The Government’s plans to cap ground rents are ‘disproportionate’ and risk ruining the UK’s reputation, a major investor has warned.
Under new proposals, annual ground rents charged to leaseholders by their freeholder will be capped at £250 from 2028.
Labour’s manifesto promised to tackle ‘unregulated and unaffordable ground rent charges’.
However, the institutional investment industry has hit back at the change and wider leasehold reform, as it will reduce firms’ income and the value of their assets.
As many pension funds invest in freehold property, it could also affect savers’ retirement pots.
Investment manager M&G said that the plans would ‘negatively impact savers and companies that have chosen to invest in UK assets’.
M&G is directly exposed to £722million of ground rent assets. If the changes are approved, it said this would lead to a one-off £230million reduction in the Group Solvency II Own Funds and reduce its solvency II ratio by one percentage point.
Leasehold reforms will risk affecting the UK’s reputation as a stable investment, warns M&G
Ground rents have historically been considered a stable investment providing long-term income to individual savers, pension funds and insurance companies.
M&G said it supported plans to strengthen leaseholder protection and tackle ‘egregious’ ground rents, but that ‘the proposed solution is disproportionate, and we will continue to consider our response.’
It also warned that in addition to affecting savers, ‘they would also set a worrying precedent, leading to consequences for the UK’s reputation as a stable investment location.’
Dan Coatsworth, head of markets at AJ Bell said: ’Reform of the ground rent system has been on the cards for some time, and valuations for related investments have been hit.
‘Pension funds and life insurance companies may well have already started reassessing such holdings, and today’s news will exacerbate that thought process.’
M&G will also have to write down the value of some assets and expects a £15million hit to annual profits.
Chief executive Andrea Rossi said: ‘We are disappointed that we have not been able to agree a proportionate solution that works for all parties.’
Leaseholders have welcomed the ground rent cap, but others have also warned of the negative impact on savers.
The Residential Freehold Association said the ground rent cap ‘would seriously damage investor confidence in the UK housing market and send a dangerous and unprecedented signal to the wider institutional investment sector.’
The trade body representing professional freeholders said: ‘Instead of focusing on those reforms which address the issues that leaseholders care most about, the Government’s draft Bill will tear up long-established contracts and property rights, which are pillars of the UK’s investment reputation.’
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