The realistic price issue – a valuer’s perspective

£111.66 million odd had been offered in the notice for the freeholder’s interest at Dolphin Square (‘DS’). The legal argument in valuation parlance at DS is described as the ‘realistic price issue’. A realistic price, it was argued, is that within the range of reasonable valuations which a competent valuer could arrive at, assuming all matters of factual doubt or valuation opinion are resolved in favour of the participating tenants.

Accordingly the valuation to be carried out in DS was that of the lowest reasonable price as at the valuation date (4 May, 2010).

Fundamentally this isn’t the enfranchisement price per se, but the lowest price a competent valuer could reasonably calculate.

How does a valuer calculate the lowest price in a collective enfranchisement of 1,229 flats with covered and uncovered car parking, storage lockers and common facilities including a fitness centre, bar, brasserie, spa and a parade of shops?

I put myself in the position of a valuer carrying out the valuation for the purposes of giving advice on the sums to be included in an initial notice of claim on or about 4 May, 2010.

Each valuation input was analysed and reasoned. In chronological order: capitalisation rates; share of freehold/999 years lease (capital) values; scale adjustment; deferment rate; and existing lease values (relativity).

In outline I reasoned the following: capitalisation rates where the single rate equalled the remunerative rate of the dual rate (such were the facts of the case); capital values based on a ‘datum point’ representing £613 per square foot for a one-bedroom, first-floor flat with a garden view, reached by analysis of comparable sales with adjustments for both non-physical and physical factors; a scale discount (20%) from the aggregate of capital values to reflect lot size; a deferment rate of 6%, being a 1% departure from the generic rate in Sportelli; and existing lease values following the Savills 2002 enfranchiseable lease schedule.

The departure in deferment rate represented a 1% addition to the risk premium reflecting argument in Zuckerman (0.5%) and increased risk with respect to volatility and illiquidity at DS above that envisaged in Sportelli (0.5%). The Savills 2002 schedule (relativity) was adopted as the Court of Appeal had yet to hear this point in McHale.

The lowest price I reasoned is just under £109 million, which “…is not outside the band of reasonable valuation figures that a reasonable valuer could propose…” (paragraph 393 of the judgement).