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Valuation of a freehold subject to long leases

The valuation of a freehold of a block of flats with long leases is based on the investment value. 

 

In order to value an investment for enfranchisement purposes and to achieve such an income for so many years there has to be a calculation. It is best illustrated in an example as follows:-

 

1. Calculate the term

 

The calculation for the term in ground rent would be £50 x 10 flats = £500.00 per annum for the block

Multiply the ground rent figure by the year’s purchase. This is calculated by the valuer or more usually taken from the valuation table. To obtain the years purchase multiplier the valuer must make an assumption on a yield rate. In this example the valuation table showed the yield as 8% for the years figure. The years purchase of lease 68 years at 8% = 12.433 so £500.00 x 12.433 = £6,216.00.

 

2. Calculate the reversion

 

The current value of the flats say £105,000.00 x 10 flats = £1.5M (leaseholders present interest)

It is the nature of leasehold properties for the value to decrease as the lease shortens. So a long lease is generally worth much more on the open market than a short term lease. In general enfranchisement will increase the value of the individual flat. The amount of this improvement will be heavily dependent upon the length of the unexpired term before extension. There are no hard and fast rules as to how much the value will increase by. It is always an estimate based on local comparisons within the market.

 

The lease will affect the value of each individual flat but the freehold valuation must consider its current state. In effect the valuer has to assess the unimproved value of the flat not the improved value.

 

When calculating the reversion the valuer must do so based on the sale value for when the current term expires. For this purpose it must be assumed that the most favourable leases will be granted for a maximum of 999 years.

 

The example below states the acquisition of the freehold will produce an increase in the value of each flat of 10%. Meaning a future value of each flat of £165,000.00.

Improved value: £165,000.00 x 10 = £1.65M

 

Again, take the multiplier from the tables to provide an investment value. What is the promise of the future £1.6M worth in today’s market? Then multiply, the present value of £1.00 to the same yield rate of 8% as of previously.

Present value £1.00 deferred 68 years at 8% is 0.00534. So £1.6M x 0.00534 = £8,811.00.

 

What is the investment value of the freehold?

 

The investment of the freehold i.e. the freehold interest is therefore represented by the sum value of the term and the reversion £6,216.00 plus £8,811.00 = £15,027.00.

That is the sum that the interest is likely to achieve in an open market sale.

 

Marriage Value

 

This represents the increased value of the flats following completion of the enfranchisement. The market value increases as the enfranchised leaseholders have the ability to grant themselves longer leases. The potential profit only arises from owning part of the freehold. All parties share the freehold equally as dictated by the legislation.

 

Legislation stipulates to ignore the marriage value of any flat held by a prospective member. Taking the figures from the previous example above the approved value of the property at £1,650,000.00.

 

From this subtract the leaseholds current value £1.5M and the freeholders interest of £15,027.00 and in any case the marriage value is £134,973.00.

 

Take a 50/50 split between the freeholder and the enfranchising leaseholders. The leaseholders would have to pay half the price i.e. £67,486.00 in addition to the freeholder’s interest.

 

You will see in this example that the marriage value can considerably exceed the value of the freeholder’s interest. The calculation depends upon the estimated increase in the value of the flats. So logically, the lower increase the lower the marriage value will be. This is where the input of a local valuer and local knowledge is of paramount importance.

 

Completing the valuation of a freehold

 

Using the examples above the potential valuation, assuming no extra costs arise from the additional freeholders interest or injurious affection would be the sum of the freeholders interest £15,027.00 plus the marriage value £67,486.00

Possible purchase price £82,513.00 or approximately £8,250.00 per flat.

 

Summary

 

The example freehold valuation assumes that all leaseholders are both qualifying and participating. The examples provided are solely to demonstrate general work and practice valuation. They are not for the application of individual circumstances. It is extremely important that you get a local professional valuer to help you in advising on the cost of purchasing the freehold.

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