Lease extension cost - £250 GR RPI linked every 10 years, 125 yrs

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    Lease extension cost - £250 GR RPI linked every 10 years, 125 yrs

    Hi,

    I am trying to figure what is the most suitable capitalisation rate to use for calculating the cost of lease extension.

    I am ignoring marriage value and deferment rate as these are just very small due to the long lease (120 years remaining).

    So assuming RPI of 3% and given that the GR of £250 increases with RPI every 10 years:

    a) with capitalisation rate of 6%, the total value of all payments is around £6700.

    b) with capitalisation rate of 4%, the total value of all payments is around £15000.

    c) with capitalisation rate of 3.5%, the total value of all payments is around £19500.

    Of course the RPI assumption has a large effect as well.

    #2
    If you're the freeholder, C, if you're leaseholder then A.
    Tribunal might go B.

    Comment


      #3
      is the latest value around 3% or 5-6% ?

      Comment


        #4
        Case ref CHI/21UC/OCE/2017/0025 St Emmanuel House, 6 Darley Road, Eastbourne BN20 7GD. 7 Feb 2018 Set a rate if 3.35% for a ground rent linked to the RPI every 15 yrs

        Therefore for a rent linked every 10 years a rate between 3% to 3.25% seems realistic

        so you would take the rent of £250 and capitalise it as follows

        £250./ 0.0325 = £7,692

        Comment


          #5
          sgclacy,

          Are you sure it is this low?

          I thought the capitalisation rate means:

          1) 1st year the expected rent value is (1-0.0325) * 250 = (1-0.0325) * 250
          2) 2nd year the expected rent value is (1- 2* 0.0325) * 250 = 233.75
          3) 3rd year the expected rent value is (1- 3* 0.0325) * 250 = 225.625
          4) 4th year the expected rent value is (1- 4 * 0.0325) * 250 = 217.5
          5) 5th year the expected rent value is (1- 5 * 0.0325) * 250 = 209.375
          ...
          In total around 2134.375.

          11) 11th year the expected rent value is (1-11*0.0325) * (250 * 1.4) = 224.875
          ...

          So with that rate of 3.25% I get around £30k of capitalisation.

          Comment


            #6
            You are doubling counting - you are increasing the income by inflation and then using a rate that includes an adjustment for inflation

            You leave the rent untouched at £250 but discount at a rate that reflects the market's long term view of inflation

            If the rent was fixed you would use a rate of around 5.75% to 6%. The market's long term view of inflation is around 2% to 2.5%
            therefore you can see why a rate of around 3.25% to 3.5% would be used to value an income stream hedged against inflation

            Comment

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