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
Structure of Presentation
 Introduction
 Research methodology
 Brief history of YP[Single rate] & YP[Dual rate]
models
 Results
 Conclusion
2
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]
3
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
4
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
5
Research methodology
Qualitative research methodology adopted using a
neighbourhood in Liverpool as a case study
105 LH purchasers purposively selected and semistructured interviews conducted in 2012
One in-depth interview with an official of Homes &
Communities Agency (HCA)
 QSR NVIVO 10 used to aid data analysis
6
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
7
Results
Types of LH Ownership
Sole Ownership
Unmarried males
Unmarried females
Married males
No
12
5
10
Married females
3
30
Total
Joint Ownership
Married couples [male &
female]
% [of 30] % [of 105]
40.0
11.4
16.7
4.8
33.3
9.5
10.0
100
No
75
2.9
28.6
% [of 105]
71.4
8
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
9
Results (cont.)
Use of ASF to Recoup Initial Capital
Awareness of ASF
No
%
2
1.9
Unaware of ASF method
103
98.1
Total [N]
105
100
Not concerned about the future
6
5.7
Not concerned about the future & use of debt capital
in the future
4
3.8
Use of debt capital in the future
95
90.5
Use of ASF method
0
0
105
100
Aware of ASF method
Method adopted to make provision for future expense
Total [N]
10
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
11
Results (cont.)
Impact of using YP[Dual rate] on LH Valuations
Appropriate YP factors [RoC – 7%; ASF rate – 2.5%; tax – 40%]
Term
10
25
50
100
150
200
250
350
400
450
500
Perp.
YP [Perp.]
14.29
YP[SR]
7.02
11.65
13.80
14.27
14.29
14.29
14.29
14.29
14.29
14.29
14.29
-
YP[DR]
6.28
10.07
12.46
13.83
14.16
14.25
14.28
14.28
14.29
14.29
14.29
-
YP[DR adjusted for tax]
4.57
8.42
11.48
13.54
14.07
14.22
14.27
14.28
14.29
14.29
14.29
12
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
13