Ground rents as an investment

Auction firms report brisk sales of “ground rents” - freeholds which pay an annual income and can provide a future windfall
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One reason is that savers are searching for investments that pay more than the low returns coming from bank deposits. And investing in property long-term for your pension or as a gift to children suddenly makes more sense.

Big estate landlords such as the Duke of Westminster have made fortunes out of owning freeholds. Small investors can build up a portfolio for a relatively modest outlay - under £5,000 for a single house converted into two or three flats.

England’s archaic property laws mean virtually every leaseholder has to pay a ground rent to the freeholder. Freeholds are purely an investment; you have no immediate right to live in the property. However, it is an extremely secure investment because you have the ultimate remedy: if leaseholders do not pay the ground rent, you can evict them and gain possession.

Typically, an investor will buy a parcel of long leases in a block of flats - say, 20 apartments each paying £200 a year, giving an income of £4,000. As a rule of thumb, ground rents sell for between 15 and 20 times the total rent you receive in a year.

The best place to buy them is at auction. Savills is selling 79 separate ground rent properties with no reserve prices at its auction next Monday 14 September (see auction news).

Ground rents that are fixed for the duration of the lease may be eroded by inflation, but usually there are set increases, perhaps after 10 or 25 years. “They’re bullet-proof investments which can be tucked away for children or grandchildren,” says Savill’s Paul Mooney.

Apart from the regular income, investors look for “angles” such as lease extensions, he adds. “For leaseholders, a lease is a diminishing asset - once it drops below 75 years, it’s difficult to get mortgage finance and therefore sell the property, so the leaseholder will have to pay the freeholder to extend the lease.” Once the lease, expires, the property normally reverts to the freeholder.

Freeholders can also generate extra income from insurance commissions when insuring the block, or by becoming managing agents and charging for their services. Building rooftop extensions on a block of flats and selling the properties is another way freeholders can make money.

An income stream is what attracts most people, but the time, energy and bother involved may be too high a price for many. “Often ground rents are bought by retired accountants who are bored with life,” confides one auctioneer.

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