Ground Rents Income Share Discussion Threads

[spectoacc] 31/7/2017 12:47

Must be some degree of "buyer beware" to this leasehold scam. Letter in the Sunday Times from someone with a Taylor Wimpey leasehold house, 125 year term, £250pa ground rent, doubling every 10 years (which they say they knew nothing about). They bought from someone who'd bought from TW (ie 2nd owner) so no access to TW's redress scheme.

But who on earth buys a house leasehold, with less than 125 years to run? A flat, 999 years on a peppercorn, fair enough.

And that's before you get to £250pa turning into £500pa, £1kpa, £2k, £4k, £8k, £16k, £32k, then £64k, per annum, from year 80. At which point you've only got 45 years remaining! You'd have to pray for some serious inflation in the next 80 years.

Without redress/changes, these places will be less than worthless - or rather, will revert to the freeholder many years before the lease is up. Does a bank holding a repossessed property have to pay the ground rent? I've no idea.

Impossible not to see the terms getting changed, even retrospectively. Sajid Javid on record as saying the correct level for ground rent is in many cases zero. That's irrespective of it being a 10 year doubler, a 25 year doubler, or simply inappropriately leasehold.

Will see what the consultation period brings, but I'm struggling to see why any house should be sold as leasehold. Flats, fair enough, assuming the terms are fair, but otherwise it just looks like a money-spinning con.

[spectoacc] 31/7/2017 08:22

Nothing I read in the press at the weekend made me think GRIO is a buy yet (re leasehold rather than specific to GRIO). Might revisit after this 8 week consultation period is up.

[poacher45] 28/7/2017 14:08

I am afraid that their latest buys just do not seem like bargains to me. Unlike the trust that Alpha real estate has invested in where the income just keeps going up. Why is the dividend down this year?

[jonwig] 28/7/2017 12:41

poacher (post #94) - the Northumberland site is minuscule (£200,000) and the yield is indexed but the loan is fixed. probably neutral over five years. Maybe they reckon they have a bargain?

Loan interest can normally be offset against tax Though no tax is paid on rental income, they do appear to pay tax on other things. I don't know how this is accounted for, but maybe you do?

[andyj] 27/7/2017 17:23

My finger hovered over the buy button today when the spread was 120-120.50, but I decided against it having rethought my earlier post. I do see some upside and a steady dividend, but I could not justify taking a higher risk for a lower yield than pref shares give. Unless they fall further and the yield rises, I'm out.

[jombaston] 27/7/2017 15:56

A 25-year doubling ground rent (2.8% pa) is in line with inflation expectations. So that could hardly be described as onerous. This is from June's Citibank survey:

Longer-term inflation expectations for the next five to 10 years rose to 3.1 percent, up from 3.0 percent in May but below February's 3.2 percent peak, Citi said.

I guess there could be a window of a week or two to pick these up...it seems that the market is reacting to the press coverage rather than any detailed knowledge of what might happen.

[poacher45] 27/7/2017 15:48

I think the fall has been overdone but they recently took an 18 million loan at 3.37%.
I then find they have bought a student ground rent in Northumberland yielding 3.10% and to me that is stupid. Perhaps somebody will enlighten me.

[jonwig] 27/7/2017 14:51

It was one-way trade for most of yesterday and this morning. Some buyers are featuring now.

[jonwig] 27/7/2017 14:50

Jombaston - altering existing leases might have a read-back to previous leaseholders. In GRIO's case it shouldn't, as none are of the 10-yr type.

sikh - that's their problem, and I think certainly not GRIO's. If the govt allowed 10-yr doubling on shared-ownership they deserve to be sued, yes.

[sikhthetech] 27/7/2017 14:06

The irony is that most(not sure how many?) of the newly built homes have been sold through 'shared ownership schemes' developed by the government...

All leases would have been checked and explained by the buyer's solicitor, so it's not like you're buying ppi or bucket and spade - I've seen both analogies...

The real irony is the govn promote the 'shared ownership scheme' and clearly state that all shared ownership properties are leasehold...

Maybe the government should be compensating the 'shared ownership scheme' buyers..

"With Help to Buy: Shared Ownership you can buy a newly built home....Shared Ownership properties are always leasehold."





'sausages and buckets and spades'

[jombaston] 27/7/2017 13:44

Worth reading the original material from the govt website. There is now an eight-week consultation period - there is a link to the document on this website.

The govt have more of an idea as to what to do with new leases. What to do with existing leases is a more difficult problem, but there are looking for suggestions.

'The Government recognises the challenges faced by existing leaseholders with
‘onerous’ ground rents. We are very keen to hear views on what steps could be
taken to improve the situation of these leaseholders, which could include steps to
tackle unreasonable and onerous rises in the future and strengthen the rights of
consumer redress from unfair trading practices.' p.19



We will hear more over the coming weeks but, in terms of existing leases, I suspect the obvious steps could be to limit increases in rents to inflation and make it more difficult (but not impossible) for freeholders to evict tenants for non-payment.

I am looking for an opportunity to buy. The question is have we reached the point of maximum panic or are we just getting there?

[andyj] 27/7/2017 12:00

What do you see as the dangers Specto?

[andyj] 27/7/2017 11:55

I agree Jonwig, at around a 10% discount to the estimated adjusted NAV, it is surely in oversold territory, given the low risk attached. Indeed once this news is fully written in and no longer news, I would anticpate a slow upward creep, closer to NAV. That, and the safety of the 3.3% div make this a very attractive investment IMO.

[spectoacc] 27/7/2017 11:53

Personally I'm surprised they thought a £5.5-£6m drop in NAV, when the new rules only apply going forward, and they say no exposure to the worst of the doubling ground rents, and that c.£6m is on only 18% of the portfolio.

But I still think there's dangers going forwards, & what's very clear is the whole "compare us to govnt bond yields & linkers" business case is looking ropey. Totally safe they are not, and I'm unconvinced the current yield is anywhere close to justifying the potential risk.

In their defence - they're still 10p above 18 month low.

[analyst] 27/7/2017 11:24

Bargepole territory until all this Ground Rent scandal is resolved legally

[jonwig] 27/7/2017 11:22

This from the H1 report:

Although the Company does not have an exposure to perpetual 10-year doubling ground rent, as per the 12 June unaudited Net Asset Value (NAV) announcement, the Directors believe that the Company's wider portfolio of doubling ground rents (18% of the portfolio capital value) may now be worth approximately £5.5 to £6.0 million less than as at 31 March 2017. This would lead to a NAV per share of approximately 132 pence, still slightly higher than the previous calculated NAV as at 30 September 2016. We continue to carefully monitor this part of the market.

They do have 25-yr doubling, but that works out at 2.8%pa.

I suspect the fall is overdone.

[sikhthetech] 27/7/2017 11:00

According to BBC the proposed changes only affects future sales and only in England...
Current owners will need to redress via their builders/solicitors...

It makes no sense to have new build single dwellings as leaseholds....

With current new builds, I expect it'll make recent leasehold new builds difficult to sell and could mean reduced house prices for those affected...the publicity is enough to make more potential buyers aware...

I see none of the people affected complain when their house prices go up!!
Maybe ground rents and their increases should be linked to house prices??

[spectoacc] 27/7/2017 10:39

@andyj - I guess that was the estimated NAV hit before yesterday's announcement, though why it should be any different I'm not sure. My concern would be legislation (or case law) going forwards, affecting what GRIO already hold.

[andyj] 27/7/2017 09:02

It is 18% and apparently this would reduce NAV by 6m, returning it to the value of a year ago. From whence, I feel, it will resume an upward trend, especially if they increase the div as they have.

[spectoacc] 27/7/2017 08:17

Thanks @jonwig - I guess those are the ones at risk of further legal changes. 18% could be worse.

[jonwig] 27/7/2017 08:02

Spec - 18% I think, and they suggested a clip to NAV: about 131p.

[spectoacc] 27/7/2017 07:58

@jonwig - memory says they had about 20% in doubling ground rents & were expecting a NAV hit - will have a dig around later.

[jonwig] 27/7/2017 07:31

Spec - nor am I! (And the pic of houses doesn't help - I'm sure GRIO doesn't own any.)

I've sold but am wondering if the fall is overdone. If their portfolio is largely new-build, there won't have been any doubling, so contracts could be revised and cleaned up without too much trouble. Maybe!

[spectoacc] 27/7/2017 07:17

Thanks; not sure I buy the "..This could be positive/scarcity value" argument. May not be the last legislation against unfair leaseholds.

[jonwig] 27/7/2017 06:45

Comment on yesterday's falls: