Originally published in the Estates Gazette 13.03.25
From one perspective, commercial ground rents might seem to be the “driest” of all property investment types. Although they may not appear to offer the same kind of immediate returns as other assets, when they are offered at auction there is a growing queue of eager buyers.
Ground rents are usually a rental payment made by a leaseholder of a property to the freeholder who owns the underlying land. The term of a ground rent is invariably long – it’s not uncommon for them to be granted initially for 100 years or more – and the income they provide is often subject to a regular review pattern or index linking. Investors are attracted by these investments’ ability to deliver steady, long-term income which can underpin portfolio performance and bring some predictability to long-term financial modelling.
Commercial ground rents are particularly attractive at present as they are not governed by the same scrutiny that the residential ground rent sector has attracted in recent years.
The holders of extensive commercial ground rent portfolios have historically been established landed estates: local authorities, institutional investors, estates with a major footprint across a particular urban area, or family owned estates that have wanted to retain long-term control over land for generations to come. The level of income produced varies substantially from a few thousand pounds into seven figures.
Investor interest in commercial ground rents is broad, spanning local, national, and international buyers. While local property companies often seek investments within their geographic areas, national and global investors view UK ground rents as attractive long-term holdings and an opportunity to buy at a discount to current unencumbered land and building values. Developers and strategic land investors also participate, particularly when acquiring assets as part of a larger medium-term land assembly exercise.
While it might be expected that the leasehold occupiers who currently pay a ground rent to the freeholder might be a “special purchaser” – driven by the opportunity to turn their leasehold interest into a freehold and realise the marriage value – we are now seeing these buyers routinely outbid by specialist investors. This is an indication of how highly sought-after ground rents currently are when they come to be offered at auction. The combination of professional investors and motivated special purchasers is creating a highly competitive environment which results in sale prices substantially in excess of traditional valuations.
Our auctions are proving to be a perfect platform to bring these interests to market as the process captures every potential buyer from the occupiers of the building on which the ground rent is levied through to specialist multi-million pound investment funds and wealthy family offices, all of which are hungry for these commoditised income strips.
The February Acuitus auction was a good example of the diversity of demand. A ground rent-style interest in a prime office site in Covent Garden, WC1, sold for £5.46m at a yield of 4.6%. The home of well-known international architectural practice Scott Brownrigg, it produces annual income of £270,000 and attracted strong investor interest for an asset which had not changed ownership for almost 100 years. Let on a lease until 2081, the interest is subject to five-yearly rent reviews geared to 60% of the lease’s definition of open-market rental value of the land and buildings. While the yield achieved was strong, the attraction of this purchase was the “once-in-a-lifetime” opportunity of being able to invest in a prime West End building for just £350 per sq ft.
Against this backdrop, there is a clear message about the opportunity for sellers of ground rent interests and the depth of demand they can tap into. However, these sellers need to ensure their assets are fully exposed to the growing range of potential buyers. Not long ago, the usual process for selling a ground rent would have been to first sound out the leasehold occupier and maybe adjoining freehold owners and then, if they didn’t bite, market the asset on a relatively localised basis.
However, now there is a growing range of buyers – both domestic and international – it is imperative to ensure that these rather unusual forms of investment are reaching the widest possible investor audience, with the commercial property auction functioning as a gateway to many new breeds of private investors.
Charlie Powter is founding director at Acuitus
