Ground Rent Valuations
How Do We Value Ground Rents?
Generally speaking a valuation for a block of ground rents with leases in excess of 90 years are worked out on the amount of ground rent that is paid to the freeholder. Another important factor that is taken into consideration is the regularity of ground rent increases and the amount that they increase by. For example a ground rent that increases every 10 years will be more valuable than a block that only increases every 25 years.
Ground Rent Valuations – Ground Rents Linked To RPI
Another example is a ground rent that increases in line with the retail prices index will be more valuable than a ground rent that increases by £50.00 every 25 years. The formula that is used for leases that are in excess of 80 years is very different to the formula applied where a lease has an unexpired term of under 80 years. Without going into too much detail the value of a freehold with leases that are under 80 years will be significantly more than a block will 99 year leases.
Annual Returns Of 5% – 7.5% Is Achievable
So lets take a block of ten flats where the leases are 125 years and the ground rents payable is £2,000. Most investors will want to pay circa 15 – 20 times that ground rent income which comes in at £30,000 – £40,000. You may get closer to the £40k mark if the landlord is responsible for the management and insurance of the block and you may get a little more if the ground rent increases are favourable for the landlord. When interest rates are as low as they have been the value of ground rents has remained quite high and very stable. At the end of the day you can buy a block of ground rents that will give you an annual return of between 5% – 7.5% without too much difficulty.
You can also visit our sister site if you are looking to buy freeehold ground rents