Component Parts

 

The capitalisation rate is the second element in calculating the premium for the lease extension (after the FHVP) and stems from the loss of the landlord’s ground rent income.  A multiplier is generally adopted stemming from the valuer’s experience and various case law which results in a capitalisation rate which is given in the table in our report.  We give a range of capitalisation rates (as we do with most values) as this is not an exact science but merely based on the experience of ourselves and the valuers acting for the other side.  

 

 

The deferment rate is the value attributed to the right of the freeholder to receive the property back at the expiration of the lease.  This is arrived at by deferring the capital values for the remainder of the unexpired term via a multiplier used to produce an investment value, i.e. what is the promise of the future flat value is worth today.  This element is generally determined by case law and is rarely altered except in extreme cases. 

 

 

The relativity percentage determines the value of the short lease property in comparison to the value of a flat with in excess of 80 years unexpired.  Where a flat has over 80 years unexpired, the relativity percentage is always 100% and therefore there is no marriage value payable.  For flats with less than 80 years unexpired, marriage value is payable and therefore relativity will be less than 100%.  Relativity is determined by sales of recent short lease flats in the vicinity, or by reference to various graphs published by both the RICS and other reputable bodies, and again is determined by the experience and view point of the valuer and is often a point of contention between valuers for leaseholders and valuers for freeholders.  Our report gives a range of values which we would expect this element to be agreed at, and using the relativity, a short lease value of the property is determined and given in the calculations within the report.  

 

The calculation of FHVP has been discussed previously (here)

By combining all of these various factors, capitalisation rate, deferment rate, relativity and FHVP, the valuer is able to calculate the premium due for the lease extension.  Due to the number of factors involved, this is rarely a simple exercise and again is a matter of opinion for the valuers involved rather than a simple black or white calculation - hence within our reports, we give a range of values which we would expect the premium to be settled at.