The lease of Ngāti Whātua Ōrākei's downtown Auckland land comes up for review next year. Photo: 123RF
Some inner-city Auckland apartment owners may have their "heads in the sand" about the possible implications of a ground rent review next year, one real estate firm is warning.
The lease of Ngāti Whātua Ōrākei's downtown Auckland land at the former Railway Lands, Te Tōangaroa, comes up for review in August next year.
The leasehold terms included a ground-rent free period until 2011, and then reviews at seven-year intervals.
It is the site of many apartment buildings, including the Scene buildings.
Scott Dunn, of City Sales, said his firm had listed 11 or 12 properties on the leasehold land in recent weeks. "Some sales will go for under $100,000, some over. We don't have anything lined up for August that will go for over $200,000."
The ground rent is set based on what Ngāti Whātua Ōrākei said was a "modest set percentage" of the unimproved freehold land value.
Nick Goodall, head of research at Corelogic, said the median land value for Auckland residential properties from council rating values increased from $605,000 in 2017 to $800,000 in 2021, although values might have fallen since.
Dunn said there could be a situation where ground rent had increased ahead of incomes, or the rent that tenants were paying investors who owned apartments on the land.
He said, for one two-bedroom apartment in the Scene 3 block on Beach Road, ground rent was $24,780 a year at present.
Last review, the ground rent for The Docks on Dockside Lane went from $772,807 a year to $1.625 million.
"In seven years the ground rent could double, which has decimated some people," he said.
He said many of the apartments had been working well as investment properties but that could change.
"I believe the next one will be the most interesting yet, my feeling is that a lot of these, this will be the time that the ground rent gets so high that income - rent from tenants - won't cover it for a lot of properties.
"They worked very well for a while. The last rent review a lot of them went close to double and that shocked a lot of people but there are still people I'm talking to now who went through the last review but are saying 'oh well I'm getting good rent'. I'm like 'you know what happened last time' but some people might still have their heads in the sand a little bit."
In a statement, Ngāti Whātua Ōrākei Whai Rawa said any adjustment in ground rent was effectively making up for changes in the land's value over the previous seven years.
"The land valuation process is informed by independent valuation data and assessments from registered valuers appointed by both the lessor - Ngāti Whātua Ōrākei - and the lessee. The terms of the lease agreement provides for a negotiation period, and an arbitration process if the parties are unable to reach agreement.
"The lease agreement, specific lease terms and rent review process are fully transparent. Ngāti Whātua Ōrākei simply acts in accordance with those terms as would any commercial landlord."
AUT professor John Tookey said Ngāti Whātua Ōrākei Whai Rawa would have a range of option available to it if there were concerns about the sustainablity of the ground rent, including pricng rent rises at or below inflation.
"A pragmatic way ahead that minimises business failures and arrears in rental properties and leased land. In the context of an economic downturn, probably the most sensible way to go."
He said it could also be a good time to add to the property portfolio because it would be possible to get "very tight tenders" on projects from "work-starved contractors". There could also be an opportunity to expand holdings of proximate properties to make more value land parcels for the future, he said.
