There is an intrinsic resistance to purchasing a leasehold property by many investors, in particular Indians. There is a sense of incomplete ownership. Attached to the investment is also a service charge, for which they have no control over. It is something they simply have to pay. It doesn’t feel like you fully own the property. A leasehold property is simply a long rental contract for which you pay in one lump sum upfront, when it expires or is close to expiry you have to pay another lump sum to have it extended. The freehold ground which this flat sits upon does not belong to the leaseholder, therefore there is an annual ground rent charge payable as well as the service charge for renting the ground. This amount however is defined upfront in a lease agreement, so you at least know what you’re getting into.
However, if you are fixated on this point it will be near impossible to invest in Central London, or most flats.
The question arises is are you fixated on purchasing a freehold, or do you wish to maximise your return?
There are of course many blocks where the managing agents simply manipulate the system to milk the service charges as much as they can. There is one notorious freeholder in Central London whose legal bills mount up to a few million a year; who knows the system, and therefore how to manipulate it better than the average leaseholder.
We manage flats on both ends of the scale, where the service charge is in the region of £20K per year, and conversely some flats where the charge is a modest £1,500 per year, which also includes building insurance.
Even a simple conversion flat which is one of two, can have issues. We have had one situation recently were the bottom leaseholder, was refusing to acknowledge he is responsible for the roof repair!
The company who owned the freehold, was an absent freeholder and was not managing the property. It therefore fell to the two leaseholders to sort the issue out. However, the rental agent of one of the flats was a small firm in Harrow, and the leaseholder was abroad. They took this as an opportunity to make money for themselves, despite this being a common problem for leaseholders, which is a frustrating situation to say the least.
A common issue which occurs when a company or an individual decides to buy the freehold of a small building is that they then haven’t got a clue on how to manage the building. There are a couple of buildings in prime London which we manage for our clients, one where there is an absent freeholder. The other where they use the service charge to simply earn money for themselves. The latter one is a very prime building where the values have been decimated by the lack of management of the freehold block. Every so often they request service charge from all the leaseholders. Presumably, the overseas landlords pay, our client hasn’t paid for over a decade, as they cannot answer the same questions asked every time they make a demand on the service charges.
So, the summary is don’t let the tail wag the dog. The objective is to earn the maximum return on your investment, not to buy a freehold. However, this doesn’t mean you should go in blind. The management pack when purchasing should be looked into carefully, both the service charge, and the ground rent.
This aspect of investing must of course be considered, but this should not be the decisive factor.
