Leasehold Valuation Understanding the Dynamics of Leasehold and Freehold Properties

When making decisions related to real estate investment, you may encounter the terms “leasehold” and “freehold,” both representing distinct forms of ownership. It is crucial to acquire a comprehensive understanding of your rights and the legal risks involved when purchasing a property worldwide.

Freehold

Freehold denotes ownership of both the building and the land it occupies. In this type of ownership, there is no time limit for the landowner and beneficiaries. Property transfer under freehold ownership is unrestricted, providing stability and a higher likelihood of long-term value appreciation. Despite requiring a greater initial capital outlay compared to leasehold properties, freehold owners are exempt from annual ground rent payments.

Leasehold

Leasehold is an ownership arrangement involving an agreement between the lessor (owner/landlord) and lessee (tenant/leaseholder). This agreement delineates the lessee’s right to use the property for a specified time, with the leasehold period diminishing each year. Extensions to the lease period are sometimes possible.

As the lease term shortens, the property’s value decreases, and the cost of ground lease extensions rises. Valuers must consider various terms and information outlined in leasehold agreements, especially for complex commercial properties, which lack standardized leases. Critical elements include payment structure, rent review mechanisms, lease term, ground rent, leaseholder’s obligations, and subletting restrictions.

When purchasing a leasehold property, clarifying the lease terms is imperative. The main drawback of leasehold property lies in the fact that, upon lease expiration, ownership reverts to the freeholder, resulting in the loss of the initial capital outlay, with investment return limited to income.

Leasehold valuation is inherently challenging, surpassing the complexity of freehold valuation. Factors such as lease terms, duration, repairs, insurance, and other liabilities vary widely, leading to diverse yields and capital values in comparable evidence analysis.

Western Valuers specializes in providing valuation advice for leasehold interests across residential, commercial, industrial, and retail properties, as well as lands and buildings with or without redevelopment potential. These valuations adhere to International Financial Reporting Standards (IFRS) for inclusion in Financial Statements.