effect of lease length on value of property?

Consider 2 identical flats. If one is valued at 200k with a lease length of 90 years, how much would the other be worth with a lease length of 900 years? I realise that this would be very approximate!

Reply to
Seuss
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Consider 2 identical flats. If one is valued at 200k with a lease length of 90 years, how much would the other be worth with a lease length of 900 years? I realise that this would be very approximate!

Reply to
Seuss

"Seuss" wrote (twice!):

What will future inflation/interest/rents be, over the next 900 years?

"Seuss" wrote

OK, perhaps anywhere between 200K and 215K ? [Assuming rates don't go down too low!]

Reply to
Tim

About £206k, using a discount rate of 4%, which is the current redemption yield on long dated gilts.

Reply to
Jonathan Bryce

Jonathan, we also are interested in this calculation - especially from an 'immediate years' point of view. If we were offered a lease of 10 years, or 30 years, or 90 years, how would or should we place a value on that? Would whether we could sub-lease or not alter the 'value'? Would whether we would outlive the lease, or need to move away during the lease, alter the 'value'?

Could you show how you calculated this, and share with us why (in the sense of why the method is a good one) you used whichever approach you took?

Very many thanks,

______________ best wishes, Ron

Reply to
Ronnie

I suggust that if the 2 flats really are identical that most people would view a 90 year lease as being virtually freehold anyway (for their lifetime), much the same as a 900 year lease, so the values would be the same.

Reply to
Neil Jones

I took £200k as being the net present value of the benefit of occupying the house for the next 90 years.

Using the NPV formula in excel, and a discount rate of 4%, it works out that this benefit is valued at about £8420 per year. That for the next 990 years at the same discount rate comes out at about £206k

For 10 years, it would be about £66,850, for 30 years, about £142,500.

I haven't taken into account the issues of being able to assign the lease, or sub let it. That would affect the annual value you place on occupying the property.

Longer lease terms might justify a higher discount rate to cover the risk that the house might fall down before the end of the lease term. There aren't that many 1000 year old houses around.

Reply to
Jonathan Bryce

In message , Jonathan Bryce writes

But the land upon which they have been built is older.

Reply to
John Boyle

Possibly not, in a property title sense. After the Norman invasion (less than 1,000 years ago) there were continuing disputes between the former Saxon landholders, and the Normans who assumed title to the lands. These disputes were variously solved, but some remained - even up to (IIRC) King Stephen's time. A law had been implemented to legalise the Norman holdings, but for some reason disputes continued (presumably the law had been badly drafted) and during Stephen's reign, a second property title statute was passed, effectively ending any legal aspiration by Saxon contestants.

The Peasants Revolt may have had property title, or use, issues.

There was a book published maybe 10 years or so ago, discussing a sort of 'Who Owns Britain' or something like that, where this was set out. I don't have the references, and I may be remembering the detail incorrectly, but I suspect property titles can not be proved to before the Norman invasion because of the manner in which property was acquired by the Normans. In that respect, the land titles are less than 1,000 years old.

Just for fun.

______________ best wishes, Ron

Reply to
Ronnie

And so even a 99 year lease from King Edward in 1065 may not have been worth much two years later.

999 year leases may very well become worthless before their expiration date.

______________ best wishes, Ron

Reply to
Ronnie

I think you accidentally transposed two digits there and meant £8240. It's the wrong answer, though, unless you assume the "rent" would be payable in arrears. A more correct answer (rent payable annually in advance) is £7925. But that's of little importance in the greater scheme of things.

This all appears to be pretty unrealistic. The justification for using a discount rate is that you assume the rent is paid in advance, up front, for the entire term of the lease, and that it is earning interest at the discount rate, so that later future years account for a smaller share of the NPV total than their earlier cousins. That's fair enough, but it also assumes a constant value of money, i.e. zero inflation. With non-zero inflation, at a rate approximately equal to the interest discount rate (is that reasonable?), we get a net effective discount rate of zero.

This would make the real value of a 900 year lease exactly as one would expect, namely ten times as much as for a 90 year lease.

You have also not taken into account any rent payable under the lease (in addition to the up-front premium), but most importantly, and I think most relevantly today, the "cost" in terms of difficulty as well as mere expense, of extending the lease or buying the freehold. If that cost is reasonable, i.e. negligible in comparison to the value of the lease, then one would xpect the value of a leasehold property to be essentially unaffected by the length of term remaining, as all leases would in effect be perpetual.

Reply to
Ronald Raygun

I think that's an important point. For 'real' NPV rather than 'nominal' I would guess at an interest rate of 1.5%. As for estimating the current 'real' rate in UK, I would begin with the return from index-linked national savings - I don't know what that is at the moment.

I don't think I'd use a zero 'real' interest rate for a model in any economy that is functioning normally. Until recently, Japan had zero 'nominal' rates - which may have implied negative 'real' rates, but Japan was considered to be in difficulty. The UK had negative 'real' rates when inflation was bad. Assuming the UK is functioning normally (and property assets might not might be, I'm not qualified to tell), then a small positive 'real' rate is a reasonable assumption, in my view.

______________ best wishes, Ron

Reply to
Ronnie

It doesn't matter for this exercise as long as you are consistent.

The reality is that 999 year leases do not cost 10 times as much as a 99 year lease. They are only very slightly higher, which is what my calculation shows.

There may be a case for using real rates rather than nominal rates for the discount rate, but it certainly won't be zero. Over the last 7 years since I moved here, rents haven't really increased at all. I am paying more because I live in a bigger place, but rents for places similar to where I was living 7 years ago are very similar to what I was paying 7 years ago.

Assuming the ground rent is the same for both the 90 and 990 year lease, this doesn't matter, as I am looking at the net benefit gained as a result of the lease.

Reply to
Jonathan Bryce

I suggest that the reason long leases don't cost proportionally more than short ones has little to do with the rent-in-advance model but with the fact that leases are seen as effectively perpetual regardless of their nominal term length, that is to say that when (or rather before) they expire there is a presumption that it will be a simple matter to renew then (or to buy the freehold) and that this will involve only a trivial cost compared with what it would cost to buy a completely new long lease.

There are, after all, (aren't there?) laws in place which give leaseholders the right to buy their freehold, though I expect these rights are limited to residential property, whereas commercial property, I suppose, retains harsher realities...

That's unusual though, in the grand scheme of things. In a normal world you would expect rent inflation and purchase price inflation to be the same. Stagnant rents vs booming sale prices are generally reckoned to be a consequence of overprovision of rental property and a shortage of property coming available for sale, all due to the BTL brigade.

In any case, those rents cannot be compared with rents under leases, because "normal" rents afford neither security of tenure nor the right to modify the property, nor the obligation to maintain it. Leases do.

The prices for which leases change hands reflects their market value at the time they change hands, and not the expected market value of rents during the remainder of their term.

Reply to
Ronald Raygun

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