Departure from Sportelli as Deferment Rates hiked

In Sportelli, which was in prime Central London, the deferment rate for flats was arrived at as follows:

• risk free rate - 2.25%, minus

• real growth rate- 2.00%, plus

• risk premium - 4.5%, plusincreased management risk for flats - 0.25%

In Zuckerman the Tribunal added 0.25% to the ‘risk premium' for obsolescence, 0.5% for the risk of long-term growth and 0.25% to the ‘increased management risk for flats'.

Given evidence of house price information, the Tribunal was satisfied that long term growth prospects in Edgbaston were "significantly slower" than in PCL and that "the difference between past rates of long-term price increases in PCL and in the West Midlands has been considerable." Therefore, the risk premium should be increased by 0.5%.

On obsolescence, in Sportelli the Tribunal did "not rule out" an adjustment to the deferment rate in ‘exceptional' cases. The Zuckerman evidence was that PCL values were greater than in Edgbaston. The Tribunal increased the risk premium by 0.25% because "it is likely to remain economically viable to repair high value properties in PCL for considerably longer than it will for similar sized flats in (Edgbaston)...(and) ... there is greater risk of deterioration at (Edgbaston) than in PCL".

In Sportelli, the increased management risk for flats was because "the management exercise is sufficiently more complex" than for houses. In Zuckerman there was evidence that the dangers of the consultation requirements for service charges became much better known and "investors would have required an addition of 0.5% to reflect the greater management problems associated with flats." The Tribunal added a departure "from the Sportelli uplift" would not have been appropriate, "had the headlease still been in existence."

And so the 6% deferment rate in Zuckerman was:

• risk free rate - 2.25%, minus

• real growth rate - 2.00%, plus

• risk premium - 5.25%, plus increased management risk for flats - 0.5%.

So where to now? Well the ‘flats' addition of 0.5% where there is no headlease, looks here to stay. The additions to the risk premium will depend on the evidence of values and longterm growth rates as compared with PCL.