Freehold Valuations & Law Commission Report 2020

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    Freehold Valuations & Law Commission Report 2020

    I'm involved in some initial discussions with the freeholder of the leaseholder of the building that I own a flat in (in London). He has expressed an interest in selling the freehold to the flat owners, and at the right price I think a deal could be done.

    I'm somewhat aware of the legal process here (the "collective enfranchisement" framework and all that). The fly in the ointment is that there seems to be some changes to the law in this area coming at some point, following on from a Law Commission report last year into the whole area - although when this will happen (or even if!) seems uncertain.

    I did carry out a "bag of a fag packet" freehold valuation back in 2019, suggesting a fair market price might be in the £80k - £100k range. However I'm wondering if these proposed law changes could have shaken up the market - presumably they would put downward pressure on these valuations, if I've understood correctly.

    Would be interested to hear from anyone who has their finger on the pulse with all this stuff...wondering if there's some way I could do some kind of benchmarking exercise based on other current deals going through, just to get a flavour of where the market is at the moment.

    Thank you.

    #2
    The two main aspects that would impinge on the value of the freehold would be marriage value and a possible cap on the ground rent used in the valuation.

    If the lease term is below 80 years then marriage value would be payable, however within the valuation fraternity there is a growing acceptance that the deferment rate used to value the reversion could well be lowered from 5% to 3.75% to 4%. This would negate marriage value, but leave the freeholder in much the same position. It would deliver on the government's proposal to make it quicker and easier, however not cheaper. Saving could be made by making the landlord carry his own costs.

    As to the capping of rents, it is noted in the Ground Rent Bill that where the existing ground rent is agreed to carry on into the new lease ( for a lower premium) no cap is put on it. If the government is confident of being able to cap rents than I would have thought they would have made a start in that new bill

    It seems as if the Government have asked the CMA to deal with the real problem ground rents and those that fall outside the CMA criteria are hardly the stuff of nightmares such that the government should get embroiled in the European Court of Human rights trying to get a ground rent of £350 per annum down to £250 per annum

    The auction market for reversionary ground rents in London shows that buyers are paying more than just the capitalization of the rent and the reversion - implying the expectation that the measures proposed will be watered down

    The great estates in London and the insurance industry that own large portfolios of these investments will have plenty to say on the subject and will run it all the way to the European Court so who knows when any reforms to the existing valuation model will come into effect. The continuing collapse in long term risk-free interest rates makes it more likely that there will be a challenge to the deferment rate sooner rather than later.

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      #3
      They were talking about it for the last 10 years, while there maybe change - i would die to know what it would be. Practically, can you wait or there is pressure to get leases extended?

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        #4
        Thanks. No huge pressure here - the leases have about 105 years left to run.

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          #5
          sgclacy,

          Thanks. The leases have about 105 years left to run, so if I've understood things correctly, marriage value won't be a factor here.

          You made the interesting comment "The auction market for reversionary ground rents in London shows that buyers are paying more than just the capitalization of the rent and the reversion" - is there any data on auction details in the public domain that I could see? Curious to see the prices at which these deals are being done at the moment. If it looks like things will move forward then I'm sure we'll appoint a solicitor/surveyor etc. and have a more formal valuation carried out. I'm just trying to get a rough ballpark type range so that we know what we're dealing with.

          All the leases had an initial 125 year term. The ground rent is £250/yr for years 1-25, £500 for years 26-50, £750 for years 51-75 and then £1,000 for years 76-125.

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