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Jason Hardman highlights the key points of the new RICS guidance note
Over the past three years, an average of £2bn in capital has been committed to the build-to-rent (BTR) sector, according to CBRE figures, by housing associations, quoted property companies and UK institutions and fund managers. There is heavy involvement from North America and significant continuing investment from northern European, East Asian and Middle Eastern sovereign wealth.
Undoubtedly, the motivation for those investing in the sector is net income return from a residential perspective, based on an asset class considered to have low depreciation and provide a secure income stream that could be a good inflation hedge over the long term. To support this market, RICS published an information paper, Valuing residential property purpose-built for renting in 2014. The first edition of the RICS guidance note Valuing residential property purpose-built for renting, published in July, comes into effect in October and builds on this paper's principles.
What the note covers
It is specific to the valuation of completed buildings, and applies to BTR property with the following typical characteristics:
* accommodation usually comprises at least 50 self-contained dwellings, or a concentration of a similar number
* the dwellings will be separately let, but held in unified ownership and oversight will be under a single entity
* the building or buildings may be specifically designed or adapted for rent and include some form of shared amenity
* the individual dwellings are usually let on assured shorthold tenancies (ASTs).
The principal approach to valuation is by reference to net income capitalisation, with benchmarking against an ungeared internal rate of return - typically over 10 years - and, where relevant, against the value of the individual dwellings sold on a unit-by-unit basis - their break-up value. It would be helpful for the valuer to follow the process shown in Figure 1.
Gross income
Currently, many BTR properties...