Buying Leasehold Property In New Zealand
Sirpa Gunn • April 23, 2019
The Pro's and Con's of buying a leasehold property in New Zealand
What is leasehold land?
Leasehold is a form of property ownership whereby you own the buildings and any other improvements on the site, but you lease or rent the land from a land owner.
The Pro’s
Leasehold land is without a doubt cheaper than buying freehold. This is because you are not purchasing the land outright, only a right to us it for the period of the lease. In Auckland it is possible to purchase an affordable leasehold home in a trendy area like Parnell, the City Waterfront or One Tree Hill where freehold properties can sell for well over double the cost of a leasehold!
For some people buying leasehold works out cheaper than renting over the period of the lease with the added benefit of owning your own home. Others decide to buy leasehold as after doing the sums they find that paying a typical lease fee of 5% p.a. of the freehold value of the land to the landowner is less than paying 8% mortgage interest to the bank on a more expensive freehold property!.
The Cons:
You should be aware however that while the lease may be affordable at the time of purchase there are rent review periods where the ground rent is assessed in comparison to the current property market values. This means that if the freehold value has increased you run the risk of a sometimes substantial increase in ground rent. I remember a few years back some clients of mine were most distressed to learn that the lease fees for their city apartment were increasing by over $10,000 per annum!
Generally people buy real estate as an investment, as way to build wealth for themselves and their heirs. It is usually the value of the land which increases over time providing capital gains to the land owner. In a leasehold situation it is the owner of the land that benefits from this increase in value of the land over time where the tenant only has the right to live there and owns an ageing house that could be decreasing in value and needing expensive maintenance and repairs.
Leasehold land is more difficult to finance with banks requiring higher deposits than for freehold equivalents. It can also prove more difficult to sell a leasehold property, particularly if you are nearing the end of the lease or approaching a review period. And remember with a leasehold property all outgoings are still your responsibility (not the land owners). These include city and regional council rates, body corporate fees if it is a stratum title, insurance and maintenance.
Do your homework:
Each leasehold property needs to be assessed on its own merits as not all leases are the same. Many have a finite term of say 50 or 100 years. The value of the property is obviously affected by the remaining term of the lease whether it has 60 years left to run or 6 can make a big difference! Some leases give the tenant the option to purchase the land freehold on expiry of the lease with a formula included to calculate the sale price of the land at that time. Other leases while having a finite term also have a right of renewal which if exercised would mean the lease could continue in perpetuity. There are also often restrictions as to the land use included in the lease. Before entering into an agreement to purchase leasehold land it is essential to get legal advice and go through the lease documentation with your lawyer before deciding whether or not to proceed.
Contact the Conveyancing Shop Lawyers today on 0800 Solicitor for more information on buying leasehold
land.
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