Of no great surprise to many in the world of enfranchisement, the Parthenia model of valuation was declared dead and buried by the Upper Tribunal (Lands Chamber) – instead, real world relativity should be the starting point for determining the value of the existing lease, without rights.
The case – which weighs in at a hefty 80 pages – deals with the calculation of marriage value for lease extensions, applicable where leases are below 80 years. To our reading, from a valuer’s perspective, this decision is the best news for Landlords since Sportelli.
We anticipate that this decision will affect properties in secondary locations to a far greater extent than those in PCL, where the difference in the premium payable by using conventional graphs compared to real world relativity could be significantly higher.
By way of background, and the key to understating the valuation implications of the case, is to know that the RICS published a research paper in 2009 which specifically addressed the graph based approach in calculating existing lease values for leases of under 80 years. The outcome of that research paper was that, for areas both inside and outside of PCL, there has been a move in practice and by Tribunals, to adopt the use of generic averages of the various graphs. One such blend of the data is known as the ‘average of the non PCL graphs.
What the graphs inherently to ignore is that in secondary locations, mortgage dependency is greater and there are fewer buyers who will purchase a short lease and deal with the accompanying hassle of extending it. The demand for short leases is supressed and so, hence, are the value of those flats, thus increasing the eventual premium payable when the lease is extended.
The suppressed short lease values of these secondary areas are in stark contrast to the cash-rich, high-demand atmosphere of Prime Central London, where buyers are willing to take on the lease extension process and tend not to discount short leases to the same extent.
The shift in valuation methodology as a result of this case is that a valuer’s starting point in assessing the value of leases with less than 80 years unexpired should be real world evidence, if it is available, before turning to a relativity graph.
What we anticipate will happen, is that Landlord’s will increasingly look to improve the premiums they seek from their Tenants, by virtue of reference to real world relativity in any given locality. Of course, and a problem is, on-line calculators cannot take into account market transactions and real world relativity – ours now has a health warning regarding its limitations.