How Labour’s leasehold flat reforms may deal a blow to pension funds

A Labour plan to cut costs for leasehold flat owners could deal a blow to pension funds, City firms have warned.

Prime Minister Keir Starmer yesterday proposed that ground rents paid by owners of leasehold properties, mostly flats, will be capped at £250 per year.

Under leasehold, homeowners buy the right to live in their home for a certain number of years. A freeholder owns the building and the land it is built on and can collect ground rent in exchange for the leaseholder’s ‘right’ to occupy it.

These freeholders include pension funds, many of which use some of savers’ money to invest in property, which is seen as low risk. Rents provide a return on that investment, which helps fund pension schemes. Campaigners have called for an overhaul of ground rents, due to some leases that involved costs ratcheting up substantially over time.

However, the investment industry has hit back, saying Labour’s plans go too far.

One of Britain’s biggest investment management firms sounded a warning over the proposals yesterday. M&G, which runs Prudential pensions, said it owns £722million of affected property and the plans would ‘negatively impact savers and companies that have chosen to invest in UK assets’. It said it would take a £230million hit if Labour’s ground rent plans were made law.

Although pension funds make a variety of investments, experts say some pensioners could lose out as a result of the change.

Jennifer Crichton, senior wealth planner at Killik & Co, said for some pension funds ‘the long-established ground rents system may have been relied upon too heavily’.

Prime Minister Keir Starmer proposed that ground rents paid by owners of leasehold properties, mostly flats, will be capped at £250 per year

Under leasehold, homeowners buy the right to live in their home for a certain number of years

She added: ‘For most pension members, the impact is expected to be minimal, although members of schemes with a higher exposure could be the unintended losers of what is a welcome change for many leaseholders.’

The ground rent change could also make the UK a less attractive prospect to foreign investors, investment industry leaders said.

This is because it would involve ripping up established contracts between property-owning freehold companies and leaseholders, in order to cut annual charges down to £250.

The Association of British Insurers said the change could set a ‘troubling precedent’ for government interference in business and was ‘likely to raise the risk premium that investors attach to the UK’.

Ground rents cost leaseholders an average of £304 per year according to the English Housing Survey for 2023 to 2024, the most recent data available.

However, they can cost significantly more in expensive locations such as London and some leases also include clauses which double the ground rent every decade.

This has left some leasehold owners struggling to sell properties and campaigners have long called for changes to help them.