Ground Rents Investment Question

Ground Rents Investment Question

11:49 AM, 17th January 2013, About 9 years ago 4

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Ground Rents Investment Question

We have received the following ground rents investment question from one of our readers. Can you help?

I am currently looking at two potential investment opportunities in the North West. All 2 bedroom flats at attractive levels. The numbers stack up except the level of Ground Rent being levied. First site average rent achieved is £425, Ground Rent levy £800 pa or 1.9 x rent. Second site average rent achieved £575, Ground Rent levy £1092 pa or 1.9 x rent. What in your experience is s reasonable level of Ground Rent and who pays Landlord or Tenant.

Would appreciate some advice.

With thanks & best regards

Paul  

Message from Mark Alexander

Hi Paul

This isn’t really my area of expertise, hence I have published your question and invite our readers to comment. I have also invited Annette stone from GML Estate Management to comment as I regard her to be an expert in this area. Annette manages a freehold interest on behalf of my family.



Comments

by Annette Stone

13:07 PM, 17th January 2013, About 9 years ago

Wow. These are very high ground rents but I am not sure what you can do about them as the ground rent is set by the freeholder who is probably also the developer. Their aim is to develop the property, sell the flats but retain an income and obviously the higher you set the ground rent the greater their income and there are freeholders who are generating millions a year in ground rents having purchased/developed over many years. My advice would be to buy someone else. Once you have signed your lease you are stuck with a ground rent which has to be paid by the flat owner and not any tenant (unless you sign all your rights and obligations away to your tenant and please do not do that) for as long as the lease lasts.
In addition to the very high ground rent many freeholders and/or developers are now sticking in 10 yearly reviews doubling ground rents whereas previously ground rent went up every 25 or 33 years and then only by a percentage not by a doubling.
Obviously, I hope you will appreciate that I give advice on a "without prejudice" basis as I cannot be aware of the exact circumstances surrounding this or any other question. The views expressed are mine alone.
As an investor as well as a managing agent I would not touch something with a high ground rent like this. The only way of ever getting out of paying the ground rent would be to buy a lease extension giving you an additional 90 years on top of your existing lease with a peppercorn ground rent payable throughout. The problem with this is that even if you have a long lease of more than 80 years the cost of purchasing the lease extension is based on a multiple of the ground rent and is normally around 20 - 25 times. As you can see this would add enormously to your costs.
An additional point is that I have never heard of a ground rent which is based on a percentage of rent received. That would give the freeholder a level of knowledge about your investment which I would consider intrusive. Also, if I am reading what you are saying correctly and the ground rent is different (presumably lower) if you are an owner occupier that would be a new twist and I would take advice on that from a specialist lawyer. If the block is one of these repossessed developments being marketed to investors only my personal view is keep away as it is going to be very difficult to maintain standards in a building which is totally tenanted and where the owners main concern is to be maximising their rental income.
Basically, walk away
My advice is to look for something else. You might find that if there is only one flat left in the block or if all the flats are not selling then a canny solicitor can do a deal on the ground rent, reducing it to a manageable level of say £250 but doubling only every 25 years. This is still high but is deemed reasonable for the current climate but it is quite hard to negotiate.
Hope this helps.

by

9:41 AM, 18th January 2013, About 9 years ago

Hi Anette
Thank you very much for your prompt response and advice! You have made some valid points, which I have already followed up on. The situation has been clarified with the vendor/ developer, who has now explained that the Ground Rent here is £250 and the balance £760 is the annual Services charge. Clearly I want approach any potential deal with my eyes open and to be fully aware of the facts. As an investor, my past experience has been with freehold properties in London. As part of a diversification strategy and to find better value I am looking at opportunities further afield. I appreciate you taking the time to give me the benefit of your knowledge. Thank you again. Paul

by terry sullivan

8:37 AM, 20th January 2013, About 9 years ago

leaseholds should be avoided--there are many unscrupulous freeholders who will screw you. run away

by Mary Latham

21:46 PM, 21st January 2013, About 9 years ago

I assume that there will be service charges on top of these high rents? It is the service charges that drive me crazy because they cannot be controlled. I am constantly fighting with Managing Agents who are either excellent or rubbish in my experience and if they are rubbish they can cost you a fortune.
There has been a recent case where the leaseholder won because of unfair charges .

Hacking v Ryan

30 October 2012

This case states that a Managing Agent cannot charge a fee for tenancy notifications if it
is not expressly stipulated in the lease. The case also highlighted that if a fee is charged, it must cover the cost of administering the scheme and not unjustly enrich the managing agent.
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