Structure of Presentation

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