Overview

The problem of valuing leasehold interests in property has been troubling New Zealand (NZ) valuers for many years. The main issue is the paucity of market comparable evidence. Conventional techniques adopted by the valuation profession for estimating leasehold interests in NZ have been criticised by the financial, legal and accounting professions together with the parties contracted to the investment; the tenant and the landlord. A common criticism is they are irrational, because they do not explicitly recognise growth. The lack of a logical basis often leads to inaccurate estimates of value, leaving the lessee, lessor and advisors frustrated and bewildered.

To understand how this climate has come about, the literature and models introduced in the NZ valuation profession to estimate partial interests are reviewed and their historical context described. The extent of leasehold land currently in NZ is examined to gauge its size and importance in the NZ property market. The categories of leasehold are further examined (i.e. commercial, residential and rural), so a sense of the relative size in each sector is apparent. A sample of six conventional leasehold models put forward by the NZ valuation profession are evaluated. Thereafter, contemporary growth explicit models are proposed, drawing on research from UK professors Andrew Baum and Neil Crosby, but adapting their modelling within the context of NZ. The research paper aims to provide a valuation model with a logical and accurate basis for valuing partial interests.