Since the economic crisis hit Britain back in 2008, investors have been looking at ways in which to protect their capital but also looking for an investment vehicle that will give a good rate of return with not too much risk. The old adage of ‘high risk, high reward’ has never been more apparent. With investment funds made up of traditional shares dropping considerably since the financial crisis, investors need something that is not so volatile. Traditionally property filled this gap, long has been the appeal of owning a property portfolio, after all you have a real physical asset rather than a share portfolio which is not a tangible investment. But with property prices suffering in the UK and are set to fall further going into 2013, what investment alternatives are available?
Many investors who are experienced in property may have realised the trend now in actually investing in the land that the property resides on. This essentially means investing in ground rents. Many of us have heard the term ground rents, but what does it actually mean? The ground rent is the amount of money paid by owners of a plot of land. In the majority of conventional properties, and certainly with domestic property, the owner(s) own the freehold. If there is property though that is a development of dwelling such as an apartment block or has or is in the process of being converted into flats, then the actual ownership is split into different interests which can be freehold and leasehold. The leaseholder will own the physical element of their dwelling but the freeholder actually owns the land their dwelling resides upon. In return for having their dwelling upon their ground so to speak the leaseholder is required to pay a ground rent to the freeholder. This is often on an annual basis.
So how is this a good investment?
As previously mentioned, investors want growth but without going the ‘high risk, high rewards’ route. Using ground rents as an investment vehicle is an excellent way to get a regular income without the high levels of volatility. The only risk involved is non payment of the ground rent but the freeholder has the legal right to claim the freehold of the land if the leaseholder does not keep their end of the bargain. So the likelihood of this happening is extremely scarce, after all compared to mortgages etc the ground rent is a small outgoing for leaseholders. There is always an incentive and reason for the leaseholder to continue paying, especially if they ever need to sell their home.
As this is not a very conventional investment, some investors can be put off by the more alien nature of this investment. However when broken down it is extremely simple. Industry analysts expect a rather conservative annual interest return of approximately 6%. This varies considerably and should not be considered a minimum or a maximum. But when you look at cash deposits at banks or open-ended investments with shares, you are not going to get this level of return with this low risk anywhere else.