Posted by: Paul Dalling, a National Valuation Lead in the VOA.
One of his roles is to advise on the valuation of small shops in
England and Wales. In this blog, Paul explains what is involved
in valuing these properties.
Small Shops
Small shops are defined as any shop less than 1,850m² (or 20,000
ft²). There are around 500,000 small shops in England and Wales –
accounting for £11.5bn worth of rateable value in 2017.
Typically, they are occupied by retailers of fashion, homeware,
food and beverage.
Factors to Consider
When approaching the task of valuing a small shop, the actual
rent paid on the property is a good starting point, but this
doesn’t always tell us the full story. For example:
- The rent may be between people who are related to each other
- The rent may have been agreed a long time ago, or very
recently, so may be too distant from the valuation date (which is
1 April 2021 for Revaluation 2023)
- The tenant may have made improvements to the property such as
adding air-conditioning or a lift, which may not be reflected in
the rent paid
- The rent may also include living accommodation, which we
would not include in our valuation of the shop
To help build our picture of the property, we measure small shops
to ‘net internal area’ (NIA). The NIA is the useable area inside
a building. It excludes things like stairwells; pillars; lift
shafts; and staff toilets. Dividing the rent by this area gives a
price per square metre, which is useful as it helps us to compare
one shop with another.
Zoning
Small shops are very location sensitive, but we would expect
those of a similar size and in a similar location to be valued at
the same rate per square metre. However, shops are unlikely to be
exactly the same size, so we use a method called ‘zoning’ to take
these different factors into account.
We divide the shop into 6.1 metre (20 foot) ‘zones’, starting
with ‘zone A’ at the window. This is the most valuable part of
the shop; it’s where customers are attracted and tempted in. We
use ‘zoning’ to arrive at an ‘area in terms of zone A’ for each
comparable shop.
‘Zone B’ is in the middle of the shop and is half as valuable as
zone A. The deeper into the shop you go, the less valuable the
floor space. ‘Zone C’ is half as valuable again as zone B. If the
shop goes back any more than zone C (or 18.3m), the rest of the
shop floor is called ‘the remainder’, which is half the value of
zone C.
The reason we divide shops into zones is that a customer looking
in through the window of a shop will see the goods on display at
the front with greater ease than goods to the rear of the shop. A
customer entering the shop is also more likely to stay near the
front of the shop than venture to the rear. Using ‘zoning’ is
currently the best way to interpret the approach a retailer takes
when considering what rent to pay.
Adjusting and Analysing Rents
Once we have gathered all the evidence, we make adjustments to
the rent. We consider the actual rent paid and adjust this to
take into account the ‘factors to consider’ discussed above. We
then divide this ‘adjusted rent’ by the area of valuable Zone A.
This is an analysis of the rent, based on the relevant ‘area in
terms of zone A’.
Making an Accurate Valuation
After analysing all the rents available, we can determine a ‘tone
of value’ for a group of similarly sized shops in a similar
location. This is more than just an average; it gives greater
weight to rents agreed closest to the valuation date. We can then
apply that ‘tone’ at the valuation stage.
Having valued a particular shop, we may need to make additions or
allowances for things not reflected in the ‘tone’ of rents. For
example, the tenant may have added air conditioning, or the shop
may be on a corner with a sales window on two different streets,
which could add value.
Conversely, the approach to the shop may be hampered by a flight
of stairs or the shape of the shop might mask part of the sales
area. We may decide that such a disadvantage requires an
allowance.
The overall goal is to determine a rateable value that reflects
an estimate of rent that would be reasonable for a particular
small shop in a particular location at the relevant valuation
date.
