We ask how what is a ground rent and what should it cost.
When addressing a property speaking to your broker about the lease early on in the fact find is an aspect which is incredibly important and often overlooked aspect when we speak to our clients. Understanding how much the ground rent is, and how much it increases will have a direct impact on your profit margins in years to come.
Ground rent should not be difficult, however some developments in the UK make this part of the lease intentionally complex to generate further developer profits at the expense of the investor. Thankfully all Baron & Cabot properties have been through a strict ground rent due diligence process to protect our investors.
A ground rent is simply a rental on the land which the property sits on. When buying as there are multiple units sat on top of the same ground, a ground rent is paid to the ‘freeholder’. This can last from 99 years up to 999 years and can be renewed under the Leasehold Reform, Housing and Urban Development Act 1993.
When considering a property you should be looking at two things lease length, ground rent cost, and how the ground rent increases each year.
Lease length
Most properties in the UK will have a minimum of 125 years, however it is sensible to look for 200 years plus. When you get to 90 years remaining you can add another 90 years for £5,000 (2019 rates) thus every 90 years difference in a property lease length when comparing could be seen as a £5,000 difference in what should be paid for a property.
Ideally Baron & Cabot look for 250 years, however 200 years plus would not cause any real problems in the decision process or the ability to get full open market value for the property when you sell or remortgage.
Ground Rent Cost
Modern ground rents are 0.1% of the property value per year (£150,000 property would be £150 per annum) however there are still a number of properties which have £250 ground rent as standard.
£250 per year is acceptable for the vast majority of mortgage lenders, however if a ground rent goes above the £250 mark not only is the developer looking quite greedy, the mortgage companies prepared to lend on the property are significantly reduced.
Ground Rent Reviews
So you are happy with the ground rent as it stands but thats not the end of it. Knowing how the ground rent increases can make or break the value of a property long term. Ask your broker for the terms of the ground rent increases and a copy of this section of the lease.
A ‘normal’ review would be ground rent tracking RPI with increases every 10 years. What this means is that the ground rent only increases with inflation and is increased every 10 years. Effectively this means that it will never ‘feel’ more expensive than it is now. Another important point with tracking inflation is that it is unlikely that the freehold will ever be sold as it is only ever worth the same amount as someones money in their pocket.
In the market we occasionally see ground rent doubling after 10 years or similar lease caveats. The suggestion would be to walk away from these sorts of agreements as it can have a knock on affect to the re-sale value of your investment.
Conclusion
Ground rents should be simple and not something to worry about so long as you have a sensible one. Always ask the question of your advisor and if you are looking at a development that Baron & Cabot don’t offer check this part of the lease (a problem lease is a good reason we may not carry the development).
Be happy with your lease by asking the basics, and if in doubt, always speak to us on any projects you are looking at.