Marriage Value - some thoughts

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    Marriage Value - some thoughts

    In a perfectly efficient world, I would advance the theory that marriage value would not exist.

    In that world we would assume that buyers could calculate the following two sums. Firstly, the capitalised value of the ground rent and secondly the value of the reversion and there were no transaction costs then the value of a property with a short lease as opposed to a long lease would be the sum of those two figures. We will also assume that at the end of the tenancy they have the right to remain in the property paying a full rack rent.

    That last criteria being important as of course the disruption and stress of moving would make someone pay more than the two figures above.

    A buyer faced with a short lease as opposed to a long lease would be indifferent between the two if the value of the ground rent they have to pay is correctly valued and the value of the reversion is also correctly valued

    In our market, an imperfect market, if marriage value exists it is because the TWO sums I have outlined above produce a figure less than the differential between the value of a property with a long lease and a value for a property with a short lease.

    Therefore, this is the evidence that the deferment rate and the capitalisation rates are not correctly set and both need to be lowered.

    Let’s us take a flat worth say £250,000 with a lease term of 99 years from 25 March 1994 - 72 years with a ground rent of £100 per annum doubling every 33 years. Following the decision in Iron Hawk

    The capitalised value of the ground rent at 6% is £2,923

    The value of the reversion discounted at 5% is £7,381

    The marriage value is £9,228

    The relativity proposes that the flat ordinarily worth £250,000 with a very long lease in a no act world is worth £221,239 with a short lease a difference of £28,761

    Now with regard to the rent with the collapse in interest rates a rental stream such as this should really be discounted at about 4.5% in our perfect world with no transactions costs. If that were the case the ground rent would be worth £4,031.

    Therefore, the reversion in this perfect world would be £28,761 less £4,031 = £24,730. This would be achieved by discounting the reversion at 3.26% - a reduction from Sportelli of 1.74%

    So, to recap if the income was discounted at 4.5% and the reversion at 3.26% no marriage value would be created.

    Is the rate reduction of 1.74% from the seminal case of Sportelli unreasonable? I would say it is reasonable. In Sportelli in 2008 the risk free rate and the Government long term risk free rate set for personal injury claims (The Ogden Rate) was broadly in line at 2.25% to 2.5% . Today the Ogden rate stands at MINUS 0.25% a fall of some 2.5%. Therefore, to claim only 1.74% of the 2.5% is wholly reasonable

    The consequences of this would be that the value of the reversion would explode for lease above 80 years where marriage value did not form part of the equation

    The other point that comes out of this appraisal is that lessees only having to pay 50% of the marriage value were in fact gaining as there should have been paying a great deal more for the reversion and the capitalised value of the rent and the extent of the error in the two figures used amounts to the marriage value created.

    The collapse in interest rates has been responsible for significant one off rises in asset values and the impact on the reversion has come as a shock to many , however in dealing with the shock need to be reminded that the value of the property will have risen and so to would the value of any pension rights



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