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Basis of rental value for performance measurement systems

This paper examines the use of the UK Red Book definition of open market rental value in the context of the provision of rental values for performance measurement purposes; specifically the bases and interpretations used in the construction of actual property-based commercial rental value indices such as the Investment Property Databank (IPD). Previous research has identified a number of possible interpretations of rental value based upon effective or headline rents, rents obtained upon new letting or provable at rent review and rents reflecting assumed or actual lease terms; it is this work that provides a basis for a questionnaire survey undertaken for this paper. The survey is of owners, managers and valuers/appraisers and is designed to identify the basis of rental value reported to IPD. Although IPD request that all valuations are based upon the Red Book definitions, the survey reveals that this is being ignored. There is significant inconsistency with owners and appraisers reporting a mixed bag of effective new letting rents, headline rents on new lettings and provable rents at review. The rental value index is therefore being formed from inconsistent data with no one basis appearing to dominate. Solutions to the problem include the provision of a more consistent set of data to IPD; but this has major cost implications since it would often require the supply of two rental valuations for the majority of properties in the database. Accordingly, the preferred solution would be the identification of the particular interpretation used in the data provided; this would allow the development of a variety of rental value indices which would increase significantly the ability of analysts to examine the impact of different rental values on property performance.