The influence of procedure on rent determination in the commercial property market of England and Wales
| DOI | https://doi.org/10.1108/14635780010345382 |
| Published date | 01 August 2000 |
| Date | 01 August 2000 |
| Pages | 420-444 |
| Author | Neil Crosby,Sandi Murdoch |
| Subject Matter | Property management & built environment |
JPIF
18,4
420
Journal of Property Investment &
Finance, Vol. 18 No. 4, 2000,
pp. 420-444. #MCB University
Press, 1463-578X
Received 26 March 1999
Revised 2 April 2000
ACADEMIC PAPERS
The influence of procedure on
rent determination in the
commercial property market
of England and Wales
Neil Crosby
Department of Land Management and Development,
The University of Reading, Reading, UK, and
Sandi Murdoch
Department of Law, The University of Reading, Reading, UK
Keywords Rent, Lease renewal, Rental value
Abstract This paper examines the effect which the rent assessment process has on the level of
rents and rental values in the commercial property market in England and Wales, by asking: is
there an accepted definition of open market rental value which is consistently adhered to,
irrespective of the context in which the rent is assessed? How, in theory, do the procedures by
which an assessment of open market rental value is arrived at differ as between a new letting, a
lease renewal, and a rent review? Is there any evidence to suggest that any theoretical
differences in the operation of the various rent assessment procedures are borne out in practice?
In particular, is there any evidence that in new lettings and lease renewals lease terms are
changed after the rent has been finalised? Is there any evidence to demonstrate that there are
different levels of rent which are sufficiently consistent to be referable to the context in which the
rent was assessed? If so, does this produce difficulties in the valuation process which may not be
presently fully appreciated? In addition to a review of the relevant literature, the primary
research undertaken for the study was a survey of surveyors and solicitors involved in
commercial lettings and rent reviews and the compilation of a database of rental valuations and
transactions.
1. Introduction
The validity of investment valuations carried out for a variety of purposes
within the commercial and industrial property markets of England and Wales
has been the subject of much scrutiny over the past three decades. Continuing
debates centre on their accuracy (see, for example, Brown, 1992; Matysiak and
Wang, 1995; the annual Drivers Jonas/IPD study), the methodology employed
(Baum and Crosby, 1995), the bases and procedures (Mallinson, 1994) and, more
recently, the behavioural aspects of such valuations (Gallimore, 1996).
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The authors gratefully acknowledge the invaluable contribution made to this research by
Christopher Taite BSc, ARICS who worked with us as a research assistant on this project and
for the financial support of The University of Reading Research Endowment Trust Fund, the
Royal Institution of Chartered Surveyors Education Trust, Boots Properties and Boots the
Chemist.
Academic papers:
The influence of
procedure
421
For the purposes of assessing open market value, the overwhelming
evidence is that practitioners continue to use the investment method of
valuation as a comparative tool, using the all risks yield as the unit of
comparison with other similar properties (Crosby, 1991; French, 1996). The
investment approach in its most simple form requires the estimation of passing
rent, rental value and all risks yield; it is this basic form which is most often
applied in practice (Crosby, 1991; French, 1996; Hutchison et al., 1996).
In the 1970s and 1980s, attention centred on the problems associated with
the determination of the all risks yield, while the other major part of the
investment approach, rent and rental value, received little attention. However,
the property market recession of the 1990s has reinforced the importance of
rent. Occupiers are having to reassess their commitment to property as profits
become harder to earn and investors are being forced to reassess their attitude
to tenants and to consider the precise value of different lease structures as the
standard lease fragments (Lizieri et al., 1997).
At the same time as investors were re-evaluating the importance of rent,
lease structure and tenant covenant strength, occupier pressure mounted on the
Government, especially from small business tenants, to legislate against some
of what were perceived to be unfair clauses contained in leases signed during
the boom period, and to resist attempts by landlords to reduce transparency in
the market. Following consultation with the property industry, the Government
decided in 1993 not to intervene for the time being, preferring to encourage an
industry code of conduct, the operation of which has recently been reviewed
(see Crosby et al., 2000). One of the possible areas for government intervention
at that time was the procedure by which rents are determined in the
commercial and industrial property market. This would, in turn, have affected
the process by which rental values are assessed. This process has developed
over time and is now very well established. It has developed in a similar
manner to the comparative process adopted to determine all risks yields,
relying on other similar market comparables for its operation.
The assessment of rents by reference to market comparables has come under
less criticism than the capitalisation process, possibly because there is a
perception that more transactions exist in the lettings market than in the
capital markets. This concentration on capital values leads to the perception
that the most difficult part of the valuation process is the identification of the
all risks yield rather than the current rental value, even though the latter is just
as essential to the valuation.
This paper challenges these perceptions and argues that debates concerning
valuation accuracy, methodology and behavioural influences should pay as
much attention to the rental aspects as they do to the capitalisation process. It
examines institutional issues concerning the rent assessment process including
the definitions of rental value, the procedures by which rents are determined,
the evidence on which these determinations are based and how valuations are
affected by these processes. In particular, the following questions are
addressed:
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