In property valuation, a deferment rate is a discount rate applied to the current price of a property in order to assess the present value of the right to vacant possession of a residential property at the end of a

leasehold A leasehold estate is an ownership of a temporary right to hold land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord. Although a tenant does hold rights to real property, a l ...

to which the

freehold Freehold may refer to: In real estate *Freehold (law), the tenure of property in fee simple *Customary freehold, a form of feudal tenure of land in England *Parson's freehold, where a Church of England rector or vicar of holds title to benefice p ...

is subject. The rate is a key component of the calculation used to determine the cost of leasehold enfranchisement.

Background

The landlord owns a 'reversion', i.e. at the end of the lease, they will have exclusive possession of the property which they can then sell or rent. If the lessee is enfranchised, that is, gets absolute and perpetual possession of the property, the landlord will lose the reversion value. The

Leasehold Reform Act 1967 The Leasehold Reform Act 1967c 88 is an Act of Parliament of the United Kingdom, which concerns English land law and compulsory purchase. A government bill, the law remains largely intact. It was passed by both Houses and had been tabled by mini ...

(houses) and the Leasehold Reform, Housing and Urban Development Act 1993 (for flats) aim to ensure that the landlord has fair compensation for this loss of value. Computing the amount of compensation requires estimating the value of deferred possession of the property – the value of the property now minus the lost income or use for the period of the lease ('jam today is worth more than

jam tomorrow Jam tomorrow (or the older spelling jam to-morrow) is an expression for a never-fulfilled promise, or for some pleasant event in the future, which is never likely to materialize. Originating from a bit of wordplay involving Lewis Carroll's Alice, i ...

'). The value of deferred possession is given by the deferment rate, or the rate of return that the lessor would have received, net of management, void and maintenance costs, over the period of the lease. Lessees will typically want a high deferment rate, lessors will typically want a low deferment rate.

Sportelli method

Following the Sportelli case the Lands Tribunal adopted the so-called ''Sportelli formula'' to determine the rate, as follows. :q = r* + P – g* Where q is the deferment rate, r* the ''real'' risk free rate, P the

risk premium A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...

for the residential property market, and g* the ''real'' long-term growth in house prices.

Hedonic regression method

An alternative to the Sportelli method was proposed by Bracke et al in October 2016. The authors collected market data for leases in the period 1987 to 1991, aiming to isolate the effect on value of the unexpired length of the lease in each such case by the statistical method known as

hedonic regression In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of ...

. However this method was rejected by the

Upper Tribunal The Upper Tribunal is part of the administrative justice system of the United Kingdom. It was created in 2008 as part of a programme, set out in the Tribunals, Courts and Enforcement Act 2007, to rationalise the tribunal system, and to provide a ...

in January 2018.Trustees of the Sloane Stanley Estate versus Adrian Howard Mundy, January 2018.

References

{{reflist Real estate valuation