The key question therefore is, how does one value a reversionary interest on the open market?
Whilst there is currently a small and apparently shrinking market (seven interests sold since 2015 according to the respondent's skeleton argument) in which a small number of investors seek a 6 to 7% return, our view is that level of return and the small size of the current market is likely to represent one end of the spectrum for the court to adopt.
An alternative approach might be based on a mixed investment portfolio. The expert evidence dealt with the mixed investment approach in the context of striking a balance between competing interests, although critically that is not the purpose of compensatory damages. This approach to valuing the reversionary interest also relies on analysing investment returns on a given day; with the exercise to be repeated at e.g. settlement meetings, schedule, and trial. The defendant's expert's investment return rate was in the region of 1.1 to 1.3%.
A third way might be to look at a fair and reasonable valuation based on a notional rental yield. The difficulty with that approach will be trying to identify the net rental yield given that a commercial landlord will allow for items such as maintenance within a rental figure and expert evidence would be necessary to determine the net yield excluding such items. The expert evidence presented to the court suggested a figure of around 3% yield using this approach.
Drawing this together, our best guess at this stage would be that we will end up with a formula for valuing the reversionary interest utilising a compromise investment yield rate of around 3 to 3.5% (the approximate midpoint of the various rates used in the reversionary interest valuation models above).
The reserved judgment is unlikely to be handed down for several weeks, and we will provide a further update when it lands.
Whilst there is currently a small and apparently shrinking market (seven interests sold since 2015 according to the respondent's skeleton argument) in which a small number of investors seek a 6 to 7% return, our view is that level of return and the small size of the current market is likely to represent one end of the spectrum for the court to adopt.
An alternative approach might be based on a mixed investment portfolio. The expert evidence dealt with the mixed investment approach in the context of striking a balance between competing interests, although critically that is not the purpose of compensatory damages. This approach to valuing the reversionary interest also relies on analysing investment returns on a given day; with the exercise to be repeated at e.g. settlement meetings, schedule, and trial. The defendant's expert's investment return rate was in the region of 1.1 to 1.3%.
A third way might be to look at a fair and reasonable valuation based on a notional rental yield. The difficulty with that approach will be trying to identify the net rental yield given that a commercial landlord will allow for items such as maintenance within a rental figure and expert evidence would be necessary to determine the net yield excluding such items. The expert evidence presented to the court suggested a figure of around 3% yield using this approach.
Drawing this together, our best guess at this stage would be that we will end up with a formula for valuing the reversionary interest utilising a compromise investment yield rate of around 3 to 3.5% (the approximate midpoint of the various rates used in the reversionary interest valuation models above).
The reserved judgment is unlikely to be handed down for several weeks, and we will provide a further update when it lands.
