A UK-focused closed ended real estate investment trust that collects ground rents from residential property has revealed that Savills has marked down the value of its portfolio from £110 mln (€127 mln) to £81 mln in the space of a year.
Shares in beleaguered Ground Rents Income Fund plc managed by Schroders fell further on Wednesday as the valuation was revealed for the year to 31 March 2024.
Grounds rents are a feature of the UK residential property market whereby leaseholders are often required to make an annual payment to the holder of the freehold property. It is estimated around 10 mln people in the UK pay a ground rent.
However, the UK government is on a course to limit this feature of UK residential property via regulation.
Ground Rents Income Fund has approximately 19,000 units across 392 assets, of which around 71% is linked to inflation via the Retail Price Index.
The company said Savills' devaluation followed UK Government consultation in November last year regarding restricting the level of ground rent which leaseholders in England and Wales pay for existing residential leases, including the government's stated intention not to pay compensation to freeholders.
‘This consultation represented a significant shift in the Government's approach to leasehold reform and has led to a pause in market activity and negatively impacted values,’ the company said.
‘Since the Government consultation was announced in November 2023, and as previously announced to shareholders, the company has worked with industry peers and advisors to prepare a comprehensive response, which was submitted in line with the consultation timetable on 17 January 2024. The potential outcome of legislative change following the Government consultation remains uncertain, and the company will continue to keep shareholders advised of material developments.’
Just days ago, it emerged leaseholders who pay ground rents will not have to pay more than £250. Even that was a watered-downed proposal with the UK minister in charge pressing for abolition of the system. The government had already abolished ground rents for new leases in the summer of 2022.
The Leasehold and Freehold Reform Bill 2023-24 was introduced to the House of Commons on 27 November 2023. The Bill’s second reading took place on 11 December 2023. It was considered by a Public Bill Committee between 16 January and 1 February 2024. The Bill’s report stage and third reading took place on 27 February 2024. The Bill has now moved to the House of Lords.
The Bill applies to England and Wales and implements commitments in the 2017 housing white paper to “improve consumer choice and fairness in leasehold” and in the Conservative Party Manifesto 2017 to “crack down on unfair practices in leasehold”. It also takes forward many of the leasehold reform recommendations made by the Law Commission in reports of 2020.
The Bill is the second part of a legislative package to reform leasehold law. It follows on from the Leasehold Reform (Ground Rent) Act 2022, which put an end to ground rents for most new residential leasehold properties in England and Wales.
But Ground Rents Income Fund had been struggling anyway.
The company was was established in 2012. Shares peaked in 2018 at 140p but began a downward spiral since then with various factors hitting hard, and have not recovered since then, trading at around 31 pence. On Wednesday they went below 29p.
The battered company had been following a strategy to sell assets in a winding up strategy that shareholders voted for last April. It has suffered from building safety issues as many assets fail to comply with the Building Safety Act 2022 that was brought in after the fatal fire at Greenfell Towers in London in 2017 that claimed 72 lives.
The battered valuation has hampered its ability to sell assets as it had hoped. Schroders was brought in during 2019 to help the company through its headwinds.
In February this year, the company completed the sale of its freehold ground rent assets in Bristol and Exeter, for a combined price of £3.45 mln. Those assets are used as purpose built student accommodation.
Further disposals are planned, with significant work ongoing to improve the liquidity of the underlying portfolio, but uncertainty relating to the leasehold reform means that transactional volumes are low across the ground rent sector.
The disposal proceeds afre meant to be used to repay debt and also act as a cash reserve against possible building safety related costs and expenses.
Group CEO is Peter Harrison, who began his career at Schroders and served as head of investment at Ground Rents Income from 2014. He was formerly with JP Morgan Asset Management as head of global equities and multi asset, and served a global CIO at Deutsche Asset Management among other firms.
