What is a leasehold property in NZ? Everything you need to know

When you buy a leasehold property, you don’t own the land, someone else does. What you’ve purchased is the exclusive right to use the property for a set period of time, which can be anywhere from 10 to 50 or even 500+ years. You will pay rent to the owner of the land - called ground rent - and you may also own the physical buildings on the land. When the term of the lease expires, the land will be returned to its owner and you’ll no longer be able to occupy it. 

As part of the purchase you’ll have a lease document which sets out the terms of the lease, including your responsibilities and rights as leaseholder. The majority of leasehold properties are apartments, with a much lower number of townhouses and houses. 

There is a high concentration of leasehold properties on the coast, around Māori land, and surrounding other significant landmarks, in areas like Auckland's Viaduct, Cornwall Park and CBD. 

It may be safe to buy some leasehold property but only if you know what you’re doing, and fully understand the terms of your lease. Owning a leasehold property is very different from owning freehold, which is the most common and understood type of ownership in NZ.

Because you don’t own the land, leasehold property is typically much cheaper than comparable freehold properties, which may mean a smaller mortgage and paying less mortgage interest. This can make leasehold properties seem very attractive.

 Let’s look at an example - right now there are two very different apartments listed in Auckland city:

1. A leasehold three bedroom, two bathroom, 100sqm absolute waterfront luxury apartment. Asking $1.29 million. 

2. A freehold one bedroom, one bathroom 50 sqm apartment much further from the water. Asking $999,000. 

If the first apartment was freehold it might sell for north of $3-4 million. But because you’re only buying the building and the right to occupy the land it’s much cheaper. On the other hand, the second property is priced higher (relative to its value) to reflect the fact that you own the apartment and a portion of the land it’s on via freehold.

Before you jump at a low price and buy a leasehold property it’s important to understand the risks involved (and there are a few!). Let’s take a closer look:

• Ground rent increases: ground rent is regularly re-assessed according to the market and land values every 7-21 years, so there’s no way to know how much you’ll be charged in future. Several people have been caught out when buying a leasehold property because the ground rent seemed cheap, only for it to significantly increase down the track (sometimes to a level that the owner couldn't afford).

• Minimal capital gains: because you don’t own the land, leasehold properties typically don’t see the same capital gains as freehold ones do (if any). If you’re buying your first home this can make it very difficult to upgrade later, as freehold properties may be appreciating in value faster than your leasehold home. This may also make leasehold properties less attractive as investments. 

• Finance can be difficult: because of the uncertainty around ground rent and the lack of capital gains it’s typically harder to borrow to finance a leasehold property. Banks may minimum deposit of 50%. 

• Hard to sell: there’s a stigma around leasehold properties because of the above points. Plus, because banks are more hesitant to lend on them, there’s typically a much smaller buyer pool for leasehold properties. As a result they can be very hard to sell, especially if there’s a ground rent review coming up. 

• Less control: you may not be able to make any changes to leasehold land, depending on the terms on the lease. This can mean that building of extensions, minor dwellings or other renovations aren’t possible. 

Google stories about the risks of leasehold properties and you’ll find plenty. For example, real estate agent Martin Dunn, head of City Sales and founder of Real Estate Together, told Stuff.co.nz he knew of a person who bought a mansion on Cornwall Park for $90,000, despite being advised against it. The ground rent then increased to $120,000 and the person was then stuck with an unsellable property that was financially crippling. 

In some rare cases, leasehold homes can work for lifestyle reasons or for downsizers, retirees and investors, Martin explains:

• Lifestyle: buying a leasehold property in Auckland’s Viaduct for $1 million, instead of a comparable property elsewhere for $3+ million can be tempting. In this example, the buyer may pay more mortgage interest on the larger loan than ground rent.

• Downsizers and retirees: for retirees who’ve sold their family home sometimes leasehold properties can make sense. For example, if the retirees have a large amount of cash it may make more sense to buy a cheaper leasehold and get higher returns on the rest of the money in other investments. Older retirees typically own property for a shorter time, so they may also be less affected by ground rent increases. 

• Investors: small, low-priced leasehold apartments in Auckland’s CBD are popular with some investors. They may not experience capital gains, but they may have very high rental returns - as high as 10% net, according to Martin. 

Due diligence is important no matter what type of property you’re buying, but it’s especially crucial when purchasing leasehold land. To protect yourself, it’s a great idea to do detailed due diligence before you make an offer. 

Here are a few things you need to know according to MoneyHub and other experts:

• Dates of rent reviews: when are rent reviews and how frequent are they? If there’s one coming up soon, beware. 

• Bare land or developed land: bare land generally has lower ground rent than developed land (i.e. an apartment block). 

• The reputation of the landowner: MoneyHub recommends Googling the landowner and asking your lawyer to find out if they have a reputation for increasing ground rents and legal action. If they do, steer clear of their properties. 

• Restrictions on your use of the property: are you able to renovate the property, add additional buildings, or change it in any other way ? It’s always better not to assume you can with leasehold properties. 

• Your responsibilities as the leaseholder: for example, if you need to pay insurance or maintain the buildings on the land. 

• Body corporate costs: because leasehold properties are often apartments, they may have body corporates and the leaseholder may be responsible for covering some or all of their costs. Make sure you understand this before buying. 

You should also carry out all the due diligence you usually would for a non-leasehold property, which may include building reports, assessing the body corporate and more. Most importantly, you should find out when the land lease expires because when it does there’s no guarantee you’ll be able to stay in the property. 

When the lease expires,the landowner can choose to reoccupy the property, which means you’ll lose the amount you paid to purchase it and have to move out. The owner may also choose to renegotiate the terms of the lease, which could affect the ground rent you pay or the way you’re able to use the property. 

To protect yourself against this you should make sure that the lease includes the option to renew once it expires.