KEY LEARNING POINTS
- Providing land on a leasehold basis can assist lower income private homebuilders who often cannot afford the up-front cost of a freehold plot. Land that is leased can also generate a steady long-term income stream for a council or landowner
- Setting up a Community Land Trust (CLT) to ‘own’ land can help people on lower incomes to build their own affordable homes. A CLT structure enables private homebuilders to avoid having to pay for the up-front cost for the land. CLTs are also a good way of ensuring homes remain affordable in perpetuity
- The housing co-operative model is well-established and can also enable people on lower incomes to access private homebuilding opportunities
For many potential private homebuilders – particularly those on lower incomes – the initial cost of acquiring a plot of land can be a major hurdle. In some parts of the UK the cost of a plot can be between a third and a half of the total development cost of a new home. It can also be difficult to secure finance to fund the up-front purchase of land. The challenge becomes even more acute in larger conurbations, where the land cost can be an even higher proportion of the total development cost.
In Continental Europe a number of councils offer land to private homebuilders on a ‘ground’ or ‘land lease’ basis. Several innovative charitable foundations and trusts that support collective private homebuilding initiatives are also keen advocates of the ground lease model.
CLTs and housing co-operatives are also helpful ownership models to enable people on lower incomes to build their own homes as they can reduce or remove the need to find the up-front capital to purchase land.
In the UK there are currently around 170 CLTs. Between them they have already built 532 homes, and another 718 are in the pipeline. Around 0.6 per cent of the UK housing stock (approximately 35,000 homes) have been provided by housing co-operatives or mutual home ownership societies. This is much lower than in the rest of Europe, where the average is nearer five per cent of all homes. In some countries the proportion built by co-operatives is significantly higher. For example, in Austria 24 per cent of all the new homes completed in 2014 (12,290 units) were delivered by co-operatives.
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This Briefing Note will be revised when the Regulations to support the commencement of the Self-build and Custom Housebuilding Act 2015 and the Government’s Right to Build policy are finalised.
Ground leases have been used in the UK for hundreds of years, and were originally developed for the so-called ‘Landed Estates’.
A ground lease involves a landowner granting a long-term lease on a parcel of land to someone so they can construct a building on it. In return the landowner then receives a steady long-term income flow in the form of a ground rent.
Traditionally organisations like the Crown Estate, the Church Commissioners, and the City of London livery companies have granted leases, and some significant parts of London - such as Regent Street, and large tracts of the financial district - are subject to ground leases. In urban areas most people associate ground leases with offices or commercial buildings, though they are often used to facilitate new housing too.
Following the Second World War there was an increased use of ground leases by local authorities and other public bodies, as a way of helping to rebuild their cities.
Most ground leases in the UK run for 125 years or longer. At the end of the lease the land and any building constructed on it normally reverts to the freeholder; though in many instances the leaseholder will have a right to negotiate an extension.
In Continental Europe a ground lease is seen as a legal right to hold and use someone else’s property. In return the leaseholder pays the owner an annual fee (the ground rent).
Someone who has a ground lease has more rights than someone that simply rents a property (a tenant). For example, a tenant cannot transfer his or her tenancy to someone else without the consent of the owner; whereas a leaseholder can do this. If a leaseholder dies the ground lease can be passed to their successors; they can also let out any property they have built on the land without first seeking approval from the landowner; and they can take a mortgage out too.
NAKED HOUSE GROUND LEASE DEAL ON SITES IN LONDON
London-based community homebuilding group Naked House is currently close to securing a ground lease deal with the London Borough of Enfield. The image here shows plans for a group private homebuilding project of around 12 homes.
The council has up to 15 small to medium sized sites that it is willing to make available to Naked House so that affordable ‘shell finish’ homes can be constructed. The council plans to lease the sites to Naked House. It will estimate the market value of each site once it has secured planning permission, and it then proposes to make each site available on a 60 year lease. The annual ground rent is likely to be five per cent of the market value. Naked House says this approach is really helpful, as it means the organisation does not have to raise huge levels of upfront finance to purchase freehold land. The council likes the approach as ultimately it still retains ownership of the land, it generates an annual income for the council, and it's a way of facilitating new affordable homes
What is ground rent?
In the UK the ground rent is typically set at between five and ten per cent of the income from the land and buildings. The rent is normally increased on a periodic basis (traditionally every five to 21 years) in line with the local market rents for land and buildings. If housing rents fall, the ground rent will usually remain unchanged. In recent years it has become more common for ground rent increases to be linked to the Retail Price Index or Consumer Price Index, and the rent rises are then levied annually.
In parts of Continental Europe the scale of the annual ground rent varies, depending on whether it is linked to the annual inflation rate, or if it is set for a longer period (typically ten or 25 years). In Amsterdam, for example, the current annual index-linked rate used by the city council is 4.69 per cent; the ten-year fixed rate is 6.08 per cent; and the 25 year fixed rate is 6.19 per cent.
What are the advantages of ground leases for council landowners?
There are four main advantages: -
- The council retains ownership of the land, so ultimately it has full control over what can or cannot be built
- The land generates a steady income from the ground rents. For example, the city of Amsterdam now secures a healthy surplus from the ground rents on the land it has leased (even after paying the interest on the money it has borrowed to purchase the land, and all its administrative costs)
- The use of ground leases can help combat land speculation
- When any land is eventually sold the proceeds can be used to fund council initiatives for the benefit of local communities.
What are the advantages of ground leases for private homebuilders?
There are two main advantages of the ground lease model for private homebuilders: -
- Acquiring land via a ground lease significantly reduces the initial ‘up-front’ capital required to fund a project
- In some instances – for example, when a group of people build together via a legal entity like a limited company or a housing co-operative – we understand ground rent payments can be offset against other income for taxation purposes
In most respects a ground lease offers as much security as the freehold ownership of land – so for example, a leaseholder can usually pass on their home to their families, they can sell their home to others, they can get a mortgage and they can usually apply for an extension of the lease.
What happens at the end of a lease?
In the UK, at the end of a lease, the landowner usually takes possession of the land and anything that has been built on it. This is commonly achieved via a reversionary clause, which transfers ownership of everything back to the owner.
In Continental Europe councils that offer ground leases don’t have these clauses. Instead, if the leaseholder doesn't want to take out another lease, the council agrees to pay them the value of any building that has been constructed on the land.
GROUND LEASES IN THE NETHERLANDS
Councils in the Netherlands have traditionally been strong advocates of proactive land management. This is particularly true in urban areas where the government and local councils routinely acquire land, master plan major new developments or regeneration initatives, and then service the land ready to create building plots or parcels of land for housing associations, development companies and private homebuilders. Dutch councils are supportive of this approach as it gives them more control and the flexibility to allocate land to specific users. This approach also enables the councils to profit from the increase in land value.
In the Netherlands the law governing ground leases gives the leaseholder the right to use the land as if they are the owner. However this use can be restricted and councils often apply restrictions that, for example, limit the use of the land to housing. Ground leases have commonly been used by councils across the Netherlands for more than a century.
Amsterdam has led the way, with around 80 per cent of the land within the city’s boundary now owned by the council and leased to more than 250,000 organisations or individuals (all the areas in red on the map are leasehold, and the yellow areas are owned by the Amsterdam municipality). The Hague and Rotterdam also manage significant proportions of their land this way, and many other Dutch cities have made some use of ground leasing.
There is no standard approach across the Netherlands – for example in Amsterdam the normal term of most leases has (until recently) been 50 years, whereas in Rotterdam it is 99 years, and in The Hague the leases are perpetual.
In recent years there has been a political debate in the Netherlands about ground leases, with right wing parties arguing against them. This is leading to some significant changes. For example Amsterdam will be introducing perpetual ground leases in 2016.
With a perpetual ground lease, the payment is specified once only - usually when someone leases a plot of land from the city for the first time. Leaseholders can opt to purchase the ground lease all at once as a lump sum or pay the ground rent annually. Under the new system the rent will only rise in accordance with a new inflationary index (that has yet to be specified). From the summer of 2016 onwards, the new system will apply to all new ground leases and around 110,000 current leaseholders will also be given the opportunity to change over to the new system.
HOW ARE GROUND RENTS CALCULATED?
In the Netherlands there are three different forms of ground rent – annual index linked, or a ground rent that is fixed for either ten or 25 years. Prospective purchasers decide which form they want to adopt.
The advantages and disadvantages of the three forms of ground rent are: -
Annually indexed ground rent – this rent is adjusted annually in line with inflation (minus one per cent). The main advantage is that the ground rent is low at the start (provided inflation/interest rates are low). The main disadvantage is that there is uncertainty about how much the ground rent will increase in the future, since no one can guarantee what future inflation levels will be
Ten year fixed ground rent - this rent is recalculated every ten years and is linked to the council’s actual return on the government loans it has secured to fund the initial land acquisition. The main advantage of this type of ground rent is that the rent level is guaranteed for a ten-year period
Twenty five year fixed ground rent - after 25 years the ground rent is recalculated and the new rent level will take account of inflation (minus one per cent) and the council’s actual return on any secured loans. The main advantage is that the ground rent is guaranteed for a 25-year period. The disadvantage is the rent may increase significantly if interest or inflation rates have risen considerably.
GROUND LEASES ON THE SALE OF BUILDING PLOTS IN GERMANY
Plots are widely provided to private homebuilders on a leasehold (Erbparcht) basis by councils in Germany.
Councils typically retain ownership of the plot and this is locked into the property title and the lease as a charge on the property. The leaseholder can build a home which is in the ownership of the private homebuilder but plot service costs are payable prior to construction. Payments are typically made quarterly and linked to variations in the Consumer Price Index. If the leaseholder does not exercise the option to extend the lease after the specified period, then the landowner (council) will take ownership of the property but must compensate the owner of the house for two-thirds of the current value of the home.
There are many examples nationally but the practice is particularly widespread in Bavaria. Oberschneiding council, for example, is releasing eight rural serviced plots as part of its ‘Klosterbreite’ housing site on the edge of Reissing, north east of Munich, (see below) on a leasehold basis.
Oberschneiding requires an annual lease payment set at four per cent of the fixed land price of the plot (€23/sq m), which equates to €0.92/sq m of plot area. So a 810 sq m plot would cost €745 per year to lease. Leaseholders can build detached homes on the plots for their own occupation as their main home. If the property is then rented out five per cent of the land price is payable, or €1,15/sq m of plot area.
Other councils take similar approaches. Cham Council, also in Bavaria, currently has seven housing sites with plots available on a leasehold basis. It offers the option of 99 year lease on its plots, payable at three per cent per year per sq m. As is conventional in Germany, plots are made available to eligible applicants with a local connection, and the council also offers a child benefit allowance for private homebuilders set at €5,000 per child under 18. Singen council offers leasehold plots at four per cent per year per sq m over 80 years.
German councils frequently cite the following advantages when they make plots available on a leasehold basis: -
- No upfront capital investment necessary for land purchase
- No finance costs for land purchase (including repayment fees or increased costs due to changing interest rates)
- More predictable terms for private homebuilders
- Supports more people to build their own affordable homes
- Ability to buy the land later (some councils have short term leasehold options for plots with a purchase clause included to give the homebuilder some time before they are required to buy the plot)
Offer land to private homebuilders on a leasehold basis
Many private homebuilders – especially those on lower incomes – struggle to raise the finance to purchase land. If land is available on a leasehold basis this can make homebuilding much more viable for them. The annual ground rent can also provide a useful income stream for councils while retaining the property or asset for future disposal.
THE TRIAS FOUNDATION’S LAND LEASING MODEL
Trias is a socially-oriented foundation (or ‘Stiftung’) based in Hattingen, near Dortmund in Germany. It operates nationwide and is primarily involved with self-organised housing projects. Its main objective is to channel commercial expertise towards social aims, by ‘capturing land value’ through purchasing land, and then leasing it on to housing organisations via a 99-year ground lease.
The Foundation was established in 2001 with an initial capital fund of €70,000 raised from around 20 socially-motivated private individuals, each gifting varying amounts. This included a network of finance and development professionals who were interested in seeing more of these projects happen.
The Foundation generates an income from its land investments through an annual ground rent of four per cent of the purchase price. In this way, the Foundation is able to strengthen itself through each project it supports. By 2015 its fund had grown to be worth around €7.5m.
Trias is often able to secure sites at a discount, as landowners like to be associated with its good work supporting worthy housing projects. The Foundation also brokers investment in projects from philanthropic investors, or from other organisations who see its work as being more ethical.
To date it has supported 28 projects (that have collectively provided 330 homes). The organisation is particularly active in Berlin, and in the Ruhr valley where it is based.
For further information on Trias see the Briefing Note on Financial support for private homebuilding.
COMMUNITY LAND TRUSTS
Another way of removing or reducing the ‘cost’ of land is to set up a CLT.
There are now more than 170 CLTs in England and Wales. The largest has more than 1,000 members and, by 2020, these organisations expect to have collectively developed 3,000 new affordable homes.
CLTs are not new - there is a long history of community ownership and management of housing and assets in this country. For example, the original Garden Cities established a community trust to own and manage the assets on behalf of the community.
The CLT model itself is an import from the United States, where it is widely recognised as a method of delivering permanently affordable housing. There are now more than 240 Trusts in the United States, and the largest, the Champlain Housing Trust in Burlington, Vermont, has delivered more than 2,000 homes. There is also an emerging CLT movement in Belgium, France, Italy and Australia.
How can a CLT support private homebuilding?
A CLT is a not-for-profit organisation run by a local community that is usually set up with the objective of enabling more affordable homes. Frequently a Trust is able to acquire land at a low cost (or sometimes land is gifted for free to the CLT by a local authority, parish council, or another sympathetic body). The Trust then usually grants a lease or a licence to local people to occupy the land and build their own low-cost homes.
Councils often play an important role in helping a local community identify and secure a site for a CLT project. For example, in villages and small towns it may be possible to build on a rural exception site - essentially developing land that, as a condition of planning consent, can only be used to provide affordable homes for local people and resale is restricted for the benefit of the community in perpetuity.
Sometimes a CLT can secure land as part of a larger development when a private developer is required to provide a contribution to affordable homes as part of a Section 106 agreement. In urban areas sites may also come forward as part of a regeneration scheme.
A CLT will also usually work with a council to specify who will be eligible for the new homes. Eligibility will vary from community to community but allocation policies need to be fair and defensible, supported locally by community members and usually by the council too.
Once a CLT has secured a site the Trust acts as the ‘custodian’ of the land, and then typically grants a lease or a licence to private homebuilders to occupy a plot so they can build their own affordable property. This means the private homebuilder gets access to land, but doesn’t have to find the upfront cost of the land in the normal way.
This represents a significant saving for private homebuilders. By utilising a CLT structure the private homebuilder only effectively has to fund the ‘bricks and mortar’ to build their property.
If the private homebuilder ever wants to move on and sell their property they can, though, in effect they can only sell the ‘bricks and mortar’ element (as the land is still owned by the CLT). With the land element ‘removed’ the property will be valued at significantly less than equivalent local homes. This ensures the homes built on CLT sites remain more affordable in perpetuity.
COMMUNITY SELF BUILD GROUP - ST JUST IN ROSELAND, CORNWALL
This project was initiated by two local brothers – one a joiner; the other a stone mason – who, on their modest wages, simply couldn’t afford to buy a house in this part of Cornwall. They formed a group with four other locally-born people who were involved in the construction sector to see if they could get a cost effective community private homebuilding project off the ground. The group negotiated with a local farmer to buy a field on the edge of the village. The land was not allocated for housing in the local plan, but with support from the local parish council, the local planning authority was prepared to treat the scheme as an exception site, and granted permission for the six affordable homes.
Local councillors were concerned that the group might build the homes and then sell them on, so they wanted to structure the project so that, if anyone ever moved, the homes could only be sold to someone local who was eligible for affordable housing. The parish council decided therefore to buy the field from the farmer, establish a Community Land Trust (CLT), and form a board of trustees. The CLT then transferred the freehold of the individual plots to each of the six families involved. A management company was formed by the six builders to service the site, provide utilities and secure the future maintenance of the common areas.
The participants were all aged between 30 and 45 and between them they had four children. All six homes were built collectively and each consists of a three-bed property of about 100 sq m.
The parish council paid £30,000 to buy the field from the farmer and set up the CLT. Each of the plots was then transferred to the private homebuilders by the CLT for £1. The construction cost of each home was very low, as the homebuilders did all the physical work themselves. Each home cost about £60,000 – the bulk of this was the cost of the materials. Site servicing costs and professional fees increased the cost to just over £100,000 per home. Typical properties of about the same size in the village are at least double this price. Most of the builders financed the construction work from savings or informal loans from family members. The project was completed in 2013, and is one of more than a dozen similar affordable schemes built in Cornwall where land has been acquired and managed by a CLT.
Financial support for setting up a CLT
The CLT Start-up Fund offers technical assistance and grants to help organisations in the early stages of setting up a CLT. It is managed by the National CLT Network, and initially provides an expert for up to three days to help scope out a project and assess its feasibility. If a community wants to create a Trust it can then apply for a grant of up to £4,000 to assist with obtaining legal advice on setting up a new CLT, to help it secure land, to prepare a business plan, or to cover some technical or community engagement costs. More information is available from the National CLT Network.
The Briefing Note on Government loans and grants to support private homebuilding also provides further information.
The co-operative housing sector in the UK is relatively small in relation to other forms of housing, and is currently responsible for 0.6 per cent of the total housing stock. In other parts of the world a much higher proportion of homes are built and managed by co-operatives – for example about 1.5m properties have been built by co-operatives in the USA, and 24 per cent of all the homes completed in Austria in 2014 were delivered by co-operatives.
In Germany many new housing co-operatives have been set up to co-ordinate the construction and management of new collective private homebuilding projects. At present around 2.2m homes in Germany are run as co-operatives.
Community Land Trusts
Support CLTs in your area - they can help to ensure properties built by private homebuilders remain affordable in perpetuity
How can co-operatives facilitate private homebuilding?
A housing co-operative is, on one level, a group of people who have control over their own housing, without actually owning it personally. The legal structure (technically an Industrial and Provident Society) can be thought of as a separate entity that owns the property, takes out mortgages, and to whom the tenants pay rent. This separate entity, however, can only do what the members of the co-op tell it to.
Housing co-operatives are similar to housing associations, but are managed (either entirely, or mainly) by their residents. If it is a ‘fully mutual’ co-operative only tenants or prospective tenants are allowed to be ‘members’ and control/manage its affairs. Housing co-operatives are registered with the Registrar of Friendly Societies at the Financial Services Authority (FSA).
Once registered as a co-operative, a group of people effectively become their own landlord, with the members collectively making all the decisions – what land to buy, what rent to charge, whether to allow others to join, what colour to paint the communal areas, whether to install low-energy light bulbs or water filters, etc.
By setting up as a housing co-operative a group of people can partly ‘side-step’ the need to personally forward-fund the cost of a parcel of land. Instead the co-operative may qualify for a loan from Co-operative and Community Finance or the Co-operative Loan Fund to purchase land. The Homes and Communities Agency may also be able to support a project through the Affordable Housing Programme.
More information is available from The Confederation of Co-operative Housing (CCH).
Support housing co-operatives in your area - their legal structure allows them to borrow money to purchase land and construct their homes with loans repaid from the rents charged on each of the properties
Further ReadingOur Briefing Note on Other Financial Support offers further insight into the topics discussed in this Briefing Note. The following case studies offer useful insight into the issues discussed in this Briefing Note:
The NaCSBA Research & Development Programme is funded by the Nationwide Foundation and aims to promote the self-build and custom build sector as an affordable route into housing for a greater number of people in the UK.
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