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The Relevance of the YP Dual Rate Model in Valuing Leasehold Interests in England

This paper examines the relevance of the Yield Percentage (YP) Dual Rate model in the valuation of leasehold interests within contemporary practice in England. It discusses the historical context, research methodology, and results from qualitative interviews with leasehold purchasers in Liverpool. The study reveals that, contrary to assumptions that purchasers use the Aggregate Sale Fund method, empirical evidence suggests otherwise. The findings indicate significant undervaluation of properties with short leases under the YP Dual Rate model, highlighting the need for a critical reevaluation of its practical application in real estate valuation.

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The Relevance of the YP Dual Rate Model in Valuing Leasehold Interests in England

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  1. Relevance of YP[Dual rate] Model in the Valuation of Leasehold Interests in Contemporary Practice in England By Raymond Abdulai [Liverpool John Moores University, UK] & Anthony Owusu-Ansah [Ghana Institute of Management and Public Administration, Ghana] 20th ERES Conference, 2-6 July 2013

  2. Structure of Presentation • Introduction • Research methodology • Brief history of YP[Single rate] & YP[Dual rate] models • Results • Conclusion

  3. Introduction • Real estate (RE) valuation required for various purposes including: • Purchase and disposal of RE • Mortgage valuation • Insurance • Compulsory purchase & compensation • Taxation/rating • Six main methods of valuation exist: • Comparative, Investment/income, Cost, Profits and residual approaches [traditional methods] • Hedonic pricing [contemporary approach]

  4. Introduction (cont.) • Investment/income approach: • YP[Single rate] model used to value freehold (FH) • YP[Dual rate] model used to value leasehold interests (LH) • Rationale - FH is a wasting asset & ASF needs to be set up • Debate over the use of YP[Dual rate] model • Not used in most countries, e.g.- Australia and US (Whipple, 2006; Fisher and Martin, 2004) • In the UK, YP[Dual rate] is used • One school of thought supports its use • Another school of thought does not support its use

  5. Introduction (cont.) • Arguments for & against the use of YP[Dual rate] tend to the be theoretical • Limited empirical studies • Objectives • To empirically examine the extent to which the use of the model actually reflects market conditions in practice • To determine whether or not it actually matters if it is the YP[Dual rate] model or the YP[Single rate] model that is used to value LHs

  6. Research methodology • Qualitative research methodology adopted using a neighbourhood in Liverpool as a case study • 105 LH purchasers purposively selected and semi-structured interviews conducted in 2012 • One in-depth interview with an official of Homes & Communities Agency (HCA) • QSR NVIVO 10 used to aid data analysis

  7. Brief history on the use of YP[Single rate] & YP[Dual rate] • 1853 - YP [Single rate] used to value LH and FH (Cox, 1853) • Single rate model well established in the C19th and rolled into C20th (Mackmin, 2008) • Support for the use of YP[Dual rate] emerged in C20th • 1909 - Webb argues for its use • Since then there have been arguments for & against the use of YP[Dual rate] • Debate closed in some countries • Debate still rages on in the UK

  8. Results Types of LH Ownership

  9. Results (cont.) • Types of mortgage markets • RE procured via loans from banks • Repayment period: 25-30 years • Two mortgage markets • Open market – LTV: 70-90%; equity: 10-30% • 85 (81%) of respondents participated in this market • Government scheme: HomeBuy Direct • 20 (19%) of respondents participated in this market • Ground rent: £200-750 pa with a term of 999 years • Price range: £125,000-253,000

  10. Results (cont.) Use of ASF to Recoup Initial Capital

  11. Results (cont.) • Using the YP[Dual rate] model implicitly assumes every LH purchaser automatically uses ASF method • Empirical evidence does not support it • Concentration is on only ASF when other methods can be adopted • Use of debt capital [common method] • PV£1 concept • A leasehold purchaser could hold a portfolio of investment vehicles

  12. Results (cont.) Impact of using YP[Dual rate] on LH Valuations

  13. Conclusion • The YP[Dual rate] model has been empirically examined • Bidders, in practice, do not use the ASF • It undervalues properties significantly in short leases • Focus is on only the ASF method when other methods exist • Risks associated with wasting assets taken into account • YP[Dual rate] could be considered when ASF is encountered in practice

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