Under VPS 5 of the Red Book, the comparable method falls under which approach?
- Market Approach or Market Value
Why is the comparable method used?
- Direct approach for comparing like-for-like
Where would you find guidance on the comparable method?
- RICS guidance Note Comparable evidence in real estate valuation (1st Edition, Oct 2019)
What is a comparable?
- A similar type of property used to providede infromation as evidence to support a valuation
What is the economic principle behind the comparable method?
- Substitution - the buyer of an ittem would not pay more for it than the cost of acquiring a satisfactory substitue.
What should a comparable be?
- Comprehensive
- Very similar
- Recent transaction
- Arms length transaction in the open market
- Verifiable
- Consistent with local market practice
How many comparables do you need?
- A minimum of three but as many as it takes to arrive at the value
What are the RICS 3 categories of comparables?
- Cat A - Direct transactional evidence
- Cat B - Market Data providing guidance rather than indication of value. (from published sources, databases, historic evidenceand ddemand/supply
- Cat C - Other sources, transactional evidence from other property types and locations and other relevant background data.
Why can the comparable method be challenging?
- Hard to find comparables
- Poor quality of comparagbles
- Fast moving market (evidence is out of date)
- Unverified comparables
- Limited evidence due to market conditions
When is the market approach (market sales comparison approach used)?
- Straightforward residential assets
Would you eve apply the comparable method in another valuation approach?
- Yes - Investment method (income approach) to find net rental income and yield
- Yes - Profits method (income approach) to asses Fair Maintainable Trade
- Yes - DCF (income approach) to derive key inputs
- Yes - DRC (Cost approach) to find land value and build costs
- Yes - RLV (cost approach) to find GDV and development costs
Where can you source comparables from?
- Direct trannsactional evidence
- Publiccaly available information
- Asking Prices
- Sale Price (of the subject)
- Historic evidence (market trends)
- Databases
- Press
What must you do when researching evidence?
- Verify it with the parties involved
What should be attributed the highest weight as comparable evidence?
- Recently completed transactions of other, similar property for which full and accurate infromation is available.
What are the two stages of analysing comparable evidence?
- Establishing a common measurement or other comparison standard
- Adjusting comparahble evidence
When adjusting comparables, what are the most important elements to consider?
- Style/type
- Location
- Age and condition
- Specification and layout
- Size
- Transaction date
- Legals
- Efficiency and adaptability
What length of fittting out rent free wouldd you usually not regard as an incentive?
- 3 months but depends on market
What are the key methods to establish an effective rent?
- Set total income and expenditure (including inncentives) against evuivalent lease that assumes no incentives to let had been granted (ignoring timing of cash flows)
In the UK, which are the main way(s) of dealing with comparables?
- Devalue each comparable to an effective rent and then apply all of them to arrive at one net effective rent for the subject property.
- Use the comparable evidence to find the market package (headline rent and incentives) that would be likely to be agreed inn the market place for the subject premises and then adjust that transaction to reflect the assumed lease terms.
What write off period could you apply?
- Lease end
- 1st rent review
- 1st break option
What would you use zoning for in this context?
- Comparing rents on retail shops (not supermarkets or department stores)
Why is zoning adopted?
- Because the front is considered more valuable than the back.
What is the usual zoning depth?
- 6.1m = 20ft
How do the zones relate to each other
- Halving back - The next zone is worth half the value.
