Are freehold ground rents a good investment?

Reply to the comment left by "Christopher Farrell" at "02/08/2013 - 18:58":

I do have one ground rent deal in Portsmouth. It is managed by Annette who has commented above. For me it is zero hassle. As I said before, if I could hear up I would own a lot more.

Sam. If a lease does run right down the freeholder would have to serve a Notice and possibly get a Court Order to get possession. To contest any Court action the lessee would have to be living in the flat as as owner occupier and it would have to be a sole residence. I do not think buy to let landlords can let a lease run right down and then contest the freeholder taking possession. The legislation does make provisions for tenancies to be granted in certain circumstances but I think this might be a bit of a minefield and you might need specialist advice if you have an actual problem.

Reply to the comment left by "sam " at "03/08/2013 - 05:50":

http://www.lease-advice.org gives you a good outline of the rights of each party

Christopher - leaseholders are not likely to allow their leases to come to termination as they now have the right to extension in perpetuity and can do so at their own request subject to certain conditions which are easily met. There is also no guarantee that legislation will not change in future. In Scotland there is no such thing as leasehold and flats are effectively automatically what in England would be called shared freehold. I can see this or something similar coming in future.

Puzzler is right to say that leases be allowed to run right down is rare although in the most expensive areas of London very short leases are not unknown and can cost millions to extend. There is a right to extend a lease at any time and although the legislation that allowed this was thought to be a nightmare for freeholders it has not turned out to be so for the majority of landlords who are experts at running their portfolios or who have experts doing it for them. Most freeholders are continually investing so the money earned from lease extensions is reinvested. Also, many freeholders manage their properties and continue to benefit from other income even when a lease extension has been granted.

Reply to the comment left by "Annette Stone" at "04/08/2013 - 09:39":

Absolutely true - in my case I think my leaseholders do not want the expense or the hassle. Or realise the predicament they are in. On my father's death they were notified of the change of freeholder which should have triggered at least some interest in extending the leases, at that time having 84 years remaining. Now there is only 77 years and 80 is the magic number for triggering a much higher valuation (after this time the landlord takes a half share in the added value from the lease extension, before that there is not considered to be any added value). No-one has even enquired about it. Obviously this is in my interest but it will still be a long while before the value is very much as the ground rents are not very high (being set so long ago).

So there is a high degree of inertia in the leasholders but as all the flats that were built in the 1980s have shorter and shorter leases and lenders criteria are better publicized there will be a market correction (London probably excepted, where as Annette says short leases are more common, but even there at least some of the funds are presumably derived from a mortgage).

Puzzler - the ground rent is not the only factor in the lease extension premium and you should take some advice on this. You can always offer lease extensions if you would like to take your profit or sell the freehold with 77 year leases and take your money out now.

The market correction is in place already I think as mortgagees are not keen to lend where there is much less than 75 years left on a lease and under 70 years is untouchable. At that stage vendors are always keen to purchase a lease extension so that they can sell their flat with a long lease and as any incoming purchaser will not have an automatic right to a lease extension for two years when the lease will be two years shorter it is normally possible to do a deal that is good for both sides. The only alternative to doing a deal if for the vendor to start serving Notice of Claim to a Lease Extension and this pushes his costs up enormously.

Lots to consider here in the ground rent market but it is a very good business if you know what you are doing.

Reply to the comment left by "Annette Stone" at "05/08/2013 - 16:19":

I am aware of what you say but I was referring to when the lease is still over 80 years.

Also there are a number of mainstream lenders who will go down to very short leases nowadays (link below) and the vendor can assign his right to an incoming purchaser.

I am in no hurry and I am sure someone will try to sell soon and realise the need to extend, it's currently in my interest to wait as long as possible. It's a daft law, it should either have been left alone or gone to the Scottish system - but too many wealthy landowners for that!

http://www.cml.org.uk/cml/handbook/englandandwales/question-list/321

I am playing devil's advocate really even though I have a freehold, as the system is still much abused. My main advice to anyone else is be aware.

I think all bases have already been covered here in terms of the pros and cons of ground rent investment, which I must say is not my speciality. However, I would like to re-iterate that any investment should be preceded by close scrutinizing of the lease and think it would also be advisable that any novice get to know the basics (if nothing else) of Leasehold legislation so that you can spot the warning signs and stomp out any issues early on.

In these investment circumstances, I would say it is imperative that you ensure management costs can be re-charged to your leaseholders, that you will not be required to forward fund the annual expenditure (You should also check for clever wording like “expended”) and clarify whether you are able to recover the cost of Section 146/147 Notices and other legal expenses.

Leases are not for the faint hearted and if you are not familiar with the terminology and key clauses, you should employ the services of an experienced and reputable conveyance/solicitor to help you decipher the leases’ and give you a plain English interpretation before committing any monies.

Please note that once an property is purchased and Agent appointed, you will not have voided yourself of all responsibility. Your input will still likely be required at various intervals during your ownership, even if only to agree the options/best course of action presented by the Agent. You should therefore ensure the agent is experienced, ethical and efficient to alleviate as much stress as possible and to ensure your leaseholders don't harbour any grudges against the buildings management which could land you in a Tribunal.
As touched upon in earlier posts, the long term investment opportunities can ultimately be pulled from under your feet. However, in my experience, happy leaseholders make this less likely to occur. An alternative to the Enfranchisement option (Leaseholders right to buy the freehold) is the Right to Manage (RTM), where the Tenants gain control of their homes without putting their hand in their pocket. This allows you (the Freeholder) to retain the Ground Rent , the Extension/alteration fees and development Profits but negates your responsibilities to overseeing the management. This might be something you look for when considering your purchases in the future.

Hope this helps.

Lauren makes some good points from the view of a pure managing agent but for ground rent investors who are in the main going to be purchasing at auction for fairly small amounts getting a solicitor involved in checking the leases before attempting to buy can void a year's profit. Of course, anyone getting into the business must know the basic terminology and what to avoid in respect of the freeholder having to advance funds but EVERY lease needs to be checked and basically it is a matter of going to the auction very early and sitting there and seeing every lease has been granted on the same terms and there have been no lease extensions done of which you are not aware and which would reduce your income. Remember auctions work on the basis of caveat emptor which is buyer beware and when the gavel comes down its yours!

The discussion is getting a bit mixed up here and any investor needs to decide if he is buying pure ground rent investments on which he is going to achieve 4 or 5% returns which is great in this climate but no so good when interest rates move up or whether he is going to look for properties that have linked insurance and management provisions which can increase his income. If that is what is wanted you need to find someone to build your portfolio (or do it yourself) and use a managing agent who clearly knows how the market is run to ensure happy lessees and a freeholder who receives his income on time.

As far as Tribunals are concerned they are not so easy to avoid these days as there are many lessees who think they give an automatic right to avoid payment of monies that are due and to act as some sort of lessees' champion. Most people find out to their cost that this is not the case and Tribunal is chaired by a property expert who is fair and even handed

Lauren also talks about RTMs. These can happen at any time but not really affect the freeholder unless he is managing the property himself. Many groups of lessees form Right to Manage Companies because they want to have the right to appoint their own choice of managing agent (accordance to the lease this is the right of the freeholder) or because they feel the freeholder is being greedy in some way. This does not affect the ground rent income (and always make sure your lessees have contact details for you and that if you are sending out ground rent invoices yourself they have the correct legal terminology) but does mean that the gift of the management fees are in the hands of the Right to Manage Companies but if you are good they keep you on - it's as simple as that!!!

Hi all,

Thank you for all your comments. It seems that ground rent investing is a lot more involved than I originally thought.

It is another very interesting facet of property investing which, although may not be of interest to everyone, here in this thread, many have had the opportunity to obtain good general knowledge of this type of property investment. Thank you all.

Many threads I read tend to almost take on a life of their own, as the input from everyone creates new sets of questions and answers and this generally creates a well rounded opinion which helps everyone.

Another type of property investment I have also been looking at recently is providing short term bridging loans, (not Joint Ventures) with full due diligence via Solicitors). Yields can be as high as or higher than property investing. Perhaps a new thread is needed?

Living in Spain, it’s hard to get to networking events or similar or having friends with similar interests. This website and the information I obtain from reading threads is very helpful.

Thanks again everyone.