I have been asked to give some (thankfully informal!) advice on issuing shares in the freehold company that owns the leasehold of a flat I own. Note that most of the leaseholders - but not all - are shareholders in the freeholder (let's call it F Limited) already, but certain non-shareholders want to buy in. So this is NOT about buying the freehold.
How therefore do we value F Limited to decide how much to issue the new shares for? I fully understand the present value of a stream of ground rent (in this case let's say an aggregate of £10,000 a year for 100 years, so at (say) 5% that's around £200k in round numbers, but what about the freehold reversion? In theory, in 100 years' time, F Limited will get its hands on a building which today is worth say £10m, so how do I factor this in given on the one hand likely property price inflation and on the other the right of leaseholders to extend their leases (infinitely?)?
I'm not a resi surveyor, but it sounds like (in pure mathematical terms - valuation is a combination of maths, market and my wet finger stuck in the air). Also sounds like it is not leasehold enfranchisement.
What you need to do is value the income for a period years at a given rate - 5% is probably a good baseline (depends on income levels and rent review pattern_), value it for 100 years, then value the £10m deferred 100 years at the same rate.
this may well be mathematically correct, but then you need to factor in market demand yadda yadda, either way, ping me an email and i will see if I can come up with a rough answer - a lot depends on location, tenant mix, lease construction but I am happy to help put.
I am assuming you are talking about England or Wales - the Colonies tend to have differing rules I need to take into account.
You are talking about quite a complex valuation. There are tables for calculating the present value of the freehold reversion - Parry's Valuation Tables.
You really need to get advice from a practicing Chartered Surveyor because assessing the rates of interest to apply to such a valuation is a skill which only someone with an in depth knowlege of local conditions will have.
Thanks for the constructive debate. Just to be clear, I'm an investment banker (Boo! Hiss!) so the logic and mechanics of discounting, risk free rates, risk premia, all that stuff are second nature to me. It's the freehold reversion bit I am struggling with - here's why:
In my example, in 100 years' time, F (the freeholder) gets its hands on a building which *today* is worth £10m. However, all other things being equal, in 100 years' time, the building will not be worth £10m, but (say property prices rise by, ooh, 2.9% in real terms (Nationwide BS data from 1975), the building will be worth in round numbers £174m in today's money.
Now, in reality the building will be a crumbling wreck by then, but in theory it could still be pulled down and rebuilt. Assuming the same sale value of the finished block of £174m, and on a developer's rule of thumb 1/3 land cost, 1/3 building cost, 1/3 profit, we already own the land so it would cost us 1/3 of £174m (say £54m for round numbers) leaving us with a "worth" of £120m in today's money in 100 years' time...and *not* the £10m (i.e. today's actual value) that the usual formulae would use. Feel free to pick holes in these numbers but the logic is surely correct?
Now, I understand that when buying the freehold, the valuation is constrained by various legislative requirement (don't ask me why!), principally the requirement to use today's value of the building as the value at the end of the lease. However, as I noted this is not a sale of a freehold, but a voluntary and commercial transaction by the entity which already owns the freehold...so I can't see why we wouldn't use the "correct" (?!) value for the asset in 100 years' time?
Now, all of that is fine, but may well produce a result which is unattractive to the buyer, in which case we're down to good old-fashioned bargaining...but that's for another day.