Ground Rent Sales Question & Answers
Please find enclosed some brief answers to some of the most popular questions that we are asked on a re3gular basis. Whilst it is not a comprehensive list of answers we hope that they will help you.
We are always more than happy to answer any questions that you may have if you email us the details we will get back to you. If you are looking for some specific help we advise you to go the the Leasehold Advice.org website. Everything that you need to know about ground rents and leasehold advice is within that site. It will also help you with how to contact the LVT.
Why Are People Investing In This Market?
The ground rent market has seen some very big increases over the last five years as investors have looked at alternative low risk investments that guarantee an annual yield. It is probably fair to say that the prices of ground rents have risen dramatically recently which means that they are yielding much less than they were tn years ago. In 2005 you could have purchased a ground rent that would yield 7.5% per annum without too much difficulty. You view some of recent ground rent sales here
In 2016 the same investment will cost you a lot more to buy and you are going to be looking at a yield close to 3% - 4%. The reason for this is that buyers have been piling into ground rents because they are unable to get any interest on their deposits and so ground rents look attractive. This will change as interest rates go up much the same as government bonds are sensitive to interest rate changes. For now ground rents have never been more popular and will continue to attract buyers as long as interest rates remain at record levels. Investors have not been getting very much interest on their saving accounts and some of them have decided to look at other ways of investing their money in low risk investments. This is why the price of these investments have increased over the last few years.
Ground Rent Sales Should I Manage My Own Blocks?
Unless you are an experienced managing agent we would advise you to employ an agent to to deal with your block management. If you own half a dozen blocks of flats it could become full time job dealing with residents and the day to ay running of each block. The Leaseholders will have to pay for the services of a managing agent so why bother doing it yourself. With the new laws that were brought in every demand for money has to be issued correctly and unless you are familiar with block management you could end up with unpaid demands which would otherwise be paid.
Who Deals With The Insurance?
If your lease stated that the freeholder is responsible for the insurance of the block it is best to let the managing agent deal with this. They will be up to speed with recent changes in the law and will know if the law requires them to insure for such items such as terrorism etc. Sometimes the lease will state that the lessees are responsible for the insurance. If this is the case you should ask for a copy of the building insurance policy to ensure that the building is adequately insured.
What About The Legal Work / Conveyancing Process?
The legal process when buying and selling freehold ground rents is very much the same as if you were buying a flat. There is more work involved than if you were buying a freehold house because there are a lot more enquiries that need to be raised. The average cost to the buyer and seller are likely to be in excess of £1000 + VAT. You might be lucky and get a cheaper lawyer but at the end of the day you get what you pay for. Most lawyers in London will probably charge you in excess of £1500 + VAT so it is worthwhile shopping around and seeing if you can get a better deal. Stamp duty will be paid at the current rate. Please see enclosed link for more help on stamp duty on ground rents.
What If The Lessees Have an RTM (Right to Manage)
If you buy a block of flats where the leaseholders have exercised their right to manage their own block you will not have any management responsibilities for the block. For whatever reason they responsible for the day to day running of the block and in most cases this works well. You will still be entitled to your ground rent whenever it is due.
The leaseholders still have to carry out their responsibilities as defined in the lease but they will organise the maintenance of the building themselves. If they fail to carry out their responsibilities as defined in the lease you can apply to the LVT to have the RTM taken away and responsibility of the block management will be handed back to the landlord.
Is The Income Guaranteed?
Yes! Even if you are in dispute with the lessees they have to pay their ground rent when it is demanded. Failure to do so will have consequences for the lessees. If there is a dispute with the lessees they may withhold the service charge but the lease will say that above all else the ground rent must not be withheld under any circumstances.
Ultimately the leaseholder could end up with a possession order the flat for non payment of ground rent. Whilst this is highly unlikely because the lessees always pay before it gets to that stage reposession of their property is the ultimate sanction.
Will The Income Increase?
Your income may increase throughout the term of the lease but you need to look at the lease to see what if any the increments are going to be. The income may not increase and could remain the same during the lease. Income can double every 25 years or they can increase every 5 years or ten years and be linked to the Retail Prices Index. they can also be linked to the House Prices Index.
There are also some very elaborate increases that you would need to have a mathematician to work out what the increments are so you need to look carefully at the lease before you buy. The value of the freehold will take into account these increases so the better the increments the higher the freehold valuation will be. Most buyers are looking for properties that are RPI linked so that they can guarantee that their investment will go up with inflation. This means that their investment will not diminish and will always be easy to sell. The most popular buildings are where the income increases inline with RPI every five or ten years.
What Return Can I Expect On My Portfolio?
As we write this article ground rent investments are selling for anything between 20 - 30 times their annual income. That means that you can expect to achieve between 2.5% - 5% per annum on before purchase costs. So if you were to go out and buy a building with 10 flats with 125 year leases for £50,000 you can expect a return of £1,250 - £2,500 per annum. This yield will increase as the income increases so it is important to find out when the increases are going to happen. It is possible the at you may only have to wait ten years for an increase in income which will push up the yield.
Long leases are going to yield more income annually than short leases because they are cheaper to buy. If you have a short lease that is under 80 years the costs of buying that lease will be much higher and so will yield much less annually. There is more information of buying properties with short leases here. There is not enough space here to go into too much detail but ground rents with short leases have also risen dramatically over the last few years. They are more specialised that long leases and buyers will have to lay out considerably more money to get into this market. They will not produce a great yield but you will be entitled to a premium for a lease extension if the lessee decides to extend their lease.
Are There Any Other Costs Involved With The Purchase?
It may be necessary for us to charge you a fee in connection with the purchase of your investment. We would only do this if we were not retained by the vendor and we would tell you how much are charges are going to be at the very outset. If we are to charge you a fee it will generally be a percentage of the purchase price. Then you need to calculate the Stamp Duty Land Tax and your solicitors fees. You may also want to set up a limited company to hold these investments but this is something you would need to discuss with your accountants. There are no other fees from our end and some of these fees are assuming that you don't already have a limited company set up for the purposes of investing in this type of investment
Who Else Buys The Investments?
There have been many more entrants into this market over the last five years. Buyers range from small investors to large blue chip insurance companies that buy properties through subsidiaries. Many of the large companies are quoted on the stock exchange. Many small investors will buy individual blocks of flats whereas the large corporates will only want to purchase with a minimum purchase price of £1m. The large companies are just looking for a guaranteed annual return as part of their investment strategy.
These companies generally tend to have relationships with the biggest house builders across the UK and very few of the properties that they acquire actually come onto the market. They will be purchased as soon as the blocks are build with new leases and will often have some input in the way the leases are drawn up so they leases are weighted in favour of the landlord. They purchase their investments in bulk to keep their costs down and buy brand new blocks of flats that are managed by a large corporate block management company. These types of investors do not want to get involved with the day to day management of these buildings and are only interested in a return for their shareholders.
Many of the new blocks of skyscrapers in London and overlooking the Thames are owned by these companies who pay millions of pounds for these investments. Some of these flats will pay annual income of £500 - £1000 per annum. From the builders point of view it is good business to have a buyer already lined up to buy the freehold at £5m as they can go to their bank and tell them that the freehold of the block has exchanged with completion to take place after the last flat has been sold.
If you have any further questions please get in touch with us.