The response to freehold growth information when estimating ground leasehold value
ISSN: 0263-7472
Article publication date: 3 November 2022
Issue publication date: 25 May 2023
Abstract
Purpose
This paper is concerned with behavioural responses to reviewed ground rents in New Zealand. The focus is on how freehold growth information is interpreted when considering reviewed ground rents on ground leasehold value.
Design/methodology/approach
Semi-structured interviews were conducted with ground leaseholders to inform the design of a controlled experiment. The interviews revealed that (a) purchasers tended to directly compare freeholds to ground leaseholds and (b) used rudimentary valuation methods. In the experiment, 40 property investors were requested to estimate the ground leasehold value close to the ground rent review time. Thereafter, 20 of the investors reassessed their ground leasehold value estimate using a projection of the future ground rent and a statement as to freehold growth (treatment). The control group of the remaining 20 investors received the estimate of the future ground rent only.
Findings
The tendency for higher treatment group valuations indicated the growth information was too available. Comparing ground leaseholds directly to freeholds, rather than thinking about the cost implications, is attributed to a manifestation of the availability heuristic.
Research limitations/implications
The study involves a typical ground lease arrangement (as verified by experts) in the New Zealand market where there are few protections for ground leaseholders. These findings justify prohibiting new ground leases where the ground rents are set by reference to freehold land value.
Originality/value
This paper extends behavioural theory (availability heuristic) to explaining human interaction with ground leaseholds.
Keywords
Citation
Pope, A.R., Squires, G. and Young, M. (2023), "The response to freehold growth information when estimating ground leasehold value", Property Management, Vol. 41 No. 3, pp. 336-350. https://doi.org/10.1108/PM-07-2022-0053
Publisher
:Emerald Publishing Limited
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