The government’s plans to abolish marriage value and allow leaseholders to extend their lease by 990 years could lead to an average price increase of 9.9% for short leasehold stock, a new study has revealed.

Bayes Business School and Knight Frank’s research contradict the government’s current policies on promoting housing affordability and levelling up, and show that the projected rises in the immediate underlying values of the short leasehold stock in England and Wales are significant at £10.9 bn and uneven across regions.

Based on the assumption all short leaseholds are extended, the researchers suggest that the longer-term effect is a 3.2% price increase nationally in the leasehold market.

In particular, the largest impacts occur in regions with either a large stock of short leaseholds (West Midlands) or leasehold stock in an expensive house price region (South East), or both (London).

Bayes Business School and Knight Frank also found that the financial gains are not confined to owner-occupier lessees as investors in the private-rented sector are often the largest recipients.

Dr James Culley, Partner and Data Science Lead at Knight Frank, said: “The current leasehold enfranchisement process appears complicated and an unnecessary headache for any leaseholder needing to go through it. For those reasons, the government proposals are laudable in their intentions to make the undertaking less complicated and cheaper for the leaseholder.

“Unfortunately, as they stand the proposals also come with large unforeseen consequences regarding affordability and pricing within the leasehold market. For instance, whilst an uplift in value for current leaseholders may be a positive thing, a large number of properties affected are in the private rented sector in low-income areas.”

Jeremy Dharmasena, Partner and Head of Leasehold Reform & Litigation at Knight Frank, said: “The government’s initiative towards simplifying leasehold reform, particularly in the extension of leases from +90 years to 990 years, comes with positives and negatives. The changes will provide tenants with a sense of stability, ensuring certainty and enhancing the marketability of their properties, which can be seen as a positive step in the right direction.

“However, I’d caution against retroactively capping ground rents, as it will have a significant impact on pension funds and existing contracts, due to a loss of rental income. Abolishing marriage value, as highlighted in James Culley’s paper, will inevitably create further challenges including legal concerns and homeowner affordability, whilst reducing premiums, may seem beneficial, will lead to a decrease in Stamp Duty Land Tax revenue.”

As well as Bayes Business School and Knight Frank’s prediction of an immediate increase in the value of short leasehold stock, the findings show that the impact is not the same across regions because of variations in short leasehold stock, lease lengths and house prices.

The expected increase in this stock value is highest at £4.2 bn for London, followed by £2.2 bn in the West Midlands, and £1.3 bn in the South East. For London, this translates to an average price increase of £43,142, compared to £22,297 in the West Midlands and £21,338 in the South East. This value, whilst added to the current value of the leasehold stock, will equal a corresponding loss of value to freeholders.

The study found that, nationally, investors owning short leasehold stock in the private sector will be the primary recipients of any financial gains, followed by middle- and low-income occupier leaseholders. A significant number of high-income occupier leaseholders will also benefit from the reform, particularly in Prime Central London. This has several implications for the Government’s levelling up agenda.

The potential impact of a premium reduction on leasehold prices and the distribution of financial gains is likely to be much due to the pipeline of leases expiring. London, the South East and Eastern, the least affordable regions in England, are projected to have the largest pipeline over the next five to 10 years.

Dr Mark Andrew, Senior Lecturer in the Faculty of Finance at Bayes Business School, said: “Our study has found that the government’s plans to extend lease length and abolish marriage value could lead to a significant rise in the cost of purchasing a leasehold dwelling.

“Since the premium is much reduced by the proposed extension plans, it is logical to expect that a significant number of short leaseholders will extend their lease. Based on the assumption all short leaseholds are extended, the projected cumulative impact on the national leasehold market is a rise in prices by 3.2%.

“Such price rises have implications for the government’s levelling up agenda, as the proposed plans will potentially make housing even more unaffordable.

“Furthermore, the largest beneficiaries of windfall financial gains will be investors and middle-income occupier lessees rather than lower income occupier lessees.

“Finally, a significant proportion of short leasehold investments are in lower income postcodes. The reforms could have implications for housing supply in the private rented sector if investors respond by selling up to realise the windfall gains.”