Leaseholds in the Residential Market

As seen by freeholders and investors

April 20, 2020

When housing is in short supply, and its affordability and the steady rise in housebuilding costs are coming under scrutiny, attention is returning to a market previously dominated by church and municipal institutions and foundations. There is a shortage of building land, particularly in the conurbations.

Against the background of the current market environment, city, town and municipal authorities are increasingly having recourse to the leaseholds as an instrument of housing policy. When allocating municipal housing land, many councils are discussing prioritising the granting of leaseholds over sales, and some now have specific plans to do so. At the same time, property companies and institutional investors are increasing their presence as freeholders or leaseholders.

We answer the following questions:

What durations are marketable? What ground rents are normal in the market; and what are the criteria for setting them?

Little detail is known as to whether general market trends have led to a change in the terms of leaseholds contracts, and in particular what investors think of them.

This study of leaseholds in the German residential market is intended to increase transparency. After a brief introduction and a description of the value drivers for leaseholds, we shall present two perspectives on them. One is the viewpoint of freeholders whom we asked in a survey to tell us about what they see as the usual contract parameters.

Selected private-sector investors and residential developers tell about their perspectives as freeholders on the subject of leaseholds. We shall highlight the pros and cons when deciding on an investment and provide an answer to the question of what constitutes an attractive leaseholds contract from an investor’s perspective.

This study has been produced in collaboration between the German Leaseholds Association (Deutscher Erbbaurechtsverband e. V.) and JLL.