Isn’t RPI better than doubling?
It is mathematically unsound to consider one factor in isolation such as the initial rate, or the method, such as fixed doubling. This is the problem with shorthand discussions of onerous ground rents to tackle ‘unfairness’.
RPI indexing is not automatically less onerous than fixed doubling. Nor might a higher initial rate be overall more onerous than a lower one.
You need to compare and contrast the capitalisation (present value or PV) of the ground rent. The total paid over the period will track the PV almost precisely.
Any definition of ‘reasonable’ needs to be benchmarked using the capitalisation (PV) value.
This is because the starting rate, method of increase (fixed doubling or RPI indexing) and the increment rate each have a significant inter-relating effect on PV capitalisation, and the total paid.
It is well understood that fixed doubling every ten years is the equivalent of an average yield of 7.16%.
What is not admitted if noticed is that RPI >=3.5% can also produce onerous ground rents at shorter increment rates (under 25 years), especially if the starting rate is higher than 0.1%. (Bearing in mind a new lease valued at £200K at 0.1% would have an initial rate of £200 pa).
I prepared comparison tables using the PV capitalisation formula:
Each increment in years is multiplied by its related GR payment and the deferment period (i.e. until that increment is payable) is also factored.
I tested the following variables and assumed an original 99 year lease worth £100K when new with 79 years term left to run:-
- Increment rate (years): 15, 20, 25, 33
- Method: RPI% @ 2.5%,3.5%,4.5%
- Alternative method: Doubling
- Initial amounts: £100, £150, £200, £250, £300
The length of remaining term was the same (79 years) in all tests so that the PV capitalisation was like for like.
Table A on the next page contains 100 test results with 50 in each column. The PVs found on the top left of Table A reflect the least onerous ground rents.
The combination of a low starting rate with longer increment intervals are the most determining factors, not whether fixed doubling or variable RPI indexing is the method used.