If you’re an apartment owner or someone on the hunt for an apartment investment, listen up. A common sticking point for many people in this position is the uncertainty around leasehold vs. freehold. With speculation that the surge in house prices will see a sizeable rise in ‘ground rents’ come the next seven year review its important to understand the details surrounding leasehold titles.  

The two are quite different; under freehold you own both the apartment and a share of the land it’s built on. Under leasehold you simply own the apartment. To complicate matters, in Auckland there are five different leasehold structures, meaning people need to be aware of what they are buying into.

 
There are pros and cons associated with each type. On one hand, some people want the security of knowing that they own every aspect of their slice of paradise. Others see leasehold as an opportunity to secure an apartment of similar standard, but at a more affordable price.

Affordability

Yes, leasehold properties are generally known for being on the lower end of the pricing spectrum. That said, there are long term costs that need to be considered. The price difference is quite considerable. For example, a quick search of TradeMe Property for ‘2 bedroom, 2 bathroom’ apartments in Auckland’s viaduct waterfront returned apartments with an average value of circa $1.7million. However, there was one priced at $350,000—yes, you guessed it, it was leasehold. Why are leasehold apartments seemingly so much more affordable?

"In Auckland it is estimated that around 15 per cent of all apartments are leasehold."

Leasehold properties require you to pay an annual fee to the owners of the land. This is called the ‘ground fee’ or ‘ground rent’. Typically you can expect this fee to cost around 5 - 7 per cent of the land’s theoretical market value, although this percentage can vary from property to property. In modern developments ‘ground rent’ is usually fixed for intervals of seven years. Older style leases can cover periods up to 21 years.

How much time is left on the lease?

When a lease runs out, the property reverts to the owner of the land the apartment is built on. Therefore, an apartment with 60 years on the lease is worth less than one with 100 years left. The difference in value is owned by the land-owner.

On very short leases, the apartment can decline in value even as property prices rise. Some leases have a final term, others can be extended, while some give the apartment owner the option of buying a share in the land and becoming freehold. When buying or selling a leasehold apartment, check how much time is left on the lease and what the options are when it runs out.

Lending

Banks don’t like risk, so they prefer lending against freehold apartments. If the ground-rent is fixed, banks can factor cost-of-living and repayment thresholds for the term of the mortgage, which is much harder to do for a leasehold apartment. A ‘rise in ground rent’ might extend mortgage repayments beyond what you can afford.

Ground rent increase on the horizon 

There is growing speculation that the surge in house prices around New Zealand will see a sizeable rise in ‘ground rents’ come the next seven year review. Further complicating matters is the issue of ground rental concessions that will soon be coming to an end. Such concessions are used to attract buyers and help ‘fill’ large apartment development projects.  This wouldn’t be the first time leasehold apartment owners have been caught unawares. In 2008 when the property market took off leasehold apartment owners faced a rent increase of 300-400 percent.

Times are changing

Historically it has only been land which has appreciated, but now the buildings themselves are also going up in value making leasehold a more attractive option. So, yes, there are some good leasehold options available. The key, as it is always with any type of property is to do your due diligence first.

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