A government consultation is underway regarding leasehold enfranchisement valuation rates. These rates are crucial as they will influence the amounts leaseholders pay to extend their leases or purchase freeholds, and the corresponding sums freeholders receive.
The upcoming Leasehold and Freehold Reform Act (LAFRA) is set to introduce a Standard Valuation Method, alongside prescribed deferment and capitalisation rates. The Act also intends to remove marriage value and alter the treatment of ground rent.
The deferment rate is used to value a freeholder's right to reclaim a property when a lease ends. Government modelling indicates that for an illustrative £250,000 flat with 80 years remaining, reducing the deferment rate from 5% to 4% could increase the reversion value from £5,044 to £10,846. Conversely, raising it to 6% would reduce it to £2,363. Across the market, a 3% deferment rate could mean leaseholders pay approximately £6.3 billion more to freeholders over ten years, compared to a 5% baseline, while a 6% rate could result in leaseholders paying around £1.1 billion less.
The capitalisation rate values future ground rent income. Government analysis of First-tier Tribunal decisions found these rates varied from 4.5% to 9%, with 88% of cases falling between 6% and 7%.