RICS guidance note

RICS professional standards and guidance, UK

Valuing residential property

purpose built for renting
1st edition, July 2018

rics.org/guidance
 rics.org

Valuing residential property

purpose built for renting

RICS guidance note

1st edition, July 2018

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square

London

SW1P 3AD

www.rics.org

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ISBN 978 1 78321 321 4

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 Valuing residential property purpose built for renting

Acknowledgments
Technical author
Jason Hardman MRICS (CBRE Limited)

Working group
Dan Batterton (LGIM Real Assets)
Adam Burney MRICS (Knight Frank LLP)
Brook Burton MRICS (Savills)
Nigel Chapman MRICS (Aberdeen Standard Investments)
Matthew Green MRICS (JLL)
Tracey Hartley MRICS (Howard de Walden Estates Ltd)
Dominic Martin MRICS (Atlas Residential)
Eleanor McMillan MRICS (Savills)
Paul Winstanley FRICS (Allsop LLP)

RICS International Standards

Global Valuation Standards Director: Ben Elder FRICS

RICS Publishing
Head of Publishing and Content: Sarah Crouch
Standards Publishing Manager: Antonella Adamus
Standards Publishing Project Manager: Katherine Andrews
Editors: Ellie Scott/Jo FitzLeverton

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Contents
Acknowledgments ������������������������������������������������������������������������������������� ii
RICS professional standards and guidance �������������������������������������������� 1
RICS guidance notes ������������������������������������������������������������������������������ 1
1 Scope ��������������������������������������������������������������������������������������������������� 2
2 Introduction ������������������������������������������������������������������������������������������ 3
3 Form of tenancy ����������������������������������������������������������������������������������� 4
4 Valuation considerations ������������������������������������������������������������������� 5
5 Valuation approach ������������������������������������������������������������������������������ 6
5.1 Key principles ������������������������������������������������������������������������������� 6
5.2 Assessment of gross income ������������������������������������������������������ 7
5.3 Assessment of operating expenditure ������������������������������������������ 7
5.4 Net income capitalisation ������������������������������������������������������������ 9
6 Benchmarking ����������������������������������������������������������������������������������� 10
6.1 Principal benchmarks ����������������������������������������������������������������� 10
6.2 Aggregate break-up value ��������������������������������������������������������� 10
6.3 Cash flow analysis ���������������������������������������������������������������������� 10
7 Other valuation considerations �������������������������������������������������������� 11
8 Valuation considerations in Scotland ���������������������������������������������� 12

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RICS professional standards and guidance

RICS guidance notes

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standard or statement locally.

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 Valuing residential property purpose built for renting

1 Scope
1.1 Since the economic downturn that started in 2007,
there has been renewed interest and significant investment
in the UK residential rented sector by market participants
looking to acquire substantial holdings of residential
property for long term letting. This guidance supersedes
the RICS information paper Valuing residential property
purpose built for renting, 1st edition, 2014. This guidance
note addresses the valuation of such assets, commonly
described as build-to-rent, though it is emphasised that
this guidance is directed to the valuation of completed
assets – whether restricted to renting or not – rather than
those under development.
1.2 Build-to-rent property is likely to possess the following
broad characteristics:
• accommodation will typically comprise of at least 50
self-contained dwellings or a concentration of a similar
number of dwellings
• the dwellings will be separately let, but held in unified
ownership
• management and oversight will be under a single
entity, potentially with an onsite presence
• the building(s) may be specifically designed or adapted
for rent, and may include some form of shared amenity
and
• the individual dwellings are typically let on assured
shorthold tenancies.
1.3 The market for build-to-rent property is considered
to differ from the buy-to-let market. This is because the
former is typically focused upon the ownership of entire
blocks of flats/apartments or concentration of dwellings
including houses in single locations rather than the smaller
scale, more dispersed or granular nature of the holdings of
participants in the latter.
1.4 This document is designed to be succinct and
does not seek to cover all potential variations. It gives
guidance on the general approach to valuation that should
be adopted for the build-to-rent part of the residential
investment sector and recognises that – reflecting market
practice – the principal basis should be an income-driven
one. While it is imperative that the valuer has regard for
the requirements of the specific valuation instruction,
it is intended that this guidance should apply to the
assessment of market value for most purposes, for
example for acquisition, disposal, financial statements,
performance or loan security.
1.5 This guidance is aimed primarily at practitioners in
England, Scotland and Wales, but it may also be relevant
to valuers practising in the rest of the UK and in other
markets.

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2 Introduction
2.1 Over recent years there have been several initiatives of the different forms of build-to-rent structures being
designed to: agreed in the market, e.g. forward fund, forward purchase
stabilised asset acquisition, etc. Valuers should make
• increase the supply of housing in the UK
sure they understand the deal structure when analysing
• encourage institutional investment in the residential comparable transactions.
sector and
• promote the growth and quality of the private rented
sector.
2.2 Since the 1960s, residential development in the UK
has predominantly been focused on owner occupation.
Elsewhere in the world, this is not the case. However, a
market is evolving in the UK that is focused on longer-term
letting with a specific emphasis on:
• long term ownership
• customer service
• maintenance and management costs and
• occupier demand.
2.3 The proportion of people in the UK renting their home
in the private sector has been steadily increasing in recent
years.
2.4 The majority of this increased demand in the rented
sector has been met by private investors acquiring a
small number of homes. This has been supported by tax
incentives and an ample supply of specialist mortgage
credit. While buy-to-let investors are likely to remain active,
tax treatment is increasingly less attractive.
2.5 Given the scale of build-to-rent developments, likely
purchasers might be:
• financial institutions and funds both from the UK and
abroad
• medium and larger corporate investors or
• registered providers of affordable housing.
For smaller schemes, the market may also include
speculative investors who wish to target a medium to long-
term break up sales opportunity of units into the individual
investor/owner-occupier market.
2.6 Purchasers of assets to be held for rent are likely
to apply detailed analysis to investments assets and will
undertake assessments of value principally based on
projected net operating income (NOI) returns rather than
assessing the value of an asset based upon a hypothetical
sale of the constituent parts to individual buyers.
2.7 It is important for valuers to possess the appropriate
expertise and skill to understand the operation of the
market and the impact, as well as the motivation, of those
participants expressly seeking to acquire and hold an asset
for long-term rent. The range of factors to be considered
can be very wide – regulation, planning and taxation
regimes continue to evolve and need to be properly
weighed and reflected. Similarly, valuers should be aware

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3 Form of tenancy
3.1 The majority of assets that are held for rent will be
occupied by tenants on assured shorthold tenancies
(ASTs) or contractual tenancies (company lets and those
outside AST rental value limits). Under an AST the rent and
term are agreed between the parties. Repairing obligations
tend to rest almost entirely with the landlord; however, the
tenant might be liable for the internal parts and furniture.
3.2 The valuer needs to take all the terms of individual
ASTs or occupational agreements into account when
valuing the asset. Particular regard should be given to the
obligations of each party, length of the tenancies and any
rent review provisions or break clauses, particularly in view
of the prevalence of terms of more than 12 months.

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4 Valuation considerations
4.1 When valuing build-to-rent assets, it is especially • assessment of the likely expenditure necessary to
important that the valuer clarifies at the outset: sustain the current income and market rent
• the precise nature and extent of the asset(s) being • an assessment of any additional factors that could
valued materially affect the value of the asset, such as legal or
planning considerations (such as a covenant that may
• the purpose of the valuation
limit individual dwellings to rent for a period)
• the basis of value to be adopted
• an assessment of the appropriate investment return
• the information (about lettings, etc.) to be relied on and
• the nature and extent of the valuer’s work, including • as a ‘sense check’ the underlying potential to sell off
investigations and the individual dwellings, one by one for sale – often
• any assumptions or special assumptions to be made. referred to as the ‘break-up potential’ – assuming this
is permitted in planning/legal terms.
RICS Valuation – Global Standards 2017 (the Red Book)
Part 4 provides guidance on valuation requirements,
process, inspection and assumptions.
4.2 The asset may or may not coincide with what is
physically seen on the ground. Great care is needed to
ensure that there is no ambiguity as to the precise nature
and extent of the interest being valued, including limitations
or constraints on its use.
4.3 The purpose of the valuation may influence the basis
of value to be adopted. Common instances where a
valuation is likely to be sought include (but are not limited
to):
• acquisition
• disposal
• financial reporting
• asset performance or
• loan security.
4.4 Owners of build-to-rent are often keen to establish
Investment Value, e.g. when reviewing portfolio
performance, rather than market value or fair value, for
IFRS/UK GAAP for financial statements.
4.5 Refer to the RICS Valuation – Global Standards 2017
Part 4 for further detail on requirements and guidance on
bases of valuation and reporting.
4.6 Clarity about the market in which the asset would
trade is essential. Valuers should initially consider the
likely categories of purchasers and buyer profile relevant
to the asset, and the competition that might come from
participants with different motivations.
4.7 The primary driver for a buyer of a build-to-rent asset
is the value of the existing and potential net income stream.
Key valuation considerations in this context are:
• security of the existing income
• the potential for rental growth and assessment of the
market rent
• likelihood of tenant change, speed of let up, depth of
occupier market and void rates

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5 Valuation approach
Figure 1 illustrates the valuation approach, and the
5.1 Key principles following sections of this document provide more detailed
guidance and comment on its practical application.
5.1.1 The primary driver for a buyer of an asset to be held
for rent is for secure long-term income. Valuations should
reflect this where such an approach is consistent with the
motivation and practice of market participants generally.
A valuer’s principal approach is likely to be an income
capitalisation one, not dissimilar to the practice widely
adopted by the commercial real estate sector.
A key difference between commercial and residential
occupational tenancies is that, in residential, the liability
for the majority of the maintenance and upkeep (and
associated costs) rest with the owner rather than the
occupier. Hence a detailed assessment of relevant
costs associated with the income that can be obtained
from a property is a key consideration in the valuation of
properties held for rent.

Figure 1: Valuation approach

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5.2 Assessment of gross 5.3 Assessment of operating

income expenditure
5.2.1 Valuers should arrive at their own views on the 5.3.1 Investors looking to hold properties for rent typically
market rent for the asset. The market rent should represent assess assets on the basis of net income returns. The
the total potential gross annual rental income. When valuer should where appropriate reflect this – always having
comparing the current gross income against the market careful regard to the basis of value being adopted and
rent the valuer should have regard to the circumstances where they do they should assess the likely expenditure
relating to the existing lettings, such as incentives to required to maintain the current and assumed market rent
achieve let up and the seasonality of the lettings market. levels. The valuer should undertake a detailed analysis of
The valuer should use his or her judgment to make any the expenditure for the asset together with a benchmarking
necessary adjustments from comparable rental evidence exercise against the cost of running comparable build-to-
to the subject asset, considering factors such as: rent assets.
• location 5.3.2 In order to assess net operating income (NOI), the
• unit size/aspect relevant costs can be categorised according to the flow
chart set out in figure 2.
• age
Figure 2 is based on the operating expenditure categories
• quality collected by MSCI (formerly IPD) for their residential index.
• design
5.3.3 Valuers should carefully consider the VAT treatment
• amenity and on expenditure, as to whether it is recoverable or not.
• length of tenancy, etc. 5.3.4 Where detailed accounts are available for individual
5.2.2 Valuers should reflect any reduction in potential assets, both comparable and the subject, the operational
gross rental levels for units that may be restricted to costs should be scrutinised and an appropriate deduction
being let at affordable private rent – formerly known made from the gross income in order to determine the
as discounted market rent, intermediate rent or any net operating income. Where operational costs are not
other affordable housing tenures – as part of planning available, i.e. assessing the market value on the special
obligations. assumption of being completed at the valuation date
(see RICS Valuation – Global Standards 2017 (Red Book)
5.2.3 Valuers should ensure that all the different features VPS 4 Section 9), a deduction should be made based on
of each unit in the block are reflected and their actual or market driven operational costs. This can be identified
potential income accounted for. Other than rental income, from the analysis of comparable properties and based
sources of potential ancillary income may include parking upon the valuer’s knowledge of the market. Similarly, when
spaces, storage, services and utilities (e.g. cleaning, the valuer is provided with information from the client,
broadband), furniture hire, etc. The valuer should ensure consideration should be given to whether the lettings and
that any ancillary net income is fully analysed in the context management functions are undertaken in house or by an
of the market and value attributed if it would be reflected in external agent, as the impact on operational costs may
bids made if the property were to be marketed. be significant. Where operational costs are considered
5.2.4 Consideration should be given to potential income abnormally low or high adjustments should be considered,
lost through bad debts or delays in payments, non- again based on comparable properties, together with the
recoverable arrears, voids and tenancy turnover. Valuers valuer’s judgment.
should also consider any local legislative provisions, for 5.3.5 Valuers should seek as much information as
example relating to actual or potential for rent controls. possible about actual operating costs from the owner
Similarly, valuers should assess the impact of existing and or manager where practicable, and use their skill and
future supply of similar accommodation. judgment to source appropriate market information to
support their assumptions in relation to the expenditure
items.

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 Valuing residential property purpose built for renting

5.3.6 In addition to the assessment of operating • kitchens

expenditure, the valuer should also consider other • bathrooms
costs that might be incurred. This includes any capital
replacement costs relating to major repairs and • heating plant and
replacements of items, such as: • redecoration, etc.
• roofs These costs may be significant but can occur infrequently
• lifts and need to be reflected in a capital deduction where
investors would obviously wish to make an adjustment.
• internal fittings They might be difficult to estimate and a valuer may need
• appliances to seek separate advice from construction professionals.
• furniture

Figure 2: Assessment of operating expenditure

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5.4 Net income capitalisation 5.4.5 The capitalisation rate will be informed by careful
analysis of comparable transactions and applied to the net
5.4.1 The valuation of assets of this nature will typically yield (net of purchaser’s costs). Where appropriate, this will
be derived from the capitalisation of the net income, with a be adjusted to be on the special assumption of a stabilised
deduction made for purchaser’s costs. For properties that state, if the comparable transaction occurred during the
are vacant at the date of valuation an allowance for a letting development or let up phase.
up period and associated costs (such as furniture where
relevant) should be made. Similarly, where due diligence
highlights that works are required to achieve the assessed
market rent, an allowance for capital expenditure will also
be appropriate.
5.4.2 While the role of the valuer is to interpret the way in
which potential purchasers of the property would assess
their bids in pricing the asset, which may include the use
of a discounted cash flow model (as set out in Discounted
cash flow for commercial property investments, 1st edition,
2010), the most comparable frame of reference to calculate
value is typically to apply an appropriate capitalisation rate
to the net income. Where a building is being developed and
a capitalisation rate is applied to the anticipated ‘stabilised’
net rent, a valuer should make an allowance for let up to
determine the market value on the special assumption of
completion. For build-to-rent, ‘stabilised’ is taken to mean
the likely longer-term steady state of occupation following
the initial let up period. When this will be achieved will vary
from asset to asset.
5.4.3 A further deduction should be made within the
valuation for purchaser’s costs, reflecting an investor’s
true net position, comprising acquisition fees – agent’s
and legal fees plus VAT – and stamp duty. Care should
be exercised when doing so to ensure deductions are
representative of the market rather than the specific
stamp duty position of the individual investor. Note: At
the time of publication, care needs to be taken to identify
whether commercial SDLT or residential SDLT subject to
Multiple Dwelling Relief (MDR) would apply. Comparable
transactions should be analysed on this basis and the
same methodology applied to the valuation, to provide a
uniform approach.
5.4.4 Adjustments should be made to the yields reflected
by comparable transactions to determine the appropriate
capitalisation rate to be applied to the valuation. Factors
affecting this include:
• location
• lot size
• tenure
• existence of a covenant restricting the dwellings to
renting for a defined period
• lease structure
• security of tenure
• income security and rental
• capital growth prospects (e.g. whether the property is
rack rented, reversionary or overrented)
• investor sentiment and
• competition (both existing and pipeline).

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 Valuing residential property purpose built for renting

6 Benchmarking
market value by utilising assumptions for all key investment
6.1 Principal benchmarks variables such as initial letting up period and costs, rental
growth, house price inflation and potential changes in
6.1.1 Having arrived at an assessment of value through the
expenditure over time.
application of an appropriate net income, capitalisation
rate and deduction for purchaser’s costs, valuers should 6.3.2 Effectively, the resultant internal rate of return/
undertake benchmarking prior to concluding their opinion. discount rate will be representative of investors estimated
This will be especially relevant in relation to market value. annual returns. The level of long-term interest rates, and the
Benchmarking is likely to comprise of: overall cost of funds, would be reflected in the investment
return assessment and will enable comparison with other
• comparison with the aggregate of the vacant
potential property or other investment opportunities. In
possession value plus notional ground rent value (if
addition to considering the cost of funds, the valuer should
applicable) and car parking (aggregate break-up value)
also make an allowance for the risk attributed to the
and
cash flow assumptions. The margin for risk needs to be
• a cash flow analysis to estimate the likely returns to considered on a case-by-case basis, having regard to the
an investor of ownership of the asset. Valuers should location, supply and demand now and in the foreseeable
refer to Discounted cash flow for commercial property future, plus the nature of the building. Detailed guidance is
investments, 1st edition, 2010. provided to valuers in Discounted cash flow for commercial
property Investments, 1st edition, 2010.
6.2 Aggregate break-up value 6.3.3 The cash flow approach also enables valuers to
6.2.1 Valuers should also, as appropriate, benchmark investigate the potential for different exits for investors,
the proposed valuation against the theoretical aggregate enabling an analysis of both onward sale as a single
of individual unit market values on the special assumption transaction to another investor or a break-up sale into
of vacant possession plus notional ground rent value (if the owner-occupier/buy-to-let market as applicable. The
applicable) and car parking. practicality of either option will depend on the individual
characteristics of the asset in question and market
6.2.2 While there is no defined relationship between the conditions.
two, valuers should consider that investors will reference
both figures in their analysis to ensure any difference 6.3.4 Valuers should also consider the application of
between them is readily explainable. growth assumptions to income, the effect of inflation on
expenditure variables and capital values where reflected
6.2.3 As part of their considerations concerning the in market activity. In adopting explicit growth assumptions
relationship between market value and the aggregate within their financial projections, valuers should be mindful
market value on the special assumption of vacant of the impact on the discount rate/internal rate of return to
possession, valuers should also consider whether it be adopted.
is appropriate to undertake a cashflow assessment of
disposing of individual vacant units into the marketplace. 6.3.5 Any financial modelling will require the valuer
Key indicators such as: to test a variety of assumptions and exits to measure
potential levels of return and analyse the sensitivity of key
• absorption rates to protect from flooding the market assumptions. It is important to note that it is unlikely there
• the ability for a development to be practically ‘broken is one ‘market assumption’ for the key investment case
up’ variables.
• the buyer’s desired profit/return, costs of sales
• potential house price changes during the disposal
period and
• the costs of holding vacant units.
These should all be reviewed to give a like for like
comparison with the market value figure of a let investment.
This factor may be particularly relevant for large-scale
schemes.

6.3 Cash flow analysis

6.3.1 By undertaking a detailed cash flow analysis,
valuers are able to assess the likely level of return from
investment of the asset at the determined opinion of

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7 Other valuation considerations

7.1 Valuers should be mindful regarding the likely age
and condition of the property at the end of the cash flow
period and reflect these where appropriate. This may
apply to both capital and rental values. Similarly, relative
obsolescence should also be taken into account.
7.2 Valuers should be aware of the different forms of
build-to-rent financing structures being agreed in the
market (e.g. forward fund, forward purchase stabilised
asset acquisition, etc.) and make sure they understand the
deal structure when analysing comparable transactions.
7.3 For valuations that include elements of commercial
property or other uses – such as affordable housing –
appropriate valuation methodologies should be applied
to the relevant property uses and included in the overall
market value for the asset. Care should be taken to ensure
that potential investors’ appetite for mixed use investment
is taken into consideration. It should not automatically
follow that, for example, the market value is simply the
sum of the residential and commercial elements of the
valuations, although this may be the case.
7.4 Build-to-rent assets that include a proportion of
affordable rent dwellings are also emerging. The valuer
should pay close attention to the treatment of the valuation
of such dwellings (and any impact on the remainder of the
asset) and should reflect the terms of any legal agreement
relating to their occupation, including any clawback,
viability review or potential reversion to private use as
appropriate.
7.5 In some instances a build-to-rent asset may be the
subject of a restriction to renting only, either in perpetuity or
for a defined period. This may be by way of the imposition
of a covenant through the planning permission for the
property. The valuer should take such restrictions into
account, particularly when undertaking the benchmarking
element of the valuation. The covenant is likely to differ
from asset to asset and might be subject to clawback
provisions to allow a sale of the individual dwellings.
The valuer must therefore ensure that it has reference to
such relevant provisions and takes these into account
appropriately in the valuation.

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8 Valuation considerations in Scotland

8.1 Valuers should have regard to any specific Scottish
government initiatives that may be in existence at the
valuation date, i.e. the Rental Income Guarantee Scheme
(RIGS).
8.2 There are a number of differences between Scotland
and the rest of the UK worth noting when considering
taxation of the asset. The valuer must refer to the relevant
Scottish legislation.
8.3 The Scottish government has also made available
a multiple dwellings relief where six or more residential
properties are purchased in a single transaction. This is
comparable with the multiple dwellings relief available
under SDLT (Stamp Duty Land Tax). However, such
transactions in Scotland are also exempt from the three per
cent LBTT (Land and Buildings Transaction Tax) Additional
Dwellings Supplement.
8.4 The private residential tenancy came into force on 1
December 2017 and aims to strike a balance between the
needs of landlords and tenants. This provides a modern,
streamlined tenancy system reflecting the recent growth in
private renting as a mainstream housing tenure. Through
consultation with industry and wider stakeholders, the
Scottish government has developed a Model Tenancy
Agreement. Rather than having an initial term, the tenancy
is open-ended, which landlords are able to terminate using
one of 18 defined ‘grounds for eviction’, and tenants by
providing a ‘notice to leave’. All initial rents will be market-
led and can be increased annually. Enforcement of the new
tenancy system will come via a specialist housing tribunal.
8.5 In addition, valuers should always consider
requirements specific to individual jurisdictions within the
UK.

12 RICS guidance note Effective from October 2018

Confidence through
professional standards
RICS promotes and enforces the highest professional
qualifications and standards in the valuation, development
and management of land, real estate, construction and
infrastructure. Our name promises the consistent delivery
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