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The UK will cap ground rents paid to freeholders on existing properties in a victory for leaseholders that Sir Keir Starmer hopes will increase affordability in the housing market.
Ministers announced on Tuesday morning that the cap would be set at £250 a year for each property, and change to a “peppercorn” after 40 years. Peppercorns denote a nominal sum that in effect has zero financial value. The measure applies in England and Wales.
The UK prime minister overruled chancellor Rachel Reeves, who had been concerned about the impact on institutional investors, many of which have large residential property portfolios.
The government said it expected “to deliver savings for about 770,000 to 900,000 leaseholders during this parliament”. Some 490,000 to 590,000 of those leaseholders currently paying more than £250 a year are in London and the south. The act could come into effect in late 2028.
The move, which was first reported by the FT, follows a previous Conservative government crackdown on soaring ground rents on new-build properties. Nicknamed “fleeceholds”, there have been examples of ground rents doubling every 10 years.
Steve Reed, housing secretary, had drawn up the proposals, which were first promised in the Labour general election manifesto in 2024. But Reeves, under pressure from investors who fear that the changes will lower the value of their property portfolios, had been pushing back on the plans for weeks.
Some owners have found it difficult to sell their properties or obtain mortgages on them because of increasing ground rents.
The Tories passed a leasehold reform act in 2022 that meant new-build ground rents could only be set at peppercorn rates. Another leasehold act in 2024 gave tenants the right to extend their standard leases to 990 years, again on peppercorn rates.
In its manifesto, Labour promised to go further by applying limits to existing houses and flats to tackle “unregulated and unaffordable” ground rent charges.
The Residential Freehold Association, which represents 10 of the biggest landlords that together own a total of about 1mn leasehold properties, said the ground rent cap “represents a wholly unjustified interference with existing property rights which, if enacted, would seriously damage investor confidence in the UK housing market and send a dangerous and unprecedented signal to the wider institutional investment sector”.
The RFA estimates that pension funds have invested more than £15bn in residential ground rents, which are seen as stable, long-term predictable income. It has said that the total value of investment in UK ground rents exceeds £30bn, and that the government should compensate investors that amount.
The government acknowledged concerns from industry, saying on Tuesday that it chose not to implement an immediate peppercorn cap so as to preserve value.
Institutional investors have also warned that professional landlords would exit the market and leave crucial building safety and maintenance works unfinished.
In a statement, M&G said it was directly exposed to £722mn of ground rent assets and the proposed changes would lead to an estimated £230mn reduction in the value of the holdings.
Andrea Rossi, chief executive of M&G, said although the firm “supports the government’s objective to strengthen leaseholder protection”, it was “disappointed” that it had “not been able to agree a proportionate solution that works for all parties”.
He added: “These changes, if implemented, would negatively impact savers and companies that have chosen to invest in UK assets; they would also set a worrying precedent, leading to consequences for the UK’s reputation as a stable investment location.”
Angela Rayner, the former deputy prime minister and housing secretary, intervened last week urging Starmer to back the proposals. She argued that the government’s own estimates suggested there would only be a minor impact on investors.
In December 2023, the housing ministry said pension funds held less than 1 per cent of assets in residential property.
Ministers had hoped to publish a draft bill implementing the changes in December, but a last-minute Treasury intervention delayed those plans.
Earlier this month, Rayner said investors were getting an annual return for “doing absolutely nothing” and could lift ground rents and service charges regardless of the “devastation” caused to tenants.
“Labour made a promise to leaseholders that we would fix this injustice, but ministers are currently subjected to furious lobbying from wealthy investors trying to water this manifesto commitment down,” she said.