Industry experts have sounded the alarm over the Government’s draft Commonhold and Leasehold Reform Bill, warning that proposed cap on ground rents could deliver a significant blow to pension funds and institutional investors.

The legislation would impose a maximum annual ground rent of £250 for a period of 40 years, after which charges would fall to a nominal peppercorn amount.

Critics argue these retrospective alterations to existing property rights threaten to destabilise asset values that currently underpin pension scheme portfolios.

The proposed measures have drawn sharp criticism from legal advisers, insurers and property industry bodies, who contend that rewriting established contractual arrangements could deter both domestic and international capital from the UK market.

Balraj Birdi, real estate partner and head of living investment at Eversheds Sutherland, characterised the proposals as representing a fundamental transformation in how property ownership operates in England over the long term.

While acknowledging that leaseholders burdened by rising costs would welcome the reforms, he cautioned that the changes extended considerably further than previous legislative interventions.

The cap would “effectively remove long-standing contractual rights that pension funds and ground rent investors have relied on”, Birdi warned, adding that asset values would be diminished immediately.

Mr Birdi raised concerns about what the reforms might mean for future investment in the housing sector, suggesting that overnight reductions in asset valuations could prompt investors to reconsider their commitment to residential property in England.

The Association of British Insurers expressed deep unease about the proposed changes, emphasising that pension funds depend on predictable and stable legal frameworks to deploy capital with confidence.

A spokesperson for the ABI stated the organisation was “deeply concerned” that retrospective amendments to property rights could erode trust in contractual certainty, push up risk premiums on UK investments, and diminish Britain’s attractiveness to both global and domestic investors.

The British Property Federation echoed these warnings, with director of policy Danny Pinder pointing to the billions of pounds already committed to large-scale residential and mixed-use schemes.

Mf Pinder argued that legislation cutting across existing commercial agreements would elevate investor risk premiums precisely when ministers were attempting to draw private capital into the economy, adding that the federation sought to collaborate with policymakers to “minimise unnecessary economic harm.”

M&G highlighted that ground rents had served as a fundamental element of the property market in England and Wales for centuries, delivering reliable long-term income streams that freeholders used to maintain buildings and fund essential work such as fire safety improvements.

The firm noted that ground rents had evolved into a significant asset class for individual savers, charitable organisations, pension schemes and insurance companies.

Furthermore, M&G noted that it backed enhanced protections for leaseholders, it considered the proposed approach disproportionate and potentially harmful to the UK’s standing as a dependable investment destination.

M&G group chief executive Andrea Rossi disclosed that efforts to reach a balanced solution acceptable to all stakeholders had proved unsuccessful, though he confirmed the company’s robust finances would enable it to weather any adverse consequences.

Chris Barry, director at Thomas Legal, warned that pension funds with substantial freehold exposure could suffer “an enormous income hit in some cases”, with repercussions for ordinary workers whose retirement savings were indirectly invested in such assets.

Housing Secretary Steve Reed said: “If you own a flat you can be forced to pay ground rents that can become completely unaffordable.

“We said we’d be on the side of leaseholders – which is why today we are capping ground rent – helping millions of leaseholders by saving them money and giving them control over their home.”

In 2025, leaseholders paid more than £600million in ground rents, and they are expected to save up to a combined £12.7billion in total over the entire lease term due to the cap, according to the Government.