Application to the Leasehold Valuation Tribunals for a determination of price or premium under the 1993 Act remains something akin to a lottery, notwithstanding 10 years of experience of the legislature and valuation principles. However, with now some 640 cases to look at it should be possible to identify some trends sufficient to guide future applications.

The Leasehold Advisory Service's website provides a unique source of information in their schedule of 1993 Act LVT determinations and this article sets out the conclusions reached in a statistical analysis of 487 determinations, from 1994 to the end of 2003.

The methodology was to examine the yield rates and determined uplifts in value of the properties (the Tribunal determinations show the present and long-lease values of the flats and the LEASE schedule shows these as uplift percentages on present values); flats with leases of 900 years or more were excluded.

Whilst results show only limited trends relating to capitalisation rates there is a distinct identifiable curve in the Tribunals' assessment of the relativity ratios between short / long leasehold interests sufficient to provide some guidance to future applications.

I should add that the study does not set out to be an expert commentary from a valuer's perspective but simply a mathematical analysis of the information to identify any prevailing trends in the Tribunals' treatment of cases before them, likely to be able to inform future submissions. I am not a valuer and approached this simply as an analysis of raw data; this provides certain statistical conclusions, which may present opportunities for more informed interpretation.

Methodology:

The decisions were divided in different ways:

First, the data was divided into decisions made by the LVTs for Collective Enfranchisement and Lease Extension. There is a roughly an equal number of each kind of application made each year, with a slight trend for more Lease Extensions for shorter leases.

Secondly, the data sets were divided into different regions, to see if there was any bias with the location of the property. This could also be used broadly to see if the LVTs use different uplifts and yields depending on property prices, since some areas will command a premium over others, simply from their location. The London data was separated into Prime London, Inner London and Outer London. Prime London was defined for our purposes as properties in N1, NW1, NW3, NW8, SW1, SW3, SW4, SW7, SW13, W1, W2, W8, W9, WC1 and WC2, primarily based on the tables of mean house prices from the Land Registry. Inner London is defined as all areas with a London postcode, apart of the areas above. Outer London is defined as all other areas in Greater London inside the London Leasehold Valuation Tribunal's jurisdiction. Outside London, division generally followed the areas covered by the regional LVTs.

Thirdly, the data was divided into the different years from 1994 to 2003, to see how the LVTs have been changing the values they use for uplifts and yields during the nine years covered by the study. This led into a separate study concerning the changes in yield rates through the period 1994 to 2003, when compared to the Bank of England base rate, UK inflation rates and long gilt yield rates. The divisions of years were 1994-1995, 1996-1997, 1998-1999, 2000-2001 and 2002-2003. More decisions have been made by the LVTs each year, so, as with areas outside London, for the earlier years the conclusions may be invalidated to a certain extent by the lack of enough results to make them statistically reliable. To offset this, the first year group is three years, whereas all the others are two years.

All these results are shown in figures 1 and 2.

Results:

Yield Rates:

The results show a scattered approach with limited consistency, other than the general trend to apply higher rates to longer existing terms. This produces the obvious result that tenants of shorter leases pay pro-rata higher prices.

There is no marked difference in yields applied to either lease extensions or collective enfranchisement, both within and outside London.

There is the expected trend for the more expensive properties to have lower yields applied to them, and therefore to be more expensive when valued for lease extension or collective enfranchisement. The London LVT applies the lowest rates to prime London properties, averaging 8.25% over the nine-year period. Inner London yield rates average 9.5% over the same period, while Outer London rates average 10.7%. In comparison, the LVTs in the rest of the country applies yield rates in the middle of this range, from 8.25% to 9.5%, with the highest yield in the north of England.

The London LVT shows a slow but relatively steady reduction in rates applied 1994-2003, with a similar, but less obvious trend across the whole country. In fact, for all decisions from 1994 to 2003 across London, yield rates have decreased by around 19%. The average yield rate across all LVTs can be compared to the Bank of England base rates, the yield rates of 10-year Government bonds, and the rate of inflation in the UK (as in figure 3). The yield rates slightly mirror the Bank of England's base rate and, in turn, the rate of inflation of the UK. There does not seem to be any correlation between the yield rates of the LVTs and either the rate of 10-year UK gilts or the broad FTSE All-Share Index, which might, perhaps, have been expected.

It might be thought that the yield rate applied in valuations for lease extensions and collective enfranchisements should be similar to that of long Gilts, since the two could be thought of as a long-term investment, with little risk of default and a constant stream of income, but this seems to not be the case with the LVT. There is more of a correlation between the Bank of England base rate and UK inflation and the LVT yield rates. We see this especially since around the beginning of 2001, since the yield rates used by LVTs have settled averaging around 8%.

Uplifts:

The trends in uplifts to property values are much clearer. Prime and Inner London show higher percentage uplifts than the outer London area and rest of the country. Leases over 40 years unexpired in Prime and Inner London average about a 10% increase in value, while in Outer London they average around 6.5%. In the rest of the country the averages are between 5% and 6%. For leases shorter than 40 years, the same trend seems to be followed, although there is less data supporting this.

The London LVT seems to be applying slightly higher uplift percentages as time goes on, although it is unclear as to whether this is the result of rising house prices, lower interest rates or other factors. This slight increase, over the nine years studied is greater for short leases than for longer leases. For leases with over 60 years left the increase over the last nine years has been fairly flat. The uplifts applied to leases under 60 years in length have increased at an annualised rate of 4.6%. The uplifts applied to leases over 60 years have stayed roughly the same.

These finding seems contrary to the conclusion of the recent report by FPD Savills, which notes that, 1992-2003, the uplifts for flats with shorter leases (20-50 years) have decreased significantly as a direct consequence of the 1993 Act, in fact, by around 6.3% at an annualised rate. This study concentrated on the residential property values of Prime Central London.

The general trend of uplifts found by the LVTs is sufficiently stable to produce a relatively accurate graph curve (figure 4). It is interesting to contrast this with similar curves from studies of Prime Residential London property prices. The curves display very similar shape/gradient, though diverging a little for leases 10-60 years unexpired.

It is difficult to distinguish between Lease Extensions and Freehold Purchases for examining changes in uplift percentages, since tenants with shorter leases tend to extend their leases rather than buy their freehold. However, in the London LVTs, lease extensions seem to generally have a higher uplift applied to them than freehold purchases:

Lease length	Uplift applied to Lease Extension	Uplift applied to Collective Enfranchisement	LE:CE ratio
Under 30	+224%	+127%	1.76
31-50	+40.2%	+46.1%	0.87
51-80	+14.1%	+8.6%	1.64
Over 80	+3.9%	+1.9%	2.05

This may seem surprising in the light of the large number of Tribunal decisions following the principle that "control adds value". The LEASE commentary to the determinations identifies references by Tribunals to Abbathure principles (Maryland Estates Limited v Abbathure Flat Management Limited, 1999) which seems to imply that there will always be a value uplift consequent upon a collective acquisition of the freehold, however long the present unexpired term, and that it should be greater than the corresponding uplift for a lease extension arising from the additional "premium for control". Whatever the substance of the Abbathure principle the Tribunal's application of it seems to have produced contradictory findings.

Conclusions:

The results of the analysis suggests that the yield rates and the uplifts the LVTs will use in the future might be reasonably predicted from their past determinations. This theory can be used for further analysis.

I look forward to seeing how the LVTs take the new law into account regarding Marriage Value on properties with over 80 years unexpired, and how future decisions will change the shapes of our results.

Note:

The survey was confined to the information in the LVT determinations; it does not seek to examine real market trends or to compare these with the Tribunals' findings. The target objective was to establish what the Tribunals determined, and the trends revealed, not to rationalise, examine or dispute the relativity of those determinations to the market, that is an issue for valuers, not for a mathematician. This is what the LVTs do, and will continue to do.