Difference in valuation multiples in Residential Care- Freehold v Leasehold
April 13, 2022
by a searcher from University of Glasgow in Glasgow, UK
Working on a residential care homes transaction, the group operates from 8 properties all owned. The plan is to acquire the group with a 7x - 8x ebitda multiple, then piece off the property on a sale and leaseback. Obviously the ebitda will drop by the rents payable to the new landlords. The vendor will keep 25% equity in the new group, but equity value will be reduced since we are taking all the property out. So looking to see how much we sell/adjust for the 25% retained equity stake in a leasehold position.
Question: What is the difference in valuation multiple for a Freehold vs Leasehold acquisition?
from University of Cambridge in Miami, FL, USA
There is a formulaic methodology that can be applied to the LH valuation but for at its core you simply look at where yields are trading for comparable FHs in your market, then adjust the yield by say 100-200bps (depends on UXT or if virtual freehold), then expand yield further based on the factors mentioned above. There’s a commonly accepted ‘market standard’ way of doing this in the UK but I would imagine it’s application varies based on property type.