The government is currently consulting on the deferment and capitalisation rates to be prescribed under the Leasehold and Freehold Reform Act (LAFRA). These rates are crucial for leasehold enfranchisement valuations and will influence the financial outcomes for both leaseholders and freeholders.
The deferment rate is used to value a freeholder's right to recover property when a lease expires. A higher deferment rate discounts the future value more heavily, leading to a lower present reversionary value. For example, reducing the deferment rate from 5% to 4% for a typical £250,000 flat with 80 years remaining could raise the reversion value from £5,044 to £10,846.
The capitalisation rate values a freeholder's future ground rent income. Government analysis of First-tier Tribunal decisions found capitalisation rates typically ranged from 6% to 7%, with a mean of 6.6% and a median of 6.5%. The economic significance of this rate may change further if proposed reforms, such as a £250 annual cap on existing ground rents, proceed.
Government modelling estimates that, against the existing 5% baseline for flats, a 3% deferment rate could transfer approximately £6.3 billion more from leaseholders to freeholders over ten years. Conversely, a 6% rate could result in leaseholders paying around £1.1 billion less. These figures highlight the significant financial consequences of setting these rates.