Expert Valuation Deep Dive: Could the deferment rate really move above 6%?

Heads up! This article is written by a valuer, for valuers, agents and solicitors - it's a complicated deep dive into a recent report from the Government Actuary's Department on one of the variables to Leasehold Enfranchisement Valuation.

For those of us working in leasehold enfranchisement, the deferment rate has been one of the few parts of the valuation that we have barely had to think about for the best part of 20 years.

Sportelli gave us 4.75% for houses and 5% for flats and, subject to the usual arguments around departures in individual cases, those rates have become pretty well embedded in valuation practice.

That may now be about to change.

The Government has asked the Government Actuary’s Department (“GAD”) to look again at the deferment rate as part of the wider leasehold reform programme. Its January 2026 report considers what happens if the Sportelli methodology is updated using more recent economic data, but also looks at whether parts of the original methodology should now be approached differently.

The headline figure is going to get plenty of attention: 6.05% for houses and 6.30% for flats.

If you are a leaseholder, the attraction of that is obvious. A higher deferment rate reduces the present value of the landlord’s reversion and, all other things being equal, reduces the premium.

But having read the report, I don’t think the interesting question is whether GAD has suddenly decided that the “correct” rate is 6.05%.

I’m not actually sure that is what the report says.

What I find much more interesting is how they have got there, how quickly the answer moves when you change some of the assumptions, and where the actuarial analysis starts to need rather more input from people who actually value residential property.

And this is not just an enfranchisement issue either. If the cost of dealing with shorter leases changes materially, it will eventually find its way into the sales market. Agents will be advising sellers with short leases differently, buyers will reassess how much they discount for the problem and sellers may make different decisions about whether to extend before going to market.

So, has GAD actually recommended 6.05%?

Not quite.

GAD was asked to carry out two different exercises.

Exercise 1 was essentially an attempt to rerun Sportelli mechanically using updated data. Exercise 2 gave GAD more freedom to reconsider how each part of the calculation should now be measured.

The familiar formula is:

real risk-free rate – real property growth + property risk premium.

For houses, the original Sportelli figures were:

2.25% – 2.00% + 4.50% = 4.75%.

Flats came out at 5%.

GAD’s main Exercise 2 example is:

2.05% – 0.50% + 4.50% = 6.05%.

But you don’t have to move the assumptions very far before the answer changes.

Use a one-year averaging period rather than six months for the risk-free rate and you get 5.85%.

Use 1.5% real property growth rather than 0.5% and you get 5.05%.

Reduce the risk premium from 4.5% to 3.5% and you also get 5.05%.

GAD then makes the point that those figures are not even intended to be the upper and lower ends of a reasonable range. Different plausible assumptions could produce figures outside them.

That is quite important.

I would therefore be wary of the inevitable headline that “GAD recommends 6.05%”. What they have really shown is that one particular updating of the Sportelli methodology produces 6.05%.

That is a rather different proposition.

One part of the report I think is particularly good

GAD makes the point that you cannot simply update one part of the Sportelli equation and leave everything else alone.

That sounds fairly obvious, but it is important.

The deferment rate is broadly trying to capture the return an investor requires from property, less the capital growth they expect while they are waiting to obtain possession.

The required return itself can be thought of as a risk-free return plus a property risk premium.

Those things are linked.

Interest rates affect property values. They affect investment decisions. Capital growth forms part of the overall return from holding property. A change in the economic outlook may affect both growth expectations and the return investors require.

GAD’s first exercise shows the problem quite nicely.

If they mechanically update the risk-free rate but leave much of the rest of Sportelli untouched, they end up at a deferment rate of around 1.6%.

GAD itself says that this is internally inconsistent and should not be relied on in isolation.

I think that is a useful reminder.

You cannot simply look at what gilts have done since 2006 and apply the movement to the deferment rate.

But equally, if you are going to change one of the other parts of the formula substantially, you need to think about what that says about the rest of it.

I think the risk-free rate analysis is probably the strongest bit

Sportelli used a 10-year forward gilt rate averaged over five years.

GAD prefers a long-term spot rate.

I can see the logic in that.

A forward rate is telling you something about the rate implied at a future point in time. A spot rate is much closer to the question of what return an investor can obtain by committing money today for a long period.

If what we are valuing is the right to receive a property back many years from now, it is not difficult to see why GAD thinks that is a better fit with what we are actually trying to measure.

They settle on a 40-year real gilt spot yield.

Forty years is not meant to be a perfect match for every lease. It is essentially a practical compromise because Bank of England data remains readily available and reasonably robust at that term.

What caught my eye more, though, was something GAD says almost in passing.

They acknowledge that the appropriate rate could be considerably different if you were looking at a five-year reversion rather than a 100-year reversion.

That potentially opens up a much bigger question.

If that is true, should the same statutory deferment rate really apply to a lease with 20 years left and one with 120 years left?

There are very good reasons why Government might want it to. A single rate is simple, predictable and avoids another valuation argument.

But simplicity and valuation theory are not necessarily the same thing.

The five-year averaging period looks increasingly difficult to justify

The original Sportelli approach took a five-year average of gilt yields.

There was a perfectly sensible reason for that. It stops short-term market volatility producing wild changes in the deferment rate.

The problem is that five years is a long time.

GAD points out that long-dated real gilt yields fell very substantially after Sportelli but have increased again since around 2022. By September 2025 they were back above the levels seen in 2005, although the five-year averaging period meant that the original methodology was still dragging much lower historic rates into the calculation.

GAD goes for six months instead.

Importantly, they don’t pretend that six months is somehow mathematically correct. They say quite openly that the averaging period is subjective and potentially material.

And it clearly is material.

Change six months to one year and the house rate moves from 6.05% to 5.85%.

That does not necessarily mean six months is wrong. It just demonstrates quite how much judgement still sits underneath a number which may eventually be prescribed in legislation.

The bit I think needs the most discussion: 0.5% real property growth

This is the part of the report I found hardest to get comfortable with.

GAD’s main Exercise 2 calculation assumes residential property growth of 0.5% per annum above CPIH over the long term.

There is a reasonable basis for looking at a lower figure than Sportelli.

Real house-price performance has been much weaker recently and GAD refers to the Office for Budget Responsibility ("OBR") forecasting real house-price growth of around 0.5% a year through to 2029.

So far, so good.

Where I think it becomes more difficult is what happens next.

GAD essentially takes that 0.5% forecast and continues it into the future.

In an enfranchisement valuation, “the future” can mean a very long time.

We could be using that assumption to value something coming back in 50, 80 or 100 years.

That is where I think the profession should be asking questions.

There is quite a big difference between saying that the OBR expects subdued real house-price growth over the next five years and saying that residential property should be assumed to grow at only 0.5% above inflation over a multi-generational period.

That does not mean the assumption is wrong. It might ultimately prove to be perfectly sensible.

But it is doing an awful lot of heavy-lifting in the calculation.

Reduce real growth from 2% to 0.5% and, all other things being equal, you add 1.5 percentage points to the deferment rate.

That is most of the movement from the familiar Sportelli figure to GAD’s 6.05%.

And GAD itself identifies many of the problems with making a very long-term forecast.

Historic house-price evidence is backward-looking. Recent weak growth may or may not continue. Housing supply matters. Population matters. Migration matters. GAD also says that it has not looked at regional differences in much depth.  

So if I were picking one part of this report that I think deserves the most scrutiny from enfranchisement valuers, it is probably this.

What about London and regional differences?

The report is necessarily looking at the housing market at quite a high level.

But that creates an obvious issue.

A reversion is not an investment in the UK House Price Index.

It is a future right to possession of a particular property in a particular place.

That distinction matters.

I spend most of my time valuing residential property in London. I would be hesitant to assume, without more evidence, that the long-term economic characteristics of a prime or land-constrained London market must be identical to those of a market where housing supply can respond much more easily.

Equally, I would not jump from that observation to saying there therefore has to be a special London deferment rate.

That is a different question altogether.

Once you start introducing different rates for London, the South East, the Midlands, different property types and different lease lengths, you quickly recreate exactly the uncertainty and professional cost that a prescribed rate is presumably trying to remove.

I think that is the genuine tension here.

Government may quite reasonably decide that one national rate is preferable.

But if it does, we should recognise that what we have is a policy compromise between valuation precision and simplicity.

It is not necessarily an assertion that every residential reversion in England is economically identical.

The risk premium is interesting for a different reason

GAD leaves the Sportelli risk premium more or less alone: 4.5% for houses and 4.75% for flats.

This is probably the bit of the report where some of the language becomes less familiar to property valuers.

One of the cross-checks GAD looks at is the additional return investors currently demand for lending money to companies rather than lending it to the Government.

Government gilts are treated as the low-risk benchmark. A company has a greater chance of getting into financial difficulty, so investors normally expect a higher return before they will lend to it. The difference between those two returns is what the report refers to as a “credit spread”.

GAD looks at investment-grade company debt and notes that the extra return being demanded by investors today is broadly similar to where it was around the time of Sportelli. It says that could provide some support for leaving the property risk premium alone. But GAD is also quite clear about the problem with the comparison: lending to a company and owning residential property involve very different risks, and company bonds generally have much shorter terms than the reversions we are considering.

GAD also looks at the assumptions it uses elsewhere for large institutional property portfolios — in simple terms, the additional return a professional investor might expect from owning a diversified portfolio of property rather than holding gilts.

That is useful as another sense-check, but again it is not a perfect comparison. Those portfolios are mainly made up of things such as offices, shops and industrial property, with only a relatively small residential element, and GAD says the time horizon is shorter than would usually be appropriate for a deferment rate.

So none of this is direct evidence of what the risk premium should be for the deferred possession of an individual house or flat.

And I think the wording GAD uses here is quite telling.

They say retaining 4.5% is “not unreasonable”.

That is rather different from saying that the evidence demonstrates that 4.5% is the correct property risk premium today.

It may well be.

But I think there is a legitimate question as to whether the figure has actually been re-established using modern residential property evidence, or whether there is simply not enough evidence to justify moving away from the figure already in Sportelli.

There is another interesting point here too.

GAD is very clear earlier in the report that growth and risk premium cannot necessarily be looked at independently.

Yet its principal calculation makes a fairly dramatic change to the long-term growth assumption while leaving the risk premium exactly where it was in Sportelli.

Again, that does not make the answer wrong.

But it is something I would expect valuers to want to explore.

And is the extra 0.25% for flats still right?

The 0.25% additional risk premium for flats survives as well.

GAD looks at the argument that flats may involve greater maintenance and management costs, but also recognises that there can be economies of scale.

Its research on this point appears fairly limited and the conclusion is essentially that they have not found enough evidence to justify changing the existing adjustment.

Again, that might lead us to the right answer.

But modern blocks are very different from one another.

Service charges, management costs, major works and building safety expenditure can vary enormously.

Whether a blanket 0.25% remains the right way of dealing with that seems to me to be another area where people working in the market may have useful evidence to contribute.

What does this mean for estate agents?

Probably more than you might initially think.

Short leases are not just an enfranchisement issue. They are a sales issue.

They affect value, mortgageability, buyer confidence, negotiations and the time it takes to get a transaction through.

If the eventual reforms materially reduce the cost of extending some leases, that could change how sellers decide to deal with them.

There will be cases where extending before sale still makes perfect sense.

There may be other cases where it becomes more attractive to sell with the lease as it is.

And buyers who currently apply quite substantial discounts for a perceived future lease-extension liability may eventually need to reconsider how they arrive at that figure.

The important bit for agents is not to start trying to calculate statutory premiums themselves.

It is to recognise the problem early.

If somebody is thinking about selling a flat with a shorter lease, it is far better to understand the likely cost and the available options before the property goes to market than for the issue to emerge halfway through conveyancing.

That can also affect the way the property is priced from day one.

If a seller is told that their flat is worth £X with a long lease, it does not necessarily follow that the correct short-lease asking price is £X less an estimated lease-extension premium. Buyers price uncertainty, inconvenience, financeability and risk as well as the premium itself.

If the statutory assumptions change, those market discounts may change too - although I would expect the sales market to take some time to absorb a new regime.

An agent who spots the issue at the valuation stage and gets the right people involved early can make a real difference to the transaction.

And while the law is changing, the usual rules of thumb around how much a short lease knocks off the sale price are likely to become even less reliable.

What does it mean for solicitors?

Solicitors are already going to be getting one question repeatedly:

“Should I extend now or wait?”

The temptation is to answer that by trying to guess whether the premium will be cheaper after reform.

I don’t think that is enough.

The client's actual objective matters.

Are they selling?

Are they keeping the flat for another ten years?

Is it an investment?

How short is the lease?

Is mortgageability already becoming an issue?

How much would it cost to deal with now?

What exactly are they hoping will change if they wait?

And how much uncertainty are they prepared to accept?

The GAD report only considers the deferment rate. Other elements of enfranchisement valuation sit outside its scope.

So even if the eventual deferment rate does move materially, that does not automatically tell you what will happen to every individual premium.

For solicitors, I think the practical answer is going to be the same as it often is with leasehold reform: the client needs to understand both the legal position and the numbers before deciding whether waiting makes sense.

That means legal and valuation advice need to sit alongside each other.

What should valuers be looking at?

This is where I think the report gets genuinely interesting.

Rather than immediately deciding whether we “like” 6.05%, I think there are a number of assumptions that need properly testing.

Is 0.5% real growth a sensible long-term assumption when much of the supporting forward-looking evidence only covers five years?

What evidence should we be looking at over a genuinely long horizon?

How much weight should be given to regional differences?

Does the resulting deferment rate make sense when compared with the economics of actual residential investment?

Is 4.5% still the right property risk premium, and what direct residential evidence is there for it today?

If long-term growth expectations are being reduced materially, what does that mean — if anything — for the return an investor would require for holding residential property?

Should the same rate apply over a 20-year term and a 100-year term?

And is the extra 0.25% for flats still supported by the way modern blocks actually operate?

Interestingly, GAD itself raises the possibility of greater variation in the future, including by lease length or region.

Whether we actually want that degree of complexity is another matter.

But they are sensible questions to ask before a rate becomes embedded for another decade.

Where do I land on it?

I think it is a good report.

GAD is open about the limitations of what it has done and is quite careful not to claim more certainty than the evidence allows. It also expressly acknowledges that it is not a specialist property valuation body and that wider expert views will need to form part of the consultation process.

I found the work around the risk-free rate particularly interesting and I think the point about maintaining consistency between the different parts of the Sportelli equation is an important one.

The bit I would like to see explored much further is the 0.5% real-growth assumption.

Not because I think it can simply be said to be wrong, but because it has such a large effect on the eventual answer and because the period over which it may be applied is so much longer than the forecast which appears to have influenced it.

The risk premium probably deserves more attention too. GAD has found a number of indirect ways of checking whether 4.5% still looks broadly sensible, but those comparisons are not the same thing as direct evidence from the residential investment market.

For me, that is where the debate should be.

Not simply:

“Should the deferment rate be 5% or 6%?”

But:

How much of the eventual rate can genuinely be anchored to market evidence, how much will inevitably remain a judgement call, and how much valuation precision should be traded for the simplicity of having a prescribed statutory rate?

That is a discussion for valuers and solicitors now.

If the answer eventually changes the economics of extending shorter leases, estate agents and the wider residential market will end up being part of that discussion too.

I suspect this is only the start of it.