Date: 21st Jul 2020
Leasehold is a form of property ownership where you own the building but not the land, and must pay annual ground rent to the landowner. While leasehold ownership is most common with apartment buildings, Napier has a high proportion of leasehold property due to its history. Keep reading to learn more about how to buy a leasehold home in Napier.
Leasehold ownership means that you own the physical property or building for a specific period but not the land it occupies. Instead, the land ownership is attributed to a Lessor, who grants a lease to the owner of the property (leaseholder or Lessee).
Owning a leasehold property requires paying rent to the Lessor, who owns the land. Typically, lease agreements include a fixed duration of ownership, rent review periods and renewal rights.
Ultimately, buying a house on leasehold land means there are rules around what you can and cannot do with the land, such as selling, transferring or developing the land.
Leasehold apartments are generally the most common property type for leaseholds, but the proportion of leasehold property in Napier is higher than in many other New Zealand towns or cities.
Following the 1931 earthquake, sizeable tracts of land came out of the sea and have since been developed over the years by industrial and residential ventures, creating leasehold land. Previously managed by the Harbour Board, the lease portfolio was later bought by the Hawke’s Bay Regional Council, making them the main Lessors.
Property owners can purchase the land and freehold their property if they wish, and many have done so over the years, reducing the overall number of Leasehold properties in Napier. A registered valuation on the land is necessary, and the Lessor will apply appropriate discounts.
The Lessee or leaseholder is required to pay a lease, often called ground rent, on the land. Usually calculated at 5% of the land value, most ground rent reviews take place every 21 years, although lease agreements vary. The lease can be budgeted as part of the property owner’s weekly outgoings (sometimes only a few dollars, depending on how long the lease term has to run) or six-monthly lump sums.
The price of leasehold property is less than that of comparable freehold because the purchaser is not buying the land, but the improvements and the equity in the lease. Buyers can also often get a better home in a more desirable area if they opt for leasehold. This makes leasehold ownership appealing to certain buyers in the market, such as:
Leasehold properties can offer a more accessible route onto the property ladder for many first-time buyers. One of the main advantages is the lower upfront cost compared to similar freehold properties. Because leasehold homes are typically priced lower, you may be able to afford a larger property, a better layout, or a more desirable location, such as being closer to a city centre, transport links, or reputable schools, that would otherwise be out of reach.
For property investors, or even rentvesters, who buy houses to rent out, a lower initial price makes leaseholds attractive. As homes are usually well-situated, there is justification for charging higher weekly rent prices. Plus, the ground rent you pay as a leaseholder is considered a deductible expense, which lowers the amount of rental income you are taxed on.
Locations like Napier and other urban hubs often have a high concentration of apartments and character buildings, many of which are leasehold due to the way the land is owned or developed. In these locations, buyers who are set on living centrally or close to key amenities such as workplaces, universities, public transport, or entertainment hubs may find that leasehold is the dominant, or even the only, option.
Choosing a leasehold property in such areas may simply be a practical decision based on availability and lifestyle needs.
This is generally only true if the asking price does not take into account the fact that the property is leasehold.
Often, well-priced leasehold properties sell more quickly than comparative freehold properties.
If you are interested in buying a leasehold property in New Zealand, start by carefully reviewing the lease agreement. The lease includes ground rent, lease term, ground rent review dates, and any restrictions.
Engage a lawyer early to help interpret the leasehold’s terms and ensure you understand your obligations. Secure finance and the help of a specialist broker if needed. Note that some banks are cautious with leasehold properties.
Once you feel certain about buying a house with leasehold land, submit an offer or register for the auction if one is being held. If your offer is accepted or you win the highest bid, you will pay a deposit and settle on the agreed date. The process is nearly identical to buying freehold land, except you will also be committed to paying ongoing costs to the landowner.
Many people in Napier have owned and lived in leasehold homes over the years, with property values appreciating as well as, and sometimes even better than, freehold homes. Leasehold ownership can be a secure and worthwhile investment. Just be sure to review the lease terms carefully to ensure they suit your needs, then buy with confidence and enjoy your new home!
To get started on buying a leasehold property, check out our latest listings or find an agent near you.