DECISION
Introduction
1. These are twenty-two appeals, made by the freeholders and heard together, against decisions by the Leasehold Valuation Tribunal of the Midland Rent Assessment Panel involving valuations under section 9(1) of the Leasehold Reform Act 1967 (the 1967 Act). In each case the LVT applied a deferment rate of 5.5 per cent in valuing the freehold interest. The appellants consider that the LVT should have used a rate of 4.75 per cent, the figure determined for houses by this Tribunal in Cadogan v Sportelli [2007] 1 EGLR 153 and approved by the Court of Appeal [2008] 1 WLR 2142 to the extent that it related to houses in the Prime Central London area (PCL). The LVT gave permission to appeal to this Tribunal in each case. None of the leaseholders responded to the appeals.
2. In one case, relating to
3. Details of the appellants, their properties, the leaseholders, the prices determined by the LVT and those suggested by the appellants’ expert witness are set out in the attached schedule (Appendix 1).
4. Mr Anthony Radevsky of counsel appeared for the appellants. He called one expert witness, Mr K F Davis FRICS, who holds among other positions that of a consultant to Messrs Cottons, chartered surveyors of
5. The 22 houses with which this decision is concerned are all situated in the
Address | Value | Unexpired Term | |||||
512 | £240,000 | 57 years | |||||
25 | £325,000 | 68 years | |||||
89 | £180,000 | 57 years | |||||
38 | £180,000 | 56 years | |||||
19 | £230,000 | 56 years | |||||
93 | Reindeer Road | £175,000 | 57 years | ||||
78 | Old Oscott Hill | £130,000 | 24 years | ||||
5 | £231,000 | 58 years | |||||
5 | Elmwood Rise | £225,000 | 55 years | ||||
17 | £145,000 | 67 years | |||||
213 | £127,500 | 44 years | |||||
70 | £145,000 | 27 years | |||||
98 | Reindeer Road | £175,000 | 57 years | ||||
7 | Barford Close | £152,500 | 61 years | ||||
61 | Maisemore Close | £177,500 | 69 years | ||||
8 | £150,000 | 73 years | |||||
15 | Latchford Close | £240,000 | 72 years | ||||
89 | Donnington Close | £132,000 | 65 years | ||||
30 | Beech Avenue | £180,000 | 25 years | ||||
7 | Farriers Mill | £140,000 | 89 years | ||||
64 | Pooley View | £195,000 | 57 years | ||||
77 | Pooley View | £175,000 | 57 years | ||||
Case for the appellants
6. Mr Davis said that, in deciding which deferment rate was appropriate, the starting point must be the guidance given by the Lands Tribunal in Sportelli. The fact that Sportelli concerned a valuation under section 9(1A) of the 1967 Act and not section 9(1) was immaterial. Under section 9(1) the initial reversion was to an extended lease for a term of 50 years at a high modern ground rent. That rent was fixed by reference to the capital value of the land and the house standing upon it. There was no logical reason why the deferment rate under section 9(1) should differ from that applicable under section 9(1A), where the reversion was to both the land and the building.
7. In Sportelli it was explained that the deferment rate was made up of three elements – the risk free rate, the real growth rate and the risk premium. The risk free rate must be the same under section 9(1) and section 9(1A). The real growth rate must also be the same. If anything land values were more secure than house values. In some of the instant cases the LVT had suggested that real growth rates were expected to be lower in the West Midlands than in
8. In each of the current cases the LVT had concluded that the risk premium should be higher under section 9(1) because of the relative advantage of potential vacant possession on expiry in a case under section 9(1A). Mr Davis did not agree. The purchaser of a section 9(1A) reversion, if available, would be acquiring a high value house. The hypothetical investor would consider that this would be putting too many eggs in one basket. A section 9(1) freehold, on the other hand, would appeal to smaller investors, who would be attracted by the increase in value as the unexpired term reduced, together with a potential increase in house values.
9. What had to be identified (if it existed) was a factor within the risk premium which would lead to a different conclusion being reached under section 9(1) than under section 9(1A). It was clear from Sportelli that the factors making up the risk premium were volatility, illiquidity, deterioration and obsolescence. There was no evidence or other reason to suppose that the rental value of a site was more volatile than the value of the house and site together. Nor was a reversion to a site more illiquid than a reversion to a house and site. The reversionary element was tradeable, whether it was to vacant possession value or to an income stream. A site was, if anything, less likely to deteriorate than a house and (unlike a house) would not be subject to obsolescence. If anything, therefore, there was a case for a lower deferment rate under section 9(1), although the appellants were content to seek the same rate.
10. Mr Davis had never seen a section 9(1A) ground rent offered for sale. On the other hand there was a strong market for freehold ground rents secured on houses and flats. This demand had increased over the past 10 to 15 years. He produced details of the prices achieved by Messrs Cottons at auction in October 2008 for section 9(1) freehold ground rent investments in
Discussion and conclusions
11. Many of the LVTs whose decisions form the subject of these appeals considered that Sportelli did not provide the appropriate starting point for valuations under section 9(1). Their general approach is summarised in the following passage from the decision on
“We note the Members in Sportelli (LT) at para 8 say ‘Nothing that is said in this decision has any direct application to capitalisation rates.’ The question before us is the appropriate deferred capitalisation rate, namely a capitalisation rate, not a deferment rate, as it is the capitalisation rate which is deferred not a capital sum.”
12. I do not think that is a correct analysis of the position. In arriving at the price payable it is necessary for the valuer to ascertain the section 15 modern ground rent and then to capitalise that rent, deferred for the unexpired term of the existing term. The modern ground rent will be payable for 50 years, and be subject to review after 25 years. However, the generally recognised method of approach is to capitalise the section 15 rent as if in perpetuity, deferred for the period of the unexpired term of the existing tenancy; not seeking to quantify any different rent that might become substituted at the expiration of twenty five years from the original term date, and not quantifying separately the value in reversion at the expiration of fifty years from the original term date (see Farr v Millersons Investments Ltd (1971) 22 P & CR at 1060, CA).
13. In every one of the 22 cases under consideration, the LVT used the same percentage, 5½, when decapitalising the site value to arrive at the modern ground rent as it did when capitalising and deferring that rent. It has not been suggested that they were wrong to do so. Indeed, in para 9-11 of Hague on Leasehold Enfranchisement, Fourth Edition, the learned editors state:
“It is settled (Official Custodian of Charities v Goldridge (1973) 26 P & CR 191, CA; Wilkes v Larcroft Properties [1983] 2 EGLR 94, CA) that, in the absence of any evidence to contrary effect, the percentage rate to be adopted for capitalisation and deferment should be the same rate as that adopted for decapitalising the site value to ascertain the section 15 rent.”
14. The effect of this approach is that, whilst in theory the valuer is capitalising a ground rent payable on reversion, in practice he is deferring a capital sum – the site value – receivable on the termination of the existing lease. In those circumstances, any guidance on the deferment rate given by this Tribunal in Sportelli, which the Court of Appeal held should be followed by LVTs, is to be followed in cases under section 9(1) as well as in those under section 9(1A).
15. In Sportelli the Tribunal concluded that the generic deferment rate should be 4.75% (para 79), that this should be increased by 0.25% for flats (para 95) and that these rates were constant beyond 20 years (para 85). In para 123 the Tribunal observed:
“The application of the deferment rate of 5% for flats and 4.75% for houses that we have found to be generally applicable will need to be considered in relation to the facts of each individual case. Before applying a rate that is different from this, however, a valuer or an LVT should be satisfied that there are particular features that fall outside the matters that are reflected in the vacant possession value of the house or flat or in the deferment rate itself and can be shown to make a departure from the rate appropriate.”
16. In the Court of Appeal Carnwath LJ agreed that this general guidance was indeed appropriate. At para 99 he said:
“I agree with the Tribunal that an important part of its role is to promote consistent practice in land valuation matters. It was entirely appropriate for the Tribunal to offer guidance as they have done in this case, and, unless and until the legislature intervenes, to expect leasehold valuation tribunals to follow generally that lead.”
17. This approval by the Court of Appeal, however, was qualified. In paragraph 102 Carnwath LJ said this:
“The Tribunal’s later comments on the significance of their guidance do not distinguish in terms between the PCL area and other parts of
18. Although, in each of the appeals now under consideration, the LVT decided that the Sportelli generic rate of 4.75% should be revised to 5.5%, the reasons for the increase were not always the same. In all cases the increase was attributed to the distinction between the reversionary positions under section 9(1) and 9(1A). In ten cases, however, (LRA/38, 39, 59, 72, 73, 92, 109, 111, 141 and 142/2008) the LVT’s decision also reflected its conclusion that a higher rate should be adopted than that which would be appropriate in the PCL area.
19. In deciding whether a departure from the 4.75% generic rate is justified in the present appeals, therefore, two questions must be answered. Firstly, are the factors which led the Tribunal to determine 4.75% in Sportelli – where the Tribunal was concerned with enfranchisement pursuant to section 9(1A) of the 1967 Act and the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act) – sufficiently different from those which would apply in valuations under section 9(1)? Secondly, is there any evidence to justify a deferment rate for houses in the
20. I consider firstly the difference between sections 9(1) and 9(1A). As Mr Davis pointed out, the Tribunal in Sportelli found that it needed to establish three components of the deferment rate. The first was the risk-free rate, defined as the return demanded by investors for holding an asset with no risk, often proxied by the return on a government security held to redemption. The Tribunal concluded that this rate should be 2.25%. Mr Davis considered that the risk-free rate should be the same under sections 9(1) and 9(1A) and I see no reason to disagree.
21. The second component of the deferment rate was the real growth in house prices. On this the Tribunal concluded that:
“a realistic, or neutral, assumption would be 2%, with any concern on the part of the investor that this rate might not be achieved being reflected in the risk premium”.
Again, Mr Davis’s opinion, that there was no justification for adopting a different growth rate depending on whether the reversion was to site value or building value, seems to me to be entirely reasonable.
22. The final component of the deferment rate was the risk premium, or the additional return required by investors to compensate for the risk of not receiving a guaranteed return. The Tribunal concluded that, in forming an overall assessment of the premium which would be required by investors in the type of asset it was considering, it was necessary to have regard to the individual components of the risks of investment in long reversions. These were volatility, illiquidity, deterioration and obsolescence. Of these components, the Tribunal concluded that physical deterioration and obsolescence were factors that required to be reflected in the generic deferment rate to the extent that the risk related to them was common to all residential property viewed in the long term.
23. Mr Davis’s view was that there was an argument for a lower deferment rate under section 9(1), because a site was not subject to obsolescence in the way that a house was and was less likely to deteriorate than a house. I think that Mr Davis is right on this point.
24. The remaining components of the risk premium were volatility and illiquidity. In Sportelli the Tribunal considered that the combined effect of these factors must have the major impact upon the risk premium. It did not think that, in the market which it had to envisage,
“there would be any significant number of investors that would be looking to hold these very long-term assets throughout their lives. The attraction of the investment would be its relative security, the prospect of growth and the opportunity for both long-term retention and earlier sale. Tradeability would, we think, be important as one of its components, and it is this that would make the volatility of the housing market and the relative illiquidity of the investment significant factors in the mind of a purchaser.”
In the Tribunal’s judgment
“Since real house prices are shown to be strongly cyclical, with persistent periods of negative growth, an investor in a long-term reversion would be very conscious of the risk that the market could be depressed at the point at which he wished to sell his interest, even though, as compared with equities, the residential property market is rather less volatile. Reversions would suffer, in comparison with equities, from illiquidity resulting from high transaction costs and the length of time to complete a transaction. The latter factor would, we think, be perceived as adding substantially to the risk associated with volatility.”
25. The Tribunal concluded that the market for house reversions would require a risk premium of 4.5%. Combined with a risk-free rate of 2.25% and a real growth rate of 2%, this produced the generic deferment rate of 4.75%.
26. In Mr
27. Since the reversion in the case of section 9(1) is to a ground rent only, a potential purchaser is likely to require a higher risk premium to compensate for the increased volatility and illiquidity than if the reversion also included a house standing on the site. The increased risk would, however, be offset to some extent by the reduced risk of deterioration and obsolescence. I find that the overall result would be to increase the risk premium to 4.75% and thus to increase the deferment rate to 5%.
28. I turn to the effect on the deferment rate of the location of the appeal properties. In paragraph 88 of Sportelli, to which Carnwath LJ was referring in his remarks quoted in para 17 above, the Tribunal said:
“Although we accept the view of the valuers that the deferment rate could require adjustment for location, on the evidence before us we see no justification for making any adjustment to reflect regional or local considerations either generally or in relation to the particular cases before us. The evidence of the financial experts suggests that no adjustment to the real growth rate is appropriate given the long-term basis of the deferment rate, and locational differences of a local nature are, in the absence of clear evidence suggesting otherwise, to be assumed to be properly reflected in the freehold vacant possession value.”
29. Since those observations were made in the Court of Appeal the Tribunal has had to consider the appropriate deferment rate to be adopted in four cases outside the PCL area where the existing term exceeded 20 years unexpired. All four decisions related to enfranchisements under the 1993 Act, not the 1967 Act. In Hildron Finance Ltd v Greenhill Hampstead Ltd [2008] 1 EGLR 179 the Tribunal (Judge
30. Mr Davis considered that there was no justification for departing from the Sportelli deferment rate of 4.75% when valuing the appeal properties in order to reflect their location in the
31. In its decision on 30 Beech Avenue, the LVT said: “We find we should be cautious in relying solely on a mathematical analysis and extrapolation of statistical trends, because valuation is an art, not a science, involving an element of judgment; and particularly because, in the case before us, Mr Moyle’s method includes subjective adjustments and relies on statistics (Nationwide statistics) which have, over 56 years, been derived from figures which are weighted and the weighting has been changed on four occasions; further, it is admitted the statistics include dissimilar types of houses and may even include studio flats. As we say earlier … the greater the number of adjustments the less reliable is the evidence; the adjustments in Mr Moyle’s calculations are numerous. Hence we are cautious.”
Having thus warned itself against relying on the Nationwide statistics, the LVT nevertheless concluded that the real growth rate for property in the
32. If it was right to draw conclusions from a single set of figures, the Nationwide statistics strongly suggest that, over a period of some 55 years, house price growth was significantly slower in the West Midlands than in
33. There is therefore insufficient evidence before me to displace the Sportelli rate of 4.75% on the grounds of location. I was told, however, that a significant number of other cases are awaiting the outcome of these appeals. In those circumstances it is appropriate for me to emphasise that the conclusions I have reached on this occasion have necessarily been arrived at without the benefit of expert evidence on behalf of the leaseholders. They have also been made with inadequate information about the Nationwide statistics and without knowing whether any other relevant statistics exist. Valuers who give evidence in similar cases in the future – whether before the LVT or the Lands Tribunal – will no doubt bear in mind their professional duty to investigate as fully as possible the matters to which I have referred before forming a conclusion as to whether the first impression that I have obtained from the Nationwide statistics fairly reflects past patterns of growth.
34. I am also concerned with an appeal against the capitalisation rate of 6% determined by the LVT in respect of
35. Mr Davis said that the factors to be taken into account in setting the capitalisation rate were length of lease, security of recovery, size of ground rent and the provision for and nature of the rent review. The current ground rent was not nominal, it was due to double in June 2009 and to double again in 2042. The amounts of rent payable were fixed and there should be no problem in collecting them. It was common to pay this type of ground rent by standing order.
36. In Mr
37. Mr Davis said that guidance was required from the Lands Tribunal as to the capitalisation rate for an escalating ground rent with fixed increases. I would be reluctant to provide such guidance without the benefit of expert evidence from both sides, unless it is absolutely necessary to do so. In this case Mr Davis has failed to satisfy me that his suggested rate of 5.25% is more reliable than the LVT’s 6%, given that both figures fall within his quoted range of 3% to 6.25%. In any event I would need to be persuaded that those rates – which are presumably paid for short terms deposits – are relevant to the valuation of a fixed interest security with 68 years unexpired.
38. I determine that the deferment rate to be used in valuing the 22 appeal properties should be 5%. The appeals on the deferment rate succeed. The appeal against the capitalisation rate used by the LVT in the case of
Address | |
£5,549 | |
£7,533 | |
£4,163 | |
£4,755 | |
£6,323 | |
£4,199 | |
78 Old Oscott Hill, | £13,767 |
£5,578 | |
5 Elmwood Rise, Sedgley, | £5,233 |
17 Belmont Close, | £2,881 |
£4,770 | |
£12,899 | |
£4,154 | |
7 Barford Close, | £3,521 |
61 Maisemore Close, | £2,783 |
8 | £2,353 |
15 Latchford Close, | £3,714 |
89 Donnington Close, | £2,683 |
£17,828 | |
7 Farriers Mill, Pelsall, | £2,121 |
64 Pooley View, | £4,544 |
77 Pooley View, | £4,087 |
Dated 24 February 2009
N J Rose FRICS
