Ground leaseholders' perception of rent review risk : the impact of the availablilty heuristic : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy (Property) at Massey University, Albany, New Zealand
The aim of this thesis is to explore the adequacy of investor perception of market ground rent review risk, on ground leasehold value. Ground rent levels are a function of freehold value levels, so if at the time of review there have been freehold price increases, it follows that ground rents will increase. Increased ground rent at rent review time, will lead to lower ground leasehold value, as the cost obligations increase for the ground leasehold. Reports of ground leaseholder discontent with ground rents are therefore not surprising, however the literature to date does not appear to robustly explain how individuals anticipate and quantify this risk when making ground leasehold purchase decisions. Investigating if behavioural theory explains the relationship between a ground rent review and a ground leasehold purchase is undertaken. The objective is to determine if the ground leasehold tenure type is flawed by not being appropriately designed to account for ground leaseholder thinking.
In order to form a hypothesis for testing, twenty-five semi-structured interviews with ground leaseholders were carried out. The semi-structured interviews pointed to ground leaseholders linking freehold and ground leasehold value increases together, not considering that the ground rent increases reduce the ground leasehold value, especially at rent review time. This incorrect correlation of freehold value growth to ground leasehold value growth, suggests that ground leaseholders are susceptible to the availability heuristic. In order to robustly test the application of the availability heuristic, experimental scenarios were put to forty property investors. The investors either completed a scenario with freehold growth as a manifestation of the availability heuristic (treatment), or not (control). The results showed that there was a statistical difference between the treatment and control groups, and in the posited direction, indicating that the availability heuristic explains the ground leasehold valuation behaviours of investors.
These results are important because they show that knowledgeable market participants, in this case property investors, are not fully accounting for the ground leasehold rent review risk. Ground leaseholder concerns about ground rent review levels aired in the semi-structured interviews are genuine. The ground leasehold rent review procedures are not designed to account for ground leaseholders thinking and the tenure form accordingly requires revision where possible.