The appraisal of equity reversions in occupied residential property

Equity release plans are financial products or sales which allow homeowners to release some of the value of their home, as a capital sum or an income or both. They are an increasingly important source of finance for older home owners in the UK, with £1.1bn of capital estimated to have been released in 2003 to supplement reduced incomes from pension and other savings (CML, 2004). Equity reversion plans (ERPs) are one form of equity release, whereby an investor buys a reversionary interest in the sale proceeds of the property on the death of the last surviving owner. Purchasers of ERPs range from specialist finance houses and property companies through to individual private investors. The Treasury has recently announced its intention to regulate the market. The issue of pricing is important since these interests are sold by elderly homeowners, some of whom may be in financial difficulties and vulnerable. This paper therefore considers the operation of ERPs, the market in which they are bought and sold and in particular the way that reversionary interests can be appraised. The resulting analysis suggests that the growth priced in to reversion investments in recent years was low compared to average UK house price growth over the last 20 years. This has implications for elderly homeownersí receipts and raises questions about the life expectancy data available in this market.