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What is this week's blog about?
In this week’s blog, we take a look at zoning – a method of valuation analysis for retail property. This is essential reading for all RICS APC and AssocRICS candidates with Valuation as a technical competency.
What is zoning NOT?
First things first! Zoning is NOT a method of measurement. This is a very common mistake that candidates make, so make sure you do not mention it in the Measurement of Land & Property competency.
So, what is zoning?
Zoning is a method of valuation analysis. It allows a consistent unit of comparison to be calculated. This can then be used in comparable analysis when assessing rental value.
A key term used in this blog will be ITZA, referring to ‘Area in Terms of Zone A’. This is the unit of comparison that will be referred to in surveyors’ valuation reports.
What is zoning used for?
Zoning is traditionally used for valuing retail property, specifically high street units where the retail frontage is particularly valuable. This is different to industrial and office properties, which are valued on a simple rate psm (or psf) basis.
What is zoning not used for?
Zoning is not typically used for larger retail units, e.g. department stores, or for supermarkets, convenience stores or retail warehouses. This is because the large size would skew the zoned analysis (i.e. resulting in an unjustifiably high overall rent), even with an evidence-based quantum allowance applied (more about this later on).
What are the basic principles of zoning?
Zoning is based on the principle that the retail frontage is worth more than the ancillary areas. This is applied through the principle of ‘halving back’, meaning that each subsequent zone is worth half of the zone before.
We use the term ‘relativity’, to explain the relationship of each subsequent zone to the first zone, otherwise known as Zone A. This could be expressed as A/1, A/2, A/4 and so on.
For example:
Zone A = A/1
Zone B = A/2, i.e. Zone B is half of Zone A
Zone C = A/4, i.e. Zone C is a quarter of Zone A (or half of Zone B)
Zone D (or remainder) = A/8, i.e. Zone D is 1/8 of Zone A (or half of Zone C)
You may find that some surveyors report Zone D and then remainder, others will report Zone C and then remainder (i.e. no Zone D). This is generally related to how the evidence is analysed; i.e. if the comparable evidence analyses use Zone C and then remainder, then this is how the subject property should be analysed on a zoned basis.
For ancillary areas such as first floors or basements, the relativity applied should be directly related to how the evidence is devalued. Sometimes surveyors will include these areas within the ITZA unit, others may apply a rental rate psm (or psf) to them. For example, a first floor could be valued at A/10, A/16 or A/20, or a flat rate of £1.50 psf could be applied. This will be based on the evidence and there are no set rules for the treatment of ancillary areas.
How is zoning applied?
When a surveyor measures the Net Internal Area of a retail unit, they should take sufficient dimensions to undertake a zoned analysis.
The ‘standard’ depth of zone is 6.1m (i.e. 20 feet), but longer 9.14m (i.e. 30 feet) zones are used in some locations, e.g. prime Oxford Street in London.
When the surveyor has calculated the area in each zone, i.e. A, B, C and so on, they will need to apply relativities, as detailed above.
The relative area in each zone, e.g. Zone B / 2 or Zone C / 4, should then be added together to calculate the total ITZA.
An example is set out below:
This can then be used to devalue an annual rent, as in the below example:
The comparable evidence can then be analysed on the same basis to provide supporting evidence, i.e. ITZA rental rates, to justify the surveyor’s opinion of the market rent.
As always, valuation is a mixture of science and art; it is up to the surveyor to analyse the evidence, apply this to the subject property and then stand back and look. The comparables need full investigation into the terms of the deal and any influencing factors, e.g. tenant unrepresented or very limited nearby supply, to be able to value the subject diligently.
In some locations, for very small units (i.e. all or almost all Zone A space), a cross check using a global rent (i.e. £10,000 p.a.) may be appropriate.
What are allowances?
There are a number of allowances, i.e. deductions or additions, that may be required to reflect the specific physical characteristics of the subject property. These should be derived from similar comparables and market experience.
Typical examples include return frontages, double frontages, narrow frontages, large units (known as quantum), masking (i.e. columns interrupt the retail space) and hard frontages (i.e. lack of windows or glazed frontage, typically found in bank properties).
There are again no set allowances and surveyors should look to the evidence for appropriate percentages to apply.
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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.