Some homes surrounding Cornwall Park are leasehold, leaving people facing hefty ground rent fee hikes. Photo / Ted Baghurst
Some homes surrounding Cornwall Park are leasehold, leaving people facing hefty ground rent fee hikes. Photo / Ted Baghurst
Rising ground rents can be a shock to unwary buyers but buying a leasehold property can be a cheap way of getting into a desirable suburb, writes David Maida.
If you want a home with a sea view around Auckland's Viaduct Harbour or prime real estate around Cornwall Park, One Tree Hill, Mission Bay or Parnell, it's likely you'll be renting or buying a property on leasehold land.
Sirpa Gunn, general manager of Conveyance Shop Lawyers, often receives inquiries about the pros and cons of leasehold land. She explains to clients that leasehold land remains the owner's property but temporary ownership and tenancy rights are sold to the resident. Those residents, as land tenants, pay a ground rent to the landowner.
"You pay to purchase leasehold land but every year you have to pay ground rent to the landowners. It's a very good ongoing source of income for whoever owns the land," Gunn says.
The land is largely owned by tax-exempt, non-profit entities such as Melanesian Mission Trust, St John's Trust, Dilworth Trust, Maori land trusts or the Crown.
Every lease has a review period when the ground rent is reassessed. Gunn says some residents have been stung.
Many of Auckland's inner-city apartments were built around 2006 and 2008 and often those on leasehold land were bought off-plan with reasonably low ground rents.
"A few years down the track they came up for renewal and they were all hit with massive increases. A lot of apartment owners were selling for a fraction of what they paid just to get out of the ongoing cost of ground rent.
"I've seen cases where clients had a small city apartment and were paying $4000 a year ground rent and overnight it went up to $21,000," she says.
Leasehold titles for housing are often stipulated on a certain percentage of the land value, which is reviewed over a set period of time. But even as land values can move up and down with the market, it is unlikely ground rents will go anywhere but up.
Occupants of leasehold housing should read the fine print of their leases to know how and when their ground rents will be assessed. It's a prime consideration when deciding if a leasehold property is good value.
Residents can challenge such increases as the flow-on effects are reductions in the properties' values and the ability to on-sell them. The first step is negotiation, then arbitration, which can be as expensive as the third option, which is court action.
On the upside, Gunn says properties which might otherwise sell freehold for $1.5 million may be available leasehold for $600,000. This is why leasehold properties often appeal to landlords who can get similar rents to freehold properties for a leasehold outlay.
"People really go for leasehold for the location and to get in at a reasonable price."
Since leasehold land is on a fixed-term contract, most people are not in it for the long haul. The leases can be renewed but only at the owner's discretion. Some leaseholders may also be given an option to buy at the end of the lease.
Leasehold apartments in the Viaduct Harbour tend to draw in working professionals with high discretionary income who work in the city. They are likely not expecting an investment return on their property.
"There are just wanting the convenience. I've got one professional couple who bought a waterfront penthouse apartment downtown with stunning views. They just want the lifestyle of living there," Gunn says.
Another demographic who might like leaseholds is the elderly.
"The last person I had who bought a leasehold property was an elderly lady who wanted to live in Parnell in the central area. She knew it wasn't going to be a good investment long-term. But she pretty much wanted to live out her retirement in a nice area. She wasn't interested in what the increase in property value would be."
Gunn says the waterfront Viaduct apartments are available only as leasehold properties as all this land is owned either by Maori or the Crown.
Banks limit loans for leasehold property to about 65 per cent of the value. With most properties, it's the land value that increases. Since leaseholders don't own the land they cannot take advantage of that added value.
Instead they own the house or apartment, which may appreciate because of higher building costs but will likely depreciate and require maintenance.
