Ground rent investments have been rising in popularity lately and it doesn’t seem to be slowing down any time soon. You might have seen them crop up in our auctions and get snapped up fast. But what exactly are they? We’re here to give you the break down on this hidden gem of the property market that often goes unnoticed and why you should add one to your portfolio.
Ground rent investments are formed when more than one property occupies a piece of freehold land, for example a block of flats or a converted house. The owners of the flats hold the rights to their property in the form of a lease and pay ground rent to the freeholder in return. Much like a landlord lets out their home to a tenant, you are renting out the land to the lessees. Ground rents have always been a long-standing feature of property ownership in the United Kingdom, dating back to early Norman England and William the Conqueror. It’s obviously evolved since then, but the principle remains and owner of the freehold title of land still has the right to charge ground rent to those who occupy it.
So why are people so keen to buy ground rents if they’re not even getting the whole property? Well, given that it is usually far less expensive to buy land than to buy an entire property, ground rent investments provide an opportunity for people to make low risk property investments without having to break the bank. Most freehold ground rent investments return yields of 5% – 10%, some freeholders also earn income by arranging insurance and management of the properties that occupy their land. In some cases the freeholder may also be able to develop land that isn’t used or leased by the lessees.
They also provide a reliable and consistent income stream for investors. Ground rents are dictated by the terms of the lease and in some instances the amount paid will increase throughout the term. They are usually paid on an annual basis. As the terms are fixed at the start of the lease you can estimate your future income with accuracy and ease.
Not only is it a good source of income, but it is also a good long-term investment. Leases typically have terms ranging from 99 to 999 years, which ensures you have a reliable fixed income for the entirety of that period. In addition, freehold ground rent investments can appreciate over time because as lease terms reduce, lessees will need to extend the term of the lease and that means paying a premium to the freeholder. Most lenders require a minimum 80 years unexpired term so the freeholder may benefit from “windfall” lease extensions further down the line.
Ground rents are a “hands off” form of property investment because leaseholders are required to maintain the property and keep up with the repairs. This saves you time, money and not to mention stress!
Ground rents are a great option to diversify and add value to your property portfolio. They’re the steady, long-term investment with minimal management. It’s always worth keeping an eye out for them in our auctions and snapping them up when you can.