By Frank Newman on 1st November 2015
It may sound unbelievable but it’s true; a property in one of Auckland’s best suburbs for $10,000 or nearest offer. Here are the listing details:
• 3 bedrooms, 1 bathroom
• House area: 156m2
• Section area: 619m2
• Open plan dining / kitchen area with sunny deck off lounge
• Gallery kitchen
• Separate laundry room
• Double garage
• Currently rented for $480 per week (average rental in the area is $481 per week).
• Outgoings (rates, insurance) approx $5,000 a year.
• Rateable value: $660,000. (Land value $500,000, improvements $160,000.)
• The current market value of the property is around $750,000.
All your’s for only $10,000. But just before you reach for the cheque book, there is one more detail:
• Leasehold property, perpetual lease, 7 year reviews.
And there’s the problem – it’s leasehold. The land is owned by an investment company and leased to the landlord.
The current ground rental is $34,925, which is calculated at 5.6% of the land’s market value which was recently reassessed by the landowners valuer at $623,660. That value and the 5.6% rental rate were not challenged by the lessee because they could not afford to go through a formal arbitration process.
The numbers show how absurd the situation is. The ground rental of $34,925 is about $15,000 more than the current rent from the entire property!
It’s win win for the lessor (the landowner) and lose lose for the lessee. Should they default on the ground lease payments the lessor will seize the buildings without having to pay a cent. They would regain the freehold title to a $750,000 property to do with what they please.
It’s no surprise the lessee will do anything to pass the liability of the perpetual lease onto someone else.
This is a vivid example of why rational investors are steering well clear of ground lease investments.