Leasehold properties sell for lower prices and tend to be in prime locations, but industry experts warn they come with big risks.
While leasehold ownership is common around the world, it is a form of ownership that flies in the face of the Kiwi dream of a freehold home on a quarter acre section.
This is because a leaseholder buys physical property, usually an apartment or townhouse, but not the land on which it is located and must pay annual ground rent to the person or business that owns the land on. which is the house.
Rental contracts and their duration vary considerably. This can affect the willingness of banks to lend for leasehold property.
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Despite this, thousands of people across the country own leasehold properties. CoreLogic estimates that there are approximately 15,400 leasehold properties with just over 5,400 located in Auckland (almost 1,000 apartments; almost 3,800 apartments; approximately 580 houses; and less than 40 âotherâ residential).
He also estimates that this year alone, about 0.5 percent of sales, or about 340 properties, have been leased.
Some examples of sales, provided by Homes.co.nz, include a townhouse in Parnell in Auckland sold for $ 190,000 in March, an apartment in Parnell sold for $ 385,000 in April, a unit in Papanui in Christchurch sold for $ 175,000 in April, and a Dunedin Central unit sold for $ 547,000 in June.
Their asking prices are the key to what makes leasehold properties attractive to some. With a booming market, they are affordable, especially given their location.
But all of these properties except one sold for prices well below their assessed value (RV). The Parnell townhouse had the biggest difference between the sale price and the RV, as the RV cost $ 890,000 and it was selling for $ 700,000 less.
The RVs in the Parnell Apartment and the Papanui Unit cost $ 650,000 and $ 490,000 respectively, so they sold for $ 265,000 and $ 315,000 less. The Dunedin unit was the exception, selling for $ 117,000 on top of its RV of $ 430,000.
Homes.co.nz Chief Scientist Tom Lintern says leasehold properties selling well under RVs come as no surprise even in today’s market.
âWhile a lease can offer an opportunity to move up the ownership ladder, it should be remembered that a lower price can lead to higher ongoing costs and higher potential lease terms in the future. . “
It is the ground rent revision element of these lease conditions that contributes to the risks associated with leases. This is also the reason for the negative stigma that is often attached to them.
Veteran real estate agent Martin Dunn says there are many tragic stories about leaseholders who were hit hard financially, or even bankrupt, by huge increases in their ground rent when it was revised.
One example is a man who, although he was advised not to, bought a mansion on the Cornwall Park side for $ 90,000 some time ago, he says. âBut he didn’t factor in the ground rent, and it went up to about $ 120,000 a year. So he ended up with a house that was sales-proof and financially crippling. “
While Cornwall Park Trust’s lease issues have long dominated the headlines, many other leaseholds have been plagued by surprisingly high rent increases. This is because the rent is tied to the value of the land it sits on, and there has been a huge growth in the value of the land over the past few years.
Dunn says that while some leases have much more favorable terms than others, he’s worried that younger buyers will be enticed into buying a seemingly cheaper home that comes with unpredictable additional costs.
“Leases don’t get the capital gains that freehold properties do, if they get them at all, and they’re much more difficult to resell because the reluctance of banks to lend on them means the pool of buyers is limited to those who have money or are wealthy in equity.
But leases work as a property option for some. The director of apartment specialists, Andrew Murray, says their viability depends on the buyer’s goal with the property.
If a buyer is looking for a simple property that will increase in value, this is not something they would recommend. They’re also not a good option for first-time homebuyers or mid-life homeowners, he says.
âThey can work well for lifestyle reasons. Someone could buy a leasehold waterfront apartment in the Viaduct area for around $ 1 million rather than a freehold property elsewhere for double the price.
âThere could be a rent of around $ 50,000 a year, but if they had borrowed an extra million from the bank, they would have an interest charge of around 4%. On $ 1 million it’s $ 40,000 a year, on $ 2 million it’s $ 80,000, so you can tell the numbers work.
The downsizers who sold the family home for a few million are another group for which leases are viable, he says. “With a lease of around $ 1 million, they can invest their remaining funds elsewhere and use the proceeds to pay the rent.”
Another group that benefits from leases are investors who buy tiny Auckland CBD apartments at very low prices.
Murray says if an apartment is 30 to 40 square meters it has a relatively low land value, but the returns are around 10 percent net. “Even if the rent goes up it’s a lower percentage so the numbers still work because returns are generally much lower in Auckland.”
However, not all leases are created equal, with lease terms varying widely and some locations and buildings far superior to others, he cautions.
Viaduct City Apartments manager Hamish Duke agrees, but says there are good options for downsizers and investors who are overlooked due to the stigma surrounding leases.
There’s a negative perception of them, but they’re not as scary as a lot of people think, he says. As an investor, he has owned CBD leases for short term rental purposes in the past, and they have done well for him.
âBut it’s essential that buyers properly examine the lease industry and do thorough research. They have to find out exactly what is out there and investigate all the different buildings and leases.
âThey should also obtain appropriate expert advice on the meaning of the different lease terms, as well as the building integrity and corporate structure of any leasehold property that interests them. This is so that they understand what they are buying. â