Developers moving away from leasehold flats as market has 'collapsed'

High service charges and fears over being held liable for cladding and maintenance issues have dampened demand across London, reports Kumail Jaffer, Local Democracy Reporter

New housing under construction at the second phase of Meridian Water in Edmonton

London’s developers are being forced to move away from “struggling” leasehold flats towards alternative tenures to unlock a stagnant market, the London Assembly has been told.

Luke Ward, director for housing, economy and placemaking at Barnet Council, said that despite high demand for housing, leasehold properties remained unaffordable for first-time buyers.

He claimed that developers were now looking towards alternative models such as build-to-rent, co-living, student accommodation or sheltered housing for older people.

More than a third of housing stock in London – 36.1% – is leasehold, meaning property owners are liable to pay service charges imposed by freeholders. Londoners are more than twice as likely as the rest of the country to be leaseholders.

Last year Mayor of London Sir Sadiq Khan was told to take action to cap service charges after a London Assembly housing committee report found the median household in the capital was paying out £3,912 every year. City Hall has subsequently launched a probe into how service charges on leasehold properties are affecting the housing crisis.

On a national basis, ministers have pledged to scrap the leasehold system for new developments, but housing minister Matthew Pennycook said it would not happen “overnight” and could take years.

In the interim, Ward said, developers are “meeting demand” by moving away from leasehold.

“Five, six years ago, or before the pandemic, there would have been lots of leasehold flats, and maybe some affordable,” he told the London Assembly’s housing committee.

“Now, they’d be five or six different tenures, all with different kinds of models around them. So, we’re seeing it move from leasehold to that.

“We’re seeing a block, say, with 50 flats that maybe three or four years ago would have been a leasehold block. Now, actually, that might be a build-to-rent block, or a co-living block, or something for older people, a student accommodation, or affordable housing.”

Buyers are put off, he said, by both the cost of new flats – London’s overall median house price-to-earnings affordability ratio is the highest in the country at more than ten – and “reputational challenges”, such as fears over cladding works and service charge levels.

“This would make potential buyers think twice,” he concluded.

Harry Scoffin, founder of campaign group Free Leaseholders, told the Local Democracy Reporting Service (LDRS): “Developers and councils are admitting the leasehold flat market has collapsed and is warping housebuilding priorities.

“What we heard at the housing committee confirms that, instead of building flats where homeowners control their own service charges through a share-of-freehold arrangement, we’re just getting more ‘own nothing, be happy’ build-to-rent milking parlours.

“When homeownership is being denied by developers and government policy, and Londoners are forced to endure the uncertainty and extortionate charges of being tenants or glorified renters as leaseholders, it is no wonder families are leaving the capital in droves.

“Now that developers are getting hit in the pocket as spiralling service charges dampen buyer demand, as suggested by a new GLA investigation, Khan has even more reason to act. Only when buyer confidence has returned to flats with leasehold ended for good will we see developers dropping homes you can’t own.”

On the supply side, Neil Davis, development delivery director at L&Q, said building costs “have never been higher” due to a mix of external factors – foreign wars driving up material costs and interest rates – and a domestic labour shortage.

Struggles with both supply and demand have meant that London is not and has not been building enough homes for years – including affordable properties.

Up until March under the mayor’s Affordable Homes Programme 2021-26, Khan delivered 14,335 affordable housing starts against an already reduced target of 17,800. It is unlikely he will reach the goal, despite the government granting City Hall a six-month extension to the deadline.

It comes as new analysis from the Centre for Cities think tank found that the government’s Social and Affordable Housing Programme (SAHP) will leave London further behind other areas on tackling housing waiting lists by 2036.

The analysis, released this week, says the current SAHP will ensure that by 2036, the number of affordable homes built will be equivalent to just 18% of London’s priority waiting list, compared with 46% in rural areas and 26% in England’s established mayoral areas.

The think tank argued that the fund should be much more targeted towards cities, where the most housing need is concentrated. This could be achieved in the capital by increasing London’s share of the existing funding pot by around a third.

Ant Breach, director of policy and research at Centre for Cities, said: “The government needs to make sure that money is targeted where housing need is greatest and where new homes can do most to support economic growth.

“Based on current plans, rural areas will build enough new social homes to make more than twice as much progress against their priority waiting lists as London. That doesn’t make sense when London has the most severe housing pressure in the country.”

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