Lease Extensions – The Valuation Process

The process of producing a valuation for a lease extension comes in two parts.  The first (and usually the most straightforward) is the ‘referencing’ of the subject property.  This will involve either a physical inspection of the property, or a desktop exercise using the information provided by the client alongside data from a range of sources such as Rightmove, Government Agencies, Google, and various other databases.

During a physical inspection, I assess the property internally and externally, gathering data on my iPad using a specially developed App designed for this purpose.  Data gathered includes an assessment of the construction of the property, measurements, photographs, and details of improvements carried out by the leaseholder, as well as a general overview of the state of the block as a whole, noting the general maintenance attitude of the freeholder.

Although I try to carry out physical inspections wherever possible, it is usually possible to produce a robust valuation on the basis of a desktop assessment with no difference in quality or accuracy.

Alongside the physical data concerning the property, a copy of the lease (and any intermediate leases) is obtained from HMLR.  From the lease, I ascertain the number of years remaining, the ground rent, and any future review provisions, as well as any other data that may impact my valuation.  At this point, I am then in a position to construct my valuation.

The valuation will consist of two or three parts:

1. The value of the reversion – i.e. the freeholder’s right to receive the property back at the end of the lease

2. The value of the term – i.e. the freeholder’s right to receive any ground rent income for the remainder of the lease

3. Marriage value – the freeholder’s right to receive 50% of the uplift in the value of the property brought about by the granting of a lease extension (only payable if the lease has less than 80 years left to run).

The first stage of the valuation requires me to ascertain the long-leasehold value of the property – that is, the likely value of the property if it was sold on the open market with a lease of 125+ years containing no onerous terms or restrictions which would impact upon the value.  This value is based upon comparable evidence comprising recent sales of similar properties within the locality; the data generally being drawn from Rightmove’s database of historic transactions, HMLR, and discussions with local selling agents.  Once I have identified three or more relevant recent sales, the sale prices are adjusted to reflect differences in size, location, quality, and condition, as well as any market movement between the sale date and the valuation date.

This value is then deferred for the remaining term of the lease, at a standard rate set by Tribunal, in order to arrive at the present-day value of the reversion.  Boiled down to its simplest definition, the value will be a sum of money that, invested for the remaining term of the lease at a particular rate of return, would be worth the same as the property at the end of the lease.

The ground rent is valued next, and this too is based on comparable evidence – in this instance, I look at what similar ground rent incomes have sold for at auction in recent months.  Sale prices are analysed to ascertain yields, which are then applied to the ground rent income in order to produce a present-day value.  The principle is very similar to that behind valuing the reversion.  Say, for example, a ground rent is worth a total of £10,000 over the next fifty years, we must ascertain the sum of money that would have to be invested at a particular rate in order to grow to £10,000 over the course of the next fifty years.

Finally, any marriage value payable is calculated.  This is, very broadly, 50% of the difference between the value of the property with its current lease and its value with an extended lease.  Having already ascertained the long-leasehold value, all that is required is to ascertain the value of the property with its current lease.  In a perfect world, there will have been recent sales of other properties with similarly short leases, and I can ascertain the value in the same way as for the long-leasehold value.  Where no such evidence exists, the value is ascertained by reference to graphs of relativity derived from extensive research of short leasehold sales, and the impact of shortening leases upon property values.  Once the long- and short-leasehold values are known, the marriage value can be calculated.

The products of the two or three valuations are then added together to produce an indication of the likely premium payable for the lease extension.

It is often said that valuation is an art rather than a science and, as such, there are no hard and fast answers to the various values and rates utilised in a calculation such as this.  As a result, the various input variables (long-leasehold value, ground rent yield, short-leasehold value) are usually assessed as a range, with the low and high ends of these ranges being utilised to provide a range within which the premium is likely to be found.

There is, therefore, never a precise answer to the question “how much will it cost to extend my lease”, as the final premium payable will depend upon the knowledge and expertise of your valuer, as well as that of your freeholder’s valuer, and each party’s negotiating position.

For further information, please contact James at j.laughlin@watsons-property.co.uk.

To discuss extending your lease, please contact our Customer Services Team at 01603 751577 or email: survey@watsons-property.co.uk