The government’s proposed cap on ground rents for leaseholders could have significant implications for pension funds and investors, industry experts have warned, amid concerns about the impact of retrospective changes to existing property rights.

Responding to the draft Commonhold and Leasehold Reform Bill, which would cap ground rents at £250 a year for 40 years before reducing them to a peppercorn, some commentators argued that the measures risked undermining asset values that underpinned pension scheme investments.

Eversheds Sutherland real estate partner and head of living investment, Balraj Birdi, described the proposals as a “major shift” in how long-term property ownership was structured in England.

He acknowledged that while the reforms would be welcome news for leaseholders facing escalating costs, they would go "far beyond" previous changes.

Birdi warned that the cap would “effectively remove long-standing contractual rights that pension funds and ground rent investors have relied on”, reducing asset values overnight and raising questions about future investment in housing.

Similar concerns were raised by the Association of British Insurers (ABI), which said pension funds required “predictable and stable rule of law” to invest with confidence.

An ABI spokesperson stated the organisation was “deeply concerned” that retrospective changes to existing property rights could undermine confidence in contract certainty, increase the risk premium attached to UK investments and weaken the country’s appeal to global and domestic capital.

The British Property Federation also warned of the potential economic impact, with its director of policy, Danny Pinder, highlighting the billions of pounds invested in large-scale residential and mixed-use developments.

Pinder argued that legislative changes that cut across existing commercial agreements would raise the risk premium for investors at a time when the government was seeking to attract private capital to support growth, adding that the federation wanted to work with policymakers as the bill progressed to "minimise unnecessary economic harm."

Echoing these concerns, M&G stressed that ground rents had been a "core component" of the English and Welsh real estate market for centuries, providing dependable, long-term cash flows relied upon by freeholders to manage properties and cover costs, including fire safety.

The firm warned that ground rents had also become an important asset class for individual savers, charities, pension funds and insurers, and argued that while it supported stronger leaseholder protections, the proposed solution was disproportionate and risked damaging the UK’s reputation as a stable investment location.

M&G group chief executive officer, Andrea Rossi, revealed that the company had not been able to agree on a proportionate solution that worked for all parties, but confirmed that its strong financial position meant it was well placed to absorb the negative impacts, reiterating its profit growth, capital generation and dividend targets.

Meanwhile, Thomas Legal director, Chris Barry, said the reforms were “bad news for pension funds heavily exposed to freeholds”.

Barry acknowledged the changes would reduce costs for leaseholders, potentially making some properties more attractive to buyers and speeding up conveyancing, but warned that pension funds could face “an enormous income hit in some cases”, with knock-on effects for working people indirectly invested through their pensions.

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