Rough understanding of premium to buy freehold

wertun

Hi,

Us and our neighbour in the flat above are considering buying the freehold of our building.
However we're trying to get a rough understanding of costs before committing fully as there's no point starting the process if it turns out it'll be too expensive.

I've used lots of online freehold valuation calculators to get a rough understanding of the premium and it initially seemed quite affordable as our ground rent currently is £125 a year and we have 122 years left on the lease.

However, our ground rent increases by £125 every 25 years which I understand would likely increase the premium. However it's still a relatively gradual increase and I know that the premium is calculated with a compound discount each year.

So my question is how can I (roughly) calculate what that compound discount of the ground rent for the remaining 122 years if it were say 6% per year but given that the ground rent increases every 25 years?

Any help would be appreciated.
Thanks

eddddy

wertun said:

Us and our neighbour in the flat above are considering buying the freehold of our building.
However we're trying to get a rough understanding of costs before committing fully as there's no point starting the process if it turns out it'll be too expensive.

I've used lots of online freehold valuation calculators to get a rough understanding of the premium and it initially seemed quite affordable as our ground rent currently is £125 a year and we have 122 years left on the lease.

However, our ground rent increases by £125 every 25 years which I understand would likely increase the premium. However it's still a relatively gradual increase and I know that the premium is calculated with a compound discount each year.

So my question is how can I (roughly) calculate what that compound discount of the ground rent for the remaining 122 years if it were say 6% per year but given that the ground rent increases every 25 years?

So you have calculated a freehold value - assuming that the ground rent is level at £125 for the next 122 years.

But the actual ground rent is...
£125 for the next 22 years
£250 for the next 25 years
£375 for the next 25 years
£500 for the next 25 years
£625 for the final 25 years

... and the discount rate is 6%


So according to my calcs, you need to add £755 to whatever freehold valuations you have, to take account of the rising ground rent.

i.e. If the ground rent is £125 and rising for each flat, you need to add £755 for each flat.

wertun

eddddy said:

wertun said:

Us and our neighbour in the flat above are considering buying the freehold of our building.
However we're trying to get a rough understanding of costs before committing fully as there's no point starting the process if it turns out it'll be too expensive.

I've used lots of online freehold valuation calculators to get a rough understanding of the premium and it initially seemed quite affordable as our ground rent currently is £125 a year and we have 122 years left on the lease.

However, our ground rent increases by £125 every 25 years which I understand would likely increase the premium. However it's still a relatively gradual increase and I know that the premium is calculated with a compound discount each year.

So my question is how can I (roughly) calculate what that compound discount of the ground rent for the remaining 122 years if it were say 6% per year but given that the ground rent increases every 25 years?

So you have calculated a freehold value - assuming that the ground rent is level at £125 for the next 122 years.

But the actual ground rent is...
£125 for the next 22 years
£250 for the next 25 years
£375 for the next 25 years
£500 for the next 25 years
£625 for the final 25 years

... and the discount rate is 6%


So according to my calcs, you need to add £755 to whatever freehold valuations you have, to take account of the rising ground rent.

i.e. If the ground rent is £125 and rising for each flat, you need to add £755 for each flat.

Thanks eddddy! That's a lot less than I was expecting. Can I ask how you got to that number? Thanks!

eddddy

wertun said:

That's a lot less than I was expecting. Can I ask how you got to that number? Thanks!

To use the jargon... you would do a Discounted Cash Flow analysis to find the present value of future cash flows using a discount rate.

If you google that phrase, or some keywords from it, you'll probably find some explanations of how that works.


FWIW, the impact of of a cumulative 6% discount rate is pretty dramatic, for example...

• £100 of ground rent in 25 years time would be worth £23 today
• £100 of ground rent in 50 years time would be worth £5.40 today
• £100 of ground rent in 100 years time would be worth 29p today

Put another way, if I said to you "How much would you pay me today, for an IOU to pay you £100 in 100 years time?" - the assumption is you'd offer me 29p for that IOU. 


Out of interest, which freehold purchase calculator(s) did you use?