Comparative Method

Question 1

What is the comparative method good for?

Answer 1

Residential market valuation. Cross-checking results from other valuation methods.

Question 2

What does the comparative method rely upon?

Answer 2

Comparables must be assessed against a hypothetical market value scenario.
Assumes a non-specific purchaser.
Any reasonable market participant.
No special value.
No forced sale.
Market stability.
Sufficient market information. Typical transactions.

Question 3

What is the principle of substitution in the comparative method?

Answer 3

Assumes a buyer will not pay more than the cost of acquiring a similar property. Forms the basis for comparing market transactions.

Question 4

What are the 8 stages of the comparative method?

Answer 4

Define the subject. Search for comparables. Adjust comparables to statutory terms. Place comparables on a common base. Deduce value from comparables. Apply deduced value to subject. Apply relevant allowances. Stand back and reflect.

Question 5

How do you apply weight to comparables?

Answer 5

Consider relevance, reliability, and recency. Adjust for lease terms, incentives, and property condition. Use judgement to prioritise stronger evidence.

Question 6

What are the disadvantages of the comparative method?

Answer 6

Hard to apply in non-residential markets. Requires justification of comparables. Must apply weight to evidence.

Question 7

What are some sources of evidence for comparative valuations?

Answer 7

Direct transactional evidence. Databases (e.g. CoStar). Publicly available information.

Question 8

What is the hierarchy of evidence?

Answer 8

Open market letting. Rent review. Lease renewal. Surrender and regrant. Third-party award. Sale and leaseback. Intercompany transaction. Hearsay.

Question 9

What is surrender and renewal?

Answer 9

A lease is surrendered and immediately regranted. Used to reset lease terms or update rent. May not reflect open market conditions.

Question 10

How should comparisons be recorded?

Answer 10

Record, analyse, and adjust in a matrix. Break down comparisons to build up valuation. Use three comparables as good practice. Optimum number depends on available evidence.

Question 11

What factors must be considered when adjusting the rents?

Answer 11

Length of lease. Type of lease. Deductions and incentives. Capital payments. Fit-out contributions.

Question 12

What are some types of lease?

Answer 12

Pre-determined calculation. Sale and leaseback. Turnover rent. Stepped rent. Abated rent.

Question 13

What is the impact of lease length?

Answer 13

Longer leases may reduce flexibility and landlord risk. Shorter leases may reflect higher rents but less security. Lease length affects comparability and valuation adjustments. Leases over five years may be adjusted by 1% per annum.

Question 14

Describe the calculation for rent-free periods.

Answer 14

Stage 1: Calculate capital value for each period — Rent × YP for term (excluding rent-free) × PV factor for rent-free period. Stage 2: Total capital values ÷ YP for term = adjusted rent.

Question 15

How do you deal with capital payments?

Answer 15

Divide the capital payment by YP for the lease term. Deduct the result from the rent.

Question 16

How do you deal with fit-out costs?

Answer 16

Divide the fit-out costs by YP for the lease term. Add the result to the rent.

Question 17

What are the percentages for repairs and insurance when adjusting rent to FRI?

Answer 17

External repairs: 6%. Internal repairs: 5%. Insurance: 4%. If the landlord is responsible, add these percentages to the rent to reflect FRI terms.

Question 18

What RICS guidance is available for adjustment of rents?

Answer 18

RICS Comparable Evidence in Real Estate Valuation (1st edition, 2019) outlines principles for analysing and adjusting comparables. Adjustments should reflect differences in lease terms, incentives, repairing obligations, and other material factors.