What Return Do Ground Rents Provide?


In recent years many property investors have been turning to alternative ways of investing in the property market without the risk of being too exposed if property prices take a hit due to the uncertainty in the property market. One way of doing this is to buy freehold ground rents where the landlord collects his income on an annual basis. They are a low risk investment rather than speculative and therefore pay a steady annual income. Most leases will provide for the ground rent to increase throughout the term of the lease, some leases will state the rent will increase every 25 years whilst other leases will stipulate the rent increases inline with the retail price index. Of course some leases will also state that the rent will not increase at all throughout the lease term. These ground rents are inflation prone are are not as popular with investors.

Whilst the income from a block of flats paying you an annual income of £10,000 per annum is very welcome at the present time it will be worth less in ten years time particularly if inflation is 5% per annum as it is at the present time. If you can buy a property where the income increases throughout the term of the lease you will have some protection from this. My company sells these types of properties and I can tell you that they will provide an annual income of between 5% and 8% depending on what you buy. Of course you will not really be benefitting from capital growth unless the whole world decides they want to invest in these products and pushed prices up.

There are a couple of large investment funds that have been set up to invest large amounts of money in these types of properties and they have been buying many of the large portfolios that have come onto the market. There are also a couple of insurance companies that hold low risk ground rents as part of their portfolio. They tend to buy pure ground rent income as they do not want to have the problem of administering the day to day management of the blocks. It is better for them to simply collect the ground rent on an annual basis without the hassle of dealing with lessees on a daily basis. Of course there are other perks that a landlord can benefit from such as late payment penalties and fees for altering leases etc. Of course landlords are still buying properties with sitting tenants but they are also looking for a little insurance against a fall in house prices.


Source by Tom Raymond Thomas

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