BREEAM In-Use Assessor

Correct: Market Value is defined by the RICS Red Book as the estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller. If community risk, such as social instability or protests, influences the decisions of market participants, it must be reflected in the valuation. This is typically achieved by adjusting inputs like the capitalization rate (yield) to reflect higher perceived risk or lowering rental growth projections, provided these adjustments are supported by market evidence and reflect the sentiment of the wider market at the valuation date.

Incorrect: Applying a uniform risk premium across a postcode is incorrect because it ignores the specific characteristics and resilience of individual assets, which contradicts the requirement for asset-specific analysis. Disregarding short-term impacts violates the fundamental principle that Market Value must reflect the state of the market and all known risks as of the specific valuation date. Substituting Market Value with Investment Value is inappropriate because Investment Value reflects the value to a specific entity (the insurer) based on their own criteria, whereas Market Value must be an objective assessment of the price achievable in the open market.

Takeaway: Market Value must always reflect the risks and perceptions of market participants at the valuation date, requiring evidence-based adjustments to valuation inputs rather than arbitrary discounts or entity-specific metrics.

Correct: According to RICS professional standards and the Red Book, valuers must consider environmental risks such as flooding and water ingress. A key component of this assessment is the impact on the property’s ‘insurability’ and the cost of that insurance. If insurance becomes prohibitively expensive or unavailable, the risk profile of the investment increases, which must be reflected in the capitalization rates (yields) and the overall Market Value. Professional judgment is required to determine how market participants would perceive these risks in terms of future liquidity and marketability.

Incorrect: Applying a standardized basis point increase is incorrect because RICS requires a site-specific assessment of risk rather than arbitrary, uniform adjustments across a portfolio. Focusing primarily on the cost approach is inappropriate for commercial assets where the income and sales comparison approaches are more reflective of market sentiment regarding environmental hazards. Relying exclusively on statutory flood maps is insufficient, as these maps are often retrospective and may not reflect current market perceptions or forward-looking climate projections that influence investment value.

Takeaway: Professional valuation of water risk requires a site-specific analysis of how insurance availability and climate projections influence market yields and long-term asset marketability.

Correct: According to RICS valuation principles, when valuing income-producing social infrastructure, the valuer must account for risks associated with regulatory or funding changes. A Discounted Cash Flow (DCF) approach is often the most appropriate way to model these changes, allowing the valuer to adjust the discount rate to reflect the specific risk profile and uncertainty of future cash flows during and after the transition period.

Incorrect: The Depreciated Replacement Cost (DRC) method is generally reserved for specialized assets where no market exists and is not appropriate for income-generating healthcare assets with a clear market. Using prime office yields as a benchmark is incorrect because social infrastructure has a distinct risk-return profile that is not comparable to commercial office space. Simply adding a caveat about the validity of the valuation does not fulfill the valuer’s duty to reflect known market risks in the current Market Value.

Takeaway: Valuers must reflect social infrastructure policy and funding risks through risk-adjusted yields or DCF modeling rather than relying on arbitrary benchmarks or simple disclosures.

Correct: According to RICS Red Book Global Standards (specifically VPS 5 and the accompanying guidance on the Cost Approach), when valuing specialized properties via Depreciated Replacement Cost (DRC), the valuer should use the Modern Equivalent Asset (MEA) approach. This approach addresses replacement risk by considering the cost of a modern asset that provides the same utility or service potential as the existing one, but with modern materials and techniques. This necessitates adjustments not just for physical wear and tear, but critically for functional obsolescence (inefficiencies in the current design) and economic obsolescence (external factors affecting the asset’s viability).

Incorrect: Reproduction cost is generally avoided in DRC valuations for Market Value because it ignores functional obsolescence and the reality that a rational buyer would not pay for outdated technology. Historical cost adjusted by indices is a method of accounting for inflation but does not reflect the current market value or the principle of substitution. Applying a market yield to a depreciated book value is a hybrid approach that lacks the theoretical rigor required by RICS for DRC and confuses the income approach with the cost approach.

Takeaway: When valuing specialized assets, the Modern Equivalent Asset (MEA) concept is the professional standard for capturing replacement risk and functional obsolescence within the Cost Approach.

Correct: According to RICS valuation principles and the Principle of Anticipation, the value of a property is the present value of future benefits. When those benefits (such as subsidies or grants) are contingent on performance metrics like job creation, the valuer must assess the risk of those benefits being lost. A probability-weighted DCF model is the most robust way to reflect the uncertainty of cash flows, and adjusting the discount rate or yield ensures that the specific risk profile of the asset—including the threat of a clawback—is captured in the final Market Value.

Incorrect: The Cost Approach is generally inappropriate for income-producing assets where the market value is derived from economic utility and cash flow rather than physical replacement. Treating the risk as a contingent liability ignores the RICS requirement that Market Value must reflect all factors that would influence the price agreed upon by a willing buyer and seller. Applying a standard vacancy allowance is a generic adjustment that fails to specifically model the unique financial impact and probability of the grant clawback, leading to an inaccurate assessment of the asset’s specific risk.

Takeaway: Valuers must use the Principle of Anticipation to explicitly model the probability and financial impact of losing performance-linked incentives within the valuation framework to reflect true Market Value.

Correct: In accordance with RICS Red Book Global Standards, Market Value must reflect all factors that market participants would consider. Increased operational costs, such as maintenance and security for the public realm, directly reduce the net operating income (NOI). Furthermore, legal restrictions on public access or gatherings can affect the ‘vibrancy’ and footfall of a site, which in turn impacts the rental growth potential and the exit yield. Adjusting both the cash flow and the yield ensures that the valuation reflects the specific risks and benefits of the property’s public realm configuration.

Incorrect: Treating the public realm as a separate asset using the depreciated replacement cost method is inappropriate for a market-based valuation of a commercial asset where the public realm is an integral part of its utility. Including only a qualitative disclosure fails the valuer’s duty to reflect material factors in the quantitative value conclusion. Applying a uniform liquidity discount is an oversimplification that does not account for the specific impact of increased operating expenses on the property’s income stream or the nuanced risks to rental growth.

Takeaway: Valuers must integrate specific public realm risks, such as increased operational costs and restricted control, into the income and yield assumptions to accurately reflect their impact on Market Value.

Correct: In an over-rented scenario, a tenant has a clear economic incentive to exercise a break clause to either renegotiate the rent or move to cheaper premises. RICS professional standards and valuation theory require the valuer to assess the probability of the break being exercised. If the break is deemed likely to be exercised, the valuation must explicitly account for the downside risks, including the loss of income during a void period, the capital expenditure of re-letting (agency and legal fees), and the market-standard incentives such as rent-free periods required to attract a new tenant at the current market rent.

Incorrect: Assuming the tenant will stay simply because of their credit rating or history ignores the economic reality that an over-rented tenant is likely to exercise a break to reduce costs. Treating the break as a mandatory expiry in every over-rented case is too rigid and fails to account for instances where a tenant might stay due to high relocation costs or strategic location value. Applying a generic yield premium is considered less transparent and less accurate than making explicit cash flow adjustments for voids and re-letting costs, which more precisely reflect the timing and magnitude of the risk.

Takeaway: Valuers must assess the probability of a break clause being exercised based on economic incentives and explicitly model the resulting voids and re-letting costs if exercise is likely.

Correct: In accordance with RICS valuation principles, when specific risks such as community unrest or social opposition affect a property, the valuer must use the comparative method to observe how market participants are pricing that risk. This involves looking for evidence of changes in yields, transaction volumes, and price points within the affected area or analogous markets. By comparing the subject area to other regions that have experienced similar ‘community risks,’ the valuer can more accurately reflect the market’s perception of risk and its impact on value, rather than relying on arbitrary adjustments.

Incorrect: Relying on the Depreciated Replacement Cost is inappropriate because it does not reflect market value or the impact of external social factors on demand. Applying a uniform national risk-adjustment factor is incorrect as it fails to account for the specific, localized nature of community risk and the unique characteristics of the subject property. Excluding post-incident data is a failure of professional duty, as the valuer must reflect the market as it exists at the valuation date, including any negative sentiment or uncertainty that market participants are currently factoring into their decisions.

Takeaway: Valuing properties with community risk requires a rigorous comparative analysis of market evidence from similar risk events to quantify the impact on liquidity and investor requirements.

Correct: In the absence of direct market evidence for specialized properties, the RICS Red Book Global Standards suggest the Depreciated Replacement Cost (DRC) method. When addressing replacement risk and technological change, the valuer must use the Modern Equivalent Asset (MEA) concept. This involves calculating the cost of a modern asset that provides similar service potential, then adjusting for physical deterioration, functional obsolescence (e.g., outdated technology), and external obsolescence (e.g., changes in market demand) to ensure the value does not exceed the amount a prudent purchaser would pay for the service the asset provides.

Incorrect: The Sales Comparison Approach is inappropriate here because general-purpose warehouses are not comparable to specialized chemical plants, and premiums cannot reliably bridge the gap in utility. The Income Capitalization Method using a ‘hypothetical rent based on cost’ is circular and does not reflect actual market dynamics or the specialized nature of the asset. The Profits Method is typically reserved for trade-related properties where the business and property are inextricably linked, such as hotels or care homes, and is not the standard approach for specialized industrial assets where the value is derived from service potential rather than direct trading receipts.

Takeaway: For specialized assets where market evidence is scarce, the Depreciated Replacement Cost method must utilize the Modern Equivalent Asset concept and account for all forms of obsolescence to accurately reflect economic utility.