UK freehold reversionary properties: valuation practice revisited

Abstract

Purpose

In the last 40 years, the UK valuation profession has relied heavily upon the “hardcore” or “layer” method for valuing reversionary properties (under‐ and/or over‐rented). This approach is not used elsewhere in the world and, prior to the rent freeze of the 1970s in the UK, it wasn't a principal method in the UK. However, valuers today, particularly in London, use this method exclusively despite it producing erroneous answers in certain cases (over‐rented; non‐normal cash flows). This paper seeks to address these issues.

Design/methodology/approach

This paper undertakes an indicative pilot study of valuation models used in the valuation of reversionary properties in the downturn of 2008‐2012. The study, whilst small, provided an insight into the techniques chosen by valuers to look at properties where the risk of falling rents, voids and prolonged vacancy is relatively high.

Findings

The paper looks at approaches, methods and techniques for property valuation. It identifies that the determination of the UK valuation profession to cling to familiar valuation models, no matter how inappropriate, may lead to mis‐valuations. Alternative, more appropriate, implicit and explicit models are suggested.

Originality/value

It is the opinion of this paper that the UK property market is now so different from the market that prevailed when the layer model was introduced that it no longer has a place in the valuers' armoury of methods to use. This paper looks at a number of case study examples and offers other (more appropriate) options for valuing reversionary interests. In particular, the findings from the study will be useful for valuers to be better able to identify the critical points in the expected cash flow and thus be better able to reflect the appropriate risk in the valuation figure provided.

Citation

French, N. (2013), "UK freehold reversionary properties: valuation practice revisited", Journal of European Real Estate Research, Vol. 6 No. 2, pp. 218-235. https://doi.org/10.1108/JERER-04-2013-0004