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Hot Topic Highlight - RICS Guidance Note, Comparable Evidence in Real Estate Valuation

Updated: Oct 30, 2023

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What is today's blog about?

In this week’s blog, we take a look at the latest RICS Guidance Note, Comparable Evidence in Real Estate Valuation (1st Edition, October 2019). This replaces the former Information Paper (1st Edition), Comparable Evidence in Property Valuation.

The new guidance aims to ensure consistent global application of comparable evidence based on sound, robust principles. It also addresses the challenges of availability and transparency.

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What is the comparable method of valuation?

There are five main valuation methods, of which the comparable method is one. The others are profits, Depreciated Replacement Cost, residual and investment.

Of course, the comparable method might also be used in these other methods, e.g. to calculate Gross Development Value in a residual or to calculate Market Rent in an investment valuation.

Essentially, the comparable method involves comparing similar transactions to give an indication of value.

What is comparable evidence?

In the new Guidance Note, RICS define comparable evidence as an ‘item of information used during the valuation process as evidence to support the valuation of another, similar item’.

What makes a good comparable?

  • Comprehensive, i.e. ideally a valuer needs more than one transaction

  • Very similar or identical

  • Recent

  • Result of an arm’s length transaction

  • Verifiable

  • Consistent with local market practice

  • Result of underlying demand, i.e. sufficient bidders to create active market

How does a comparable method valuation work?

Firstly, the valuer needs to search for comparable evidence. They will need to record comprehensive details, including:

  • Address

  • Type of property

  • Tenure, i.e. freehold or leasehold

  • Location

  • Lease terms, if applicable

  • Brief description

  • Floor areas

  • Transaction type and date

  • Value and any incentives

  • Analysis

  • Parties involved

  • Source of information

  • Any issues relating to reliability

  • Date the evidence was verified

After this, the valuer will need to:

  • Analyse the net effective rate, i.e. taking any incentives into account

  • Collate evidence in a schedule or matrix

  • Adopt a common measurement or comparison standard

  • Adjust quantitatively and qualitatively using the hierarchy of evidence and other key considerations (including the valuer’s own knowledge and experience)

  • Analyse to form opinion of value

  • Stand back and look to sense check the final valuation figure

  • Report their opinion to the client

Where can I find comparable evidence?

RICS have categorised comparables into three categories, forming a hierarchy of evidence:

  • Category A – direct transactional evidence

  • Category B – general market data providing guidance rather than a direct indication of value, such as evidence from published sources, commercial databases, indices, historic evidence and demand/supply data

  • Category C – other sources, such as transactional evidence from other property types and locations and other relevant background data

Are there any sector-specific considerations?

Yes, the RICS provide detailed guidance on key factors to take into consideration for a variety of sectors. For example, soil fertility for rural valuers, facilities and aspect for residential valuers, quality of pitch and tenants for commercial valuers and ground conditions for valuers considering sites with development potential.

What challenges do valuers face?

  • Limited or infrequent transactions

  • Lack of up-to-date evidence

  • Evidence created by special purchasers, who may have paid more than the market because of an over-riding motivation

  • Lack of similar or identical evidence due to the complex nature of real estate

  • Lack of market transparency

A lack of robust evidence should not prevent a valuation being provided, this is where the skills and experience of the valuer become even more important.

Valuers can also look further afield and at a wider range of evidence or indicators where direct comparables are limited.

In the case of uncertainty, the Red Book states that ‘valuers should not treat … a statement expressing less confidence in a valuation than usual as an admission of weakness … it is … a matter entirely proper for disclosure’.

Valuers should, therefore, ensure clients understand that unusual market conditions may lead to uncertain valuations, but that this will help them to make better informed business decisions.

Where can I find the full guidance?

You can head to the RICS website to download a full copy of the Guidance Note.

How can we help?

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Stay tuned for our next blog post to help build a better you

N.b. Nothing in this article constitutes legal, professional or financial advice.


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