TRP625 Applied Real Estate Valuation

Block 2a: Valuation – core practice

Topic (4a) Measuring Practice and Zoning

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TOPIC SUBJECT  
Block 1: The building blocks of valuation (Block lead: Ola Oladiran)
(1) Introduction to Valuation  
(2) Annuities  
(3) Varying annuities  
Block 2a: Valuation - core practice (Block lead: Cath Jackson)
(4) Professional principles and practice (4a) Measuring Practice and Zoning
    (4b) The “Red Book” Workshop
    (4c) Report Writing Skills
Block 2b: Valuation - The five methods (Block lead: Cath Jackson)
(5) Five Methods: Comparable (5a) Five Methods: Comparable
    (5b) Introduction to Comparables Workshop
    (5c) EGi Webinar
    (5d) Comparables Workshop
(6) Five Methods: Investment  
(7) Five Methods: Residual, Contractors
(8) Five Methods: Profits  
Block 3: Professionalism and ethics (Block lead: Lee Crookes)
(9) Ethics I (9a) Surveying and planning as ethical activities: theoretical perspectives
(9b) The RICS Global Professional and Ethical Standards
(10) Ethics II (10a) Professionalism and ethics in surveying and planning practice
(10b) Ethics in practice: Ethical standards
Block 4: Summary and revision (Block lead: Cath Jackson and Ola Oladiran)
(11) Summary, conclusions, assessment Q&A   2
 Block 2a:
Valuation – core practice
• This block introduces you to industry standards
• Used consistently, throughout the real estate industry
• When carrying out professional valuation work, you
must:
• Measure the space • (4a) Measuring Practice
• Adjust to ITZA for retail and Zoning
property Mon and Thurs as usual
• Adhere to mandatory RICS • (4b) Red Book Workshop
rules and guidance Wed 20 Oct @16.00-17.00
• Present professional work • (4c) Report Writing Skills
to clients Fri 3 Dec @12.00-13.00
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 Red Book Workshop
Alfred Denny Computer Room A04

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 Structure
Core practice
• As set out by the RICS

Measuring the space

• RICS Property Measurement (CPD)
– IPMS (International Property Measurement Standards)
– RICS Code of Measuring Practice

Retail property – ‘Zoning’ and ‘ITZA’

• Zoning
– Basis of method
– Analysis of properties: 1. comparable, 2. subject property
– Issues
– Exercise 5
 RICS - Access to material via isurv
• Royal Institution of Chartered Surveyors (RICS)
– www.rics.org : Much material, market surveys etc
– www.isurv.com : Really important resource, all sorts of info
• Access details are on Blackboard in the RE Hub / next slide

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 Logging on to isurv
To access isurv, please go to isurv.com and
log on using the following credentials:
• username: 6768461@isurv.com
• password: isurv1
Please do not edit any settings within the
account

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isurv – a huge resource

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 RICS’ Red Book
• RICS (2019) RICS Valuation – Global Standards,
RICS Business Services, London.
– Commonly known as the “Red Book”
– Issued November 2019, effective from 31 January 2020
– Incorporates full reproduction of IVS

• UK national supplement 2018

– Effective from 14 January 2019

• Log in to isurv
– ‘Valuation’ / ‘RICS Red Book Global Standards / RICS Valuation
Global Standards
– This is online, therefore always up-to-date. This must always be the
preferred way to access the Red Book. Use the pdf on the RICS site with
caution (there may have been an update since you last downloaded it!).
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 RICS national or jurisdictional valuation standards
• RICS also publishes – separately from the global standards – a number of national
supplements (see PS 1 section 4) and national guidance material. They are designed to cover
specific statutory or regulatory requirements in local jurisdictions, while being consistent with
relevant international standards. This approach is fully in accord with United Nations
voluntary guidelines encouraging jurisdictions to enhance transparency and overall
consistency in valuation.
• The following national association valuation standards are published on isurv (based on the
2014 edition of the Red Book):
• Brazil: RICS Brazil – Valuation Standards (BRVS)
• Canada: 2015 Canadian jurisdictional applications of valuation standards
• Cyprus: Application of the RICS Valuation Professional Standards in Cyprus
• France: Application of the RICS Valuation Professional Standards in France
• Germany: Application of the RICS Valuation Professional Standards in Germany
• Greece: Application of the RICS Valuation - Professional Standards in Greece
• Poland: Application of the RICS Valuation - Professional Standards in Poland
• Portugal: Application of the RICS Valuation Professional Standards in Portugal
• Russian Federation:
Application of the RICS Valuation Professional Standards in Russian Federation
• Sweden: Application of the RICS Valuation - Professional Standards in Sweden
• and based on the 2017 edition of the Red Book:
• Hong Kong: RICS Valuation – Professional Standards Hong Kong. 10
RICS also publishes a number of national supplements based on RICS Valuation –
Global Standards 2017:
• Australia
• India
• UK
In addition, RICS publishes a number of jurisdiction guides, also based on RICS
Valuation – Global Standards 2017:
• Abu Dhabi
• Brazil
• China
• Dubai
• France
• Germany
• Hong Kong
• Indonesia
• Japan
• Netherlands
• New Zealand
• Saudi Arabia
• Singapore
• UK
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• USA
 RICS – Red Book
• Global Standards – forms the focus for this module

• See: (4b) The ‘Red Book’ Workshop 12

 Measuring the space
• Measuring and analysing all properties
(subject properties and comparables) must
always be undertaken on a common basis to
ensure robust results

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 Measurement - overview
• RICS Property Measurement
– 2nd edition (effective date: 18 May 2018)
– On Blackboard
https://www.isurv.com/downloads/download/1978/rics_property_me
asurement
– Professional statement:
• Status: Mandatory requirements for RICS members and regulated firms
• IPMS: Office Buildings
• IPMS: Residential Buildings
– Please watch this RICS CPD session on IPMS (see Module
Overview): https://www.youtube.com/watch?v=LpZMiV3Km9M

• Code of measuring practice

– 6th edition (effective globally from 18 May 2015)
– On Blackboard
• Currently applies to all building classes except offices and residential

• May be updated to comply with new IPMS standards…

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 Overview
GEA / GIA / NIA /
IPMS 1 IPMS 2 IPMS 3

Costs Rent Rent

(construction) (industrial) (office and retail)15
 IPMS: Office Buildings / Code of Measuring Practice
• See Blackboard for full publications
• It is your professional duty to keep abreast of updates (see
isurv.com)
IPMS: Office Buildings Code of Measuring Practice
IPMS 1 GEA (gross external area)
IPMS 2 – Office GIA (gross internal area)
IPMS 3 – Office NIA (net internal area), sometimes also
referred to as net lettable area, net usable area, carpet area
or other descriptions.
• Property Measurement: Technical Definitions:
‒ The IPMS definitions do not correspond exactly to the former GEA, GIA and
NIA definitions for offices and residential. The differences are explained in
section 2.
‒ The internal dominant face (IDF) is the inside finished surface comprising
more than 50% of the floor to ceiling height for each IDF wall section. If such
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does not occur, then the finished surface is deemed to be the IDF.
 Retail property –
‘Zoning’ and ‘ITZA’
• Rental levels linked to retail sales
• Not all areas of shop contribute equally to sales
• Divide unit into zones depending on potential for sales
• “Shoppers are lazy”:
– Area nearest the door is most valuable (Zone A)
– Area further into shop less valuable (Zone B)
– Area at back/remainder least valuable (Zone C / Remainder)
• Retail units valued by “zoning”
• Rents are highest at the front and decrease further back

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 Zoning
• Principle of “halving back”:
– Area nearest door used to attract customers
• Valued as Zone A (say, £100 psm)
– Middle of shop used for sales
• Valued as Zone B, or A/2 (say, £50 psm)
– Rear or remainder of shop used for storage
• Valued as Zone C, or A/4 (say, £25 psm)
• Valued as Remainder, or A/8 (say, £12.50 psm)
• To calculate value, the size of the area within
each zone is altered to reflect its location
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Examples: 1. Analysis of comparable
• Prime shop recently let at £145,000 p.a.
• Analyse to determine Zone A rate.

R Shop width 15m

Shop depth 32m
Zone C Zone depth 6.1m

Zone B

Zone A

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• Determine Area ITZA

Area (sq.m.) RF Area ITZA

Zone A 15 x 6.1 = 91.5 1 (A/1) 91.5 sq.m.
Zone B 15 x 6.1 = 91.5 0.5 (A/2) 45.75 sq.m.
Zone C 15 x 6.1 = 91.5 0.25 (A/4) 22.875 sq.m.
Remainder 15 x 13.7 = 205.5 0.125 (A/8) 25.688
sq.m.
Total 185.813 sq.m.

• Determine Zone A rental

Annual rental = £145,000 = £780 psm ITZA

Area ITZA 185.813 sq.m.
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 Other areas*
• Value always linked to use
(and potential for sales, whether used or not)
• FF (2F) sales
– Access by front escalator, say A/10 (A/15)
– Access by rear stairs, say A/15 (A/25)
• Basement storage
– Dependant on access and quality, say A/20
• Ancillary office/storage
– IF separated by structural wall, apply rate psm
– IF behind temporary partition, zone through
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 Examples: 2. Subject property
Determine the rental value
• Shop width 10m Remainder
• Shop depth 25m
• Poor basement store 10m x 20m
Zone C
• Basement staff area 10m x 5m
(temporary)
• Good FF sales 10m x 21m Zone B

• FF office area 10m x 4m

(structural) Zone A
• Zone depth 6.1m
• Secondary location
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• Determine area ITZA
Area (sq.m.) RF Area ITZA
Zone A 10 x 6.1 = 61 1 (A/1) 61.0 sq.m.
Zone B 10 x 6.1 = 61 0.5 (A/2) 30.5 sq.m.
Zone C 10 x 6.1 = 61 0.25 (A/4) 15.25 sq.m.
Remainder 10 x 6.7 = 67 0.125 (A/8) 8.375 sq.m.
Basement store 10 x 20 = 200 0.05 (A/20)* 10.0 sq.m.
Basement staff 10 x 5 = 50 0.05 (A/20)* 2.5 sq.m.
FF sales 10 x 21 = 210 0.1 (A/10)* 21.0 sq.m.
Total 148.625 sq.m.
[*need to justify chosen RF]
FF office 10 x 4 = 40 sq.m.

Valuation
Retail: 148.625 sq.m. ITZA @ say £500 psm ITZA =£74,312.50
Office: 40 sq.m. @ say £175 psm = £7,000
£81,312.50 p.a.
say, £81,500 p.a. 23
Overview
 Issues
• Zone depths vary (determined by market convention):
– Scotland 9m
– England 6.1m (used to be 20 ft)
– N Ireland Zone A = 5m, Zone B = 8m
• Adjustments for position:
– % increase for return frontage (corner position)
– % decrease if set back / hidden
– Zone from 2 streets if applicable
• “Tobacco kiosk” problem
– Small units, all Zone A
– MR too low when zoned, use overall rate
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• “T” shape problem
– Areas hidden / screened
– Increase RF for concealed areas

Zone B

Zone A

– Screened Zone A area, value using A/1.5 or A/2

– Screened Zone B area, value using A/3 or A/4
• Not all shops are zoned
– Supermarkets use overall rate
– Department stores use overall rate, depending on26
floors / access
“Awkward”
shaped
shops:
Sheffield

2-18 Fargate,
Sheffield

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 Videos
• Please watch this RICS CPD session on IPMS:
www.youtube.com/watch?v=LpZMiV3Km9M (47:27 mins)
• Please watch this short video that gives a very useful overview of
zoning:
https://www.youtube.com/watch?v=xyvM0HfVHrY&feature=youtu.be
(3:20 mins)

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 Exercise
1. You have been instructed to value the retail property detailed
below. Your client is interested in purchasing the property and
has a tenant lined up. You should advise on the MR of the
subject property.
Ground Floor: Shop width 15m, Shop depth 10m
1m WC
Sales
2m

1.5m
1m
stairs 1.5m
5m
High Street 29
Basement: width 15m, depth 10m

storage
ceiling height 1.75m
2.5m

stairs 2.5m

Your research has revealed the following comparable evidence:

SHOP A:
Shop width 7m, shop depth 15m. Recently let at £5,250 p.a. on FRI lease.
SHOP B:
Area 150 sq.m. ITZA. Recently let at £12,300 p.a. on modern FRI lease.
SHOP C:
GF sales area 90 sq.m. (all Zone A) including a WC 6 sq.m. Basement
storage 80 sq.m. good ceiling height of 2.5m. Recently reviewed at £8,280
p.a. on internal repairing lease.
 
 Analyse the comparable information using zones of 6.1m, and reduction factors as
you feel appropriate (and state your reasoning).

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