23 Dec Are leasehold properties a good buy? Shared by Auckland lawyers | Quay Law
Are leasehold properties a good buy?
This article shared with you by the Auckland conveyancing team at Quay Law. Please contact our approachable lawyers if you have any questions.
Most Kiwi property owners aspire to own both their house and the land, but there is another option which is miles cheaper.
It’s called leasehold, where the homeowner only owns the building and rents the land.
More commonly used for rural and commercial properties, leasehold residences are scattered around the country, often owned by church groups or councils.
But they are most visible in central Auckland where about 15 per cent of the central city’s apartments are thought to be on leasehold land.
The allure of leasehold is easy to see. In a city where freehold apartments cost about $7000 per sq m to build, leasehold apartment values have tumbled to about $2000 per sq m.
However, there’s a good reason why leasehold prices have plummeted.
The annual “ground rent” is subject to review every seven or 21 years, depending on the lease.
Rent reviews are usually based on a fixed percentage of the land value and with Auckland’s soaring land prices, they can be a shock.
Olly Newland, an Auckland property commentator and investor, is not a fan. He recommends people steer clear of leasehold.
Leasehold land was a good idea 100 years ago because they used to have what is known as Glasgow leases which went forever and were reviewed every 21 years, when inflation or your land price, were flat, he said.
“And so there were just gentle increases every 21 years. It was a cheap way for people buy farms or houses. But it all screwed up in the last 50 years when land prices roared up and the rent went with it. So it’s a very bad investment now.”
Kelvin Horspool invested in a one-bedroom apartment in Scene 3, a swish apartment complex on Maori land in Auckland.
Apartment owners were given a rent holiday for the first seven years but now its iwi owners want to start charging ground rent.
Scene 3’s penthouse was sold off the plans for $780,000 and was passed in at auction recently at $330,000.
Horspool says he has no beef with the Maori land owners, as he was well aware of the fine print in his contract.
However, he suspects many of his fellow apartment owners – some of whom are reportedly Australian investors – were less well-informed.
“New Zealanders, in my opinion, can be quite naive in leasehold situations. Take Australia, they’ve got very little in terms of residential leasehold…but around the rest of the world, leasehold is very popular because it’s the only way people can buy into houses.”
Martin Dunn, of Auckland real estate agency City Sails, blames the plunge in Auckland leasehold values on property “spruikers” who sold the apartments at inflated, virtually freehold prices.
“I will say that we have never sold leasehold apartments off the plans,” he explains.
“We say that a leasehold investment is an oxymoron, like a fun run. It’s a conflict of terms.”
Dunn believes the entire leasehold market will eventually convert to owner-occupier status.
In the meantime, he says there is a place for leasehold, particularly with Chinese buyers who are familiar with the concept, and with young people who would be otherwise priced off the property ladder.
Prices have gotten to the point in his view where they are almost “irresistible” but they are still failing to gain traction.
A two bedroom, two-bathroom apartment Dunn knows of, with a tennis court, gym and carpark, sold for $350,000 four years ago, and is now a snip at $120,000, although the building has some remedial issues.
“Now the outgoings would be $10,000 but if you bought that and got a flatmate in, the flatmate would pay you $200 a week, that would cover your ground rent…How cheap does that have to get?”
However, there are a couple of considerations. The first is that it’s harder to get a mortgage because it’s secured against the building alone, requiring a bigger deposit.
The retail banks are less keen on lending against leasehold property.
The other is that there is always a day of reckoning if the ground rent goes up or the owner wants to exit.
And for those currently trying to get out of their lease, the length of time is a crucial factor.
If a rent review is due in a year, the apartment’s rental situation may well have lost much of its lustre.
On the other hand, if it’s a 21-year rent review and there are many years to go, a prospective owner might take a punt that land inflation is slowing down and that the eventual rent increase will be small.
Most leases are in perpetuity, although some on Princes Wharf are limited to 70 or 90 years. That gives you security but also means that your only exit options are to sell or illegally walk away.
However, if you’ve saved a few quid in your cheaper home, there may be another option: an offer from the landlord to buy the property (the land).
This has often happened with religious land owners who don’t want the image of being a “greedy landlord,” says Newland.
He agrees that freeholding the land quickly, before land prices go up further, might be a short-term cheap way to get a decent property. But he couldn’t recommend it.
“There’s always another sucker who just goes for the price and doesn’t think about it.”
Questions to ask about leasehold
•When are the reviews?
•How is the value of the land determined? Is it considered bare land or developed?
•How possible is it to buy the lease? And when?
•How hard might it be to sell the property?
•Are there land restrictions? (ie. no sleepout or added buildings)
– © Fairfax NZ News