Thinking of selling your ground rent or freehold? People are often surprised by the apparent demand for ground rent investments. There are plenty of companies out there offering instant valuations and cash purchases. But does this offer you the best value for your asset? To understand the potential value you need to understand the factors which determine the ultimate price you are offered.
The first factor is the lack of any “real” market place – it is not like selling a house or a car where there is easy access to “comparables” for example Mouse Price or Parker’s Guide, to help to you decide if you are getting the right price. However there is little public information on what prices a freehold is sold for. They appear in auctions from time to time but it is not that easy to obtain that information.
What are my ground rents worth?
The value of ground rents is based on two main factors :
- the total ground rent in the building; and
- the lease length.
We cannot provide formal valuation advice but generally the rental income is multiplied by a figure usually around 15-20 x rent. For example a rental income of £250 on 20 flats produces an income of £5,000. An investor may pay £75,000 for such a ground rent investment.
The lease length is significant if the lease is around 99 years or less. The anticipated lease extension cost will increase the worth of the ground rent investment. Bear in mind however that a lease extension will result under the statutory extension scheme in a peppercorn rent replacing the current rent so there is a trade off to be made because the ground rent is lost. However if the property is in a high value area the cost of the lease extension may be significant. You can calculate the approximate worth of this by using a lease extension calculator (for example try lease-advice.org ). Bear in mind also that the tenant may never extend the lease or certainly not during your lifetime. A discount needs to me made to factor this in so do not expect to receive the full potential lease extension cost from a buyer.
Other factors will adjust this. For example rent review provisions are important as they affect the value of the income stream. Insurance and management control can add a small amount of value. There may be other factors such as potential to develop.
What are ground rents?
When a new block of flats is built or converted into flats, two levels of ownership are created – freehold and (long) leasehold. The leasehold titles are purchased by the flat owners and the length of the lease can vary from 99 years to 999 years. The developer usually retains the freehold and this freehold interest includes the benefit of collecting the ground rent reserved under each of the leases. The rent may vary but can be a few pounds to around £250 or more per year. Some times this rent increases over time but usually only once every 25 or 33 years.
Why do people sell ground rents?
There can be various reasons.
To wind up an Estate:
Often ground rents, especially small rents, can accumulate in an estate and need to be sold so that the proceeds can be distributed to the beneficiaries.
To remove administrative burden:
A small ground rent can be uneconomic to collect. There are also some tricks and traps in the legislation which can make it difficult for someone not involved in the sector to effectively collect and recover small debts. Even larger blocks or portfolios can cause problems in collection of rent. Large investors generally know the area and/ or there are economies of scale which reduce the cost of collecting individual ground rents.
To free up capital :
A ground rent can produce a large cash sum which may be needed especially for developers whose real business is the construction of units not collecting rents.
To wind up their company or developments:
When the developer winds up their development or business they are often left with parcels of left over land and ground rents from past developments. The cost dealing with these may not be economic and/or they are disproportionate to the running cost of the business.
What legal procedures are involved in selling ground rents?
If the seller is a developer the developer can avoid having to comply with legislation relating to the right of first refusal if he contracts to sell the freehold effectively before 50% of the flats in the building are under contract.
If you hold the ground rents in a company (and you do not want to retain the company) you can sell the company/company shares and avoid the need to serve a notice however the costs of selling company shares is often prohibitive but it will depend on the value of the portfolio/size/type company.
In all other cases in order to sell ground rents it is necessary to serve a Section 5 notices on all the long leaseholders/owners/tenants of the flats. This gives them the right (but no obligation) to purchase the freehold including the ground rents at the price states on the notice. There are different types of notice used depending on the type of sale, generally straight to transfer, contract and transfer or auction (see below). There is a two months period in which they can respond and then they have a further two months to nominate a purchaser, if the development is very small this may be their personal names or more likely a company set up by the owners to purchase the freehold.
If the tenants fail to respond to the notice (or fail to respond in time) then the transaction can proceed provided the price is not less than that states in the notice. Quite often this type of matter will proceed straight to completion without formal enquiries save for arrears statements being produced.
There is of course a slightly different route for auction – effectively the tenants can register an interest and purchase at the same price ultimately set at auction.
How do I sell?
There are a number of ground rent investment companies who offer to buy your ground rent (just google) – beware of low offers with the promise they will take the hassle out of the process by serving the notices etc because this is relatively low cost process. By all means obtain some offers but beware of the hard sell. This may be more cost effective if you have a low value ground rent.
However the obvious place to start in our view is with your tenants. They are well advised to acquire the freehold and you may want to negotiate with them first. You may need some guidance as to how to do this from us. Even if all of the tenants do not want to participate you may find enough of them show interest.
The other obvious option is auction. You can see from past auction results that other ground rent portfolios are sold quite often. You can sell off large portfolios piecemeal attracting small cash purchasers who compete with each other on price. You can also often negotiate discounts on fees for smaller auction lots/multiple lots to reduce the cost of sale.
Can we assist?
For further information or to discuss your circumstances in more detail please contact Mark Sadler on 01708 757575 or email MBS@ker.co.uk