The deferment rate used to calculate leasehold enfranchisement premiums should be set at 3.68%, according to campaign group Justice for Property Rights.
J4PR has made the recommendation in its response to the government’s consultation on the valuation rates to be used under leasehold reform.
The prescribed capitalisation and deferment rates will be used when calculating the present value of future income and property interests as part of the price paid by leaseholders when extending leases or acquiring freeholds.
J4PR broadly supports putting the valuation principles into legislation but argues that the methodology used to set the rates is particularly important because they are expected to be reviewed only periodically.
SPORTELLI REVIEW
The campaign commissioned Ivan Harkins, a former director in the real estate team at financial risk management specialist JCRA Group, to examine work produced by the Government Actuary’s Department alongside the consultation.
J4PR argues that the methodology established following the Sportelli judgment should be updated using current market and economic data, producing a deferment rate of 3.68%.
Its calculation comprises a 0.68% real risk-free rate, a 1.5% real growth rate and a 4.5% risk premium.
The group disagrees with elements of the Government Actuary’s Department’s approach, including its use of a six-month averaging period for the real risk-free rate.
J4PR argues that a five-year period would produce a more stable measure and be more appropriate where prescribed rates could remain in place for a lengthy period.
It also favours longer-term economic forecasts when assessing real growth rather than the five-year forecast it says is used in the GAD analysis.
CAPITALISATION RATES
J4PR has separately proposed three capitalisation rates depending on the way ground rents increase.
It recommends 6.83% where there are no increases, 6.44% for fixed increases and 4.03% where rents are linked to house prices or inflation.
Richard Merrin, Spokesperson for Justice for Property Rights, says: “We broadly welcome the enshrinement of the principles of valuation in legislation which provides an opportunity for clarity and a structured approach to the calculations anchored in market and other relevant observable data.
“Because the legislation envisages a 10-year review timeframe it is crucial the rates set reflect a fair assessment of appropriate rates at the outset of the review period.”
The government has said the purpose of the prescribed rates is to calculate the present value of future receipts and income streams rather than to use the rates themselves to further reduce premiums for leaseholders or compensate freeholders for other reforms to the valuation process.
