What does 2015 have in store for the ground rent industry?
January 5th, 2015
Everyone that was involved in the ground rent market in 2014 will know what a fascinating year it was. A niche market which over the years had been overlooked has now become one of the most competitive asset classes in the property industry with ground rent prices reaching an all-time high, however is this price growth sustainable?
For investors, ground rents offer a high yielding, low risk, fixed income which acts as a hedge against inflation and over the last couple of years this has caught the attention of large institutions and property funds who are keen to invest while interest rates are low. The influx of these large scale investors into what was already an extremely competitive market has had a significant effect on the value of ground rents. Traditionally the ground rent market was dominated by established privately funded investors who understood the true value of ground rents however, over the last couple of years with the rapid injection of interest; ground rent prices have reached record highs as new investors pay over the odds in a bid to gain entry into the market. This market saturation has forced existing investors to re-think their strategy in order to compete with the ever increasing values.
This of course is good news if you are a freeholder or a developer as there is now a lucrative opportunity to ‘cash in’ on the value of ground rents. Many developers are now working hand in hand with ground rent investors to tailor the structure of their leases in order to maximise the value of their freehold assets. In 2015 it is expected that the UK’s largest developers will continue to form partnerships with ground rent investors, as they not only maximise the value of the ground rents but can also forward fund the developers if need be.
With David Cameron’s pre-election pledge to build 100,000 homes for first time buyers , the house building industry is buoyant and with the majority of these 100,000 homes being leasehold, there has never been a better time for developers to work with ground rent investors to capitalise on the market conditions.
Over recent years it has been widely considered that selling ground rents via auction has represented the best method of disposal however, this is not strictly true. Informed Investors have become cautious of purchasing at auction due to the lack of information available prior to auction and are subsequently bidding at reduced levels to incorporate the risk, I expect this trend to continue in 2015 with the best prices being recorded in private treaty transactions.
Whilst 2014 saw substantial growth in the ground rent market, growth at this current level can only sustain itself for so long. With the economic uncertainty surrounding the general election and with ground rent prices being so closely yet inversely linked to interest rates, the ground rent market will inevitably slow down over the course of the next year and prices will plateau. So perhaps 2015 is the year to sell.
Colin Horton BSc (Hons) Asset Manager
