faced with unsatisfactory management. The solution in such circumstances is for the lessees to exercise their collective right of enfranchisement and purchase the freehold. Recent guidance from the Leasehold Advisory Service (LEASE) advises purchasers of flats to investigate the parties to the lease in advance and to consider with care any purchase involving a tripartite lease or a building where the common parts have a separate lease.

In simple terms, a lease grants the leaseholder the right to enjoy the exclusive use of a property for a fixed period of time, and it is conditional upon the observance of certain express and implied terms contained within the lease itself. Leases come in different lengths commonly 99 years, 125 years or nowadays even 999 years (sometimes also referred to as “virtual freehold”). When the time prescribed by the lease expires, the ownership of the property reverts back to the freeholder (called “freehold reversion”). The freeholder is then at liberty to deal with the property as he pleases (which may include the grant of a new lease). The freeholder is sometimes referred to as having a “reversionary interest” in the property, meaning the freeholder’s right to take possession of the property on expiry of the lease term. A reversionary interest is a valuable asset that can be traded.

If your lease is about to expire, do not panic! It is unlikely you will be automatically turfed out into the street. Rather, the law (which is primarily contained in Schedule 10 to the Local Government and Housing Act 1989) will usually provide you with an opportunity to remain in occupation as a tenant. More commonly, however, you will have the opportunity to negotiate the purchase of your freehold or negotiate an extension of your lease. Although the law will afford you some protection in these circumstances, it is a technical and specialised area and it is advisable to seek professional legal advice.

At this point, it is extremely important to highlight a common misconception often held by leaseholders: a lease does not provide the leaseholder with entire ownership of the property. If there is only one piece of information you remember from reading this book, then that should be it. All a leaseholder “owns’ is the lease contract; the property is ultimately owned by the freeholder. Shocking as it may seem, a leaseholder only has the right to use the property that is the subject of the lease for the period of time prescribed in the lease. The length of the lease can be spotted when reading the lease by the words “to hold” which will be located nearby. Think of a lease as a form of “virtual ownership” of the property for a period defined by the lease length, accompanied by legal protection of the leaseholder’s enjoyment of the use of the property during the lease term.

Leases are valuable assets. They can be bought and sold for significant sums of money. Despite the imperfections of the leasehold system, some leases are worth millions of pounds. When a lease is sold, it will need to be “assigned” to the new owner.