Calculation Approaches Explained

Redbook Assist supports six valuation approaches in line with the RICS Red Book. Here is how each works and when to use it.

1. Comparison Approach

Best for: Residential properties, standard commercial properties with good transaction evidence.

The comparison approach derives value by analysing recent sales of similar properties and adjusting for differences. In Redbook Assist:

• Select comparable transactions from your evidence database
• Apply adjustments for size, condition, location, tenure, and other factors
• The system calculates an adjusted rate and applies it to the subject property
• Result: opinion of Market Value based on direct comparison

Key inputs: Comparable transactions, adjustment percentages, subject property floor area.

2. Term and Reversion

Best for: Rack-rented commercial investments (where passing rent equals or is close to market rent).

This approach values the income stream in two parts:

• Term — The passing rent for the unexpired lease term, capitalised at a risk-adjusted yield
• Reversion — The market rent (ERV) from lease expiry, capitalised at a higher yield and deferred

Key inputs: Passing rent, estimated rental value (ERV), unexpired lease term, term yield, reversionary yield.

3. Hardcore / Layer

Best for: Over-rented investments or properties with complex income structures.

The hardcore method splits the income horizontally:

• Bottom slice (hardcore) — The market rent element, capitalised in perpetuity at a core yield
• Top slice — The excess rent above market level, capitalised for the remaining lease term at a higher yield

This is preferred over term and reversion when the passing rent exceeds the ERV.

Key inputs: Passing rent, ERV, unexpired lease term, hardcore yield, top slice yield.

4. Discounted Cash Flow (DCF)

Best for: Development sites, complex income profiles, properties with phased lettings or rent reviews.

DCF projects future cash flows (rents, voids, costs, exit value) and discounts them to present value at a target rate of return.

Key inputs: Projected income, void periods, running costs, exit yield, discount rate (target IRR), projection period.

5. Depreciated Replacement Cost (DRC)

Best for: Specialised properties with no market transactions (schools, hospitals, utilities).

DRC estimates the cost of replacing the property and deducts depreciation for physical, functional, and economic obsolescence.

Key inputs: Land value, gross replacement cost, physical depreciation, functional obsolescence, economic obsolescence.

6. Residual Approach

Best for: Development appraisals — estimating the value of land with development potential.

The residual method calculates land value by estimating the completed development value (GDV) and deducting all development costs.

Key inputs: Gross development value, construction costs, professional fees, finance costs, developer profit, contingency, SDLT on land purchase.

Choosing the right approach

The RICS Red Book does not prescribe which approach to use — that is a matter of professional judgement. Consider:

• Evidence availability — Comparison requires transaction evidence; DRC does not
• Property type — Standard properties suit comparison; specialised properties may need DRC
• Income profile — Simple income suits term and reversion; complex income suits DCF
• Purpose — Secured lending valuations typically use comparison or investment approaches

You can use multiple approaches on the same valuation and cross-check results. This is good practice for complex properties.