As part of my work with the Leasehold Knowledge Partnership I am looking at how the deferment rate used in leasehold tribunal decisions can be estimated using market data.
It already seems, see my previous post on this, that the rental-implied deferment rate changes through time, to my initial surprise. But it is equally surprising that there are considerable regional variations.
The table below, sourced from crowdfunder Property Partner, shows median gross rents and annual average house prices for different Places Outside London. Kevin (who hails from Middlesbrough) was impressed that they spelled ‘Teesside’ correctly.1
Dividing gross rent by price gives us the average gross yield per annum. Multiplying by a netting ratio of 66% to account for voids, repairs, management costs and periodic updates of the property, gives us the net rental yield. As I claimed in this post a week ago, we can show that the net rental yield is approximately equal to the deferment rate, 2 through a simple derivation of the dividend discount model.
The table shows a surprising variation in the implied deferment rate, with the lowest in Leeds at 3.3%, and the highest in Sunderland at nearly 7%. The Sunderland and Teesside effect is almost certainly due to the low price of property there. Yet all rates are somewhat above the minimum rate of 1% used in the PRA PRA Policy Statement 31/18 published on 10 December 2018.
These results are tentative, of course. We don’t know whether the ‘average house price’ used by Property Partner is the average across the universe of rental properties in e.g. Sunderland, or across all properties in Sunderland. If, as is possible, non-rental properties are priced higher than rental properties, the deferment rate would be even higher. But even so, if the deferment rate is higher, then it is higher, whereas the ERM industry would prefer it lower, or negative.
| Town | Median Rent pcm | Gross annual rent | Average house price | Average gross annual yield % | Ratio | Implied deferment |
| Sunderland | £575 | £6,900 | £65,201 | 10.6% | 65% | 6.9% |
| Teesside (Middlesbrough) | £425 | £5,100 | £56,272 | 9.1% | 65% | 5.9% |
| Aston & Birmingham City | £676 | £8,112 | £116,732 | 6.9% | 65% | 4.5% |
| Salford | £750 | £9,000 | £131,863 | 6.8% | 65% | 4.4% |
| Edinburgh | £1,101 | £13,212 | £197,010 | 6.7% | 66% | 4.4% |
| Manchester Metropolitan | £895 | £10,740 | £160,315 | 6.7% | 66% | 4.4% |
| Manchester | £750 | £9,000 | £135,174 | 6.7% | 64% | 4.3% |
| Newcastle & Northumbria | £823 | £9,876 | £150,609 | 6.6% | 65% | 4.3% |
| Nottingham & Nottingham Trent | £794 | £9,528 | £151,535 | 6.3% | 65% | 4.1% |
| Coventry | £901 | £10,812 | £179,412 | 6.0% | 65% | 3.9% |
| Bangor | £750 | £9,000 | £156,173 | 5.8% | 64% | 3.7% |
| Huddersfield | £540 | £6,480 | £116,802 | 5.5% | 65% | 3.6% |
| Portsmouth | £925 | £11,100 | £201,434 | 5.5% | 65% | 3.6% |
| Queen’s, Belfast | £802 | £9,624 | £183,505 | 5.2% | 65% | 3.4% |
| Edge Hill (Ormskirk) | £1,040 | £12,480 | £239,298 | 5.2% | 65% | 3.4% |
| Durham | £650 | £7,800 | £151,438 | 5.2% | 63% | 3.3% |
| Southampton | £901 | £10,812 | £212,852 | 5.1% | 65% | 3.3% |
| Cumbria (Carlisle) | £477 | £5,724 | £113,025 | 5.1% | 65% | 3.3% |
| Leeds | £776 | £9,312 | £184,628 | 5.0% | 66% | 3.3% |
Source: Property Partner