Rating Manual section 6 part 3: valuation of all property classes

Section 520b: large food stores

This publication is intended for Valuation Officers. It may contain links to internal resources that are not available through this version.

1. Scope

1.1 This instruction applies to Large Food Stores (scat code 152) 750m² to 2,500m² gross internal area and valued overall. Such stores have, in the past, have been synonymous with discounter retailers, but are now occupied by a wide variety of national retailers.

2. List Description and Special Category Code

Bulk Class: Shop Primary Description: CS List Description: Shop and Premises. It is recommended that this description be over-typed as ‘Large Food Store and Premises’. SCAT Code 152.
Suffix G (Generalist).

3. Responsible Teams

3.1 Large Food Stores are a specialised class of property. There is an increasing interface between this category of food retailing and the superstore category. As a result, properties in this class must not be dealt with in isolation. The valuations are derived from evidence from a wide geographical area. There must be consideration of valuations and co-ordination across geographical and property class boundaries.

3.2 Responsibility for inspection, survey and valuation rests with Generalist caseworkers who have received specialist training and who have knowledge of this class . The National Specialist Unit (NSU) provides support.

3.3 It is also recommended that each Unit should allocate a named co-ordinator, or Lead Valuer, to act as a point of contact within the Unit. This Lead Valuer will be responsible for assisting in the delivery of the Unit’s valuation scheme and also for liaising on value and technical issues with other Lead Valuers across adjoining Units. The Lead Valuer will be responsible for ensuring compliance with this section.

4. Co-ordination

4.1 Large Food Stores are subject to co-ordination procedures.

4.2 The Large Food Stores Class Co-ordination Team (CCT) has overall responsibility for the co-ordination of this class. You can find contact details here P:\VPs & CCTs\Commercial Valuation Panel\Class Co-ordination Teams\33 - Hypermarkets and Superstores\2017\Large Food Stores CCT Members as at April 2015.xls The team are responsible for the approach to and the accuracy and consistency of Large Food Store valuations. This instruction describes the valuation basis and NSU will provide advice as necessary during the life of the rating lists.

4.3 Caseworkers have a responsibility to:

  • follow the advice given at all times – Practice Notes are mandatory

  • seek advice from the co-ordination team before valuing a new hereditament

  • not to depart from the guidance given on appeals or maintenance work, without approval from the Class Co-ordination Team.

4.4 Coordination with hypermarkets and Superstores (SCAT 139) is required particularly at the lower margin (ie around 2,500m²). See paragraph 8.4.

5.1 There is no specific legal framework for this class.

6. Survey Requirements

6.1 Inspections should be carried out in accordance with the Valuation Office Agency Code of Practice.

6.2 Large food stores are measured to Gross Internal Area (GIA) in accordance with the RICS Code of Measuring Practice 6th Edition or its replacement. Gross Internal Area (GIA) - Measurement definitions - isurv

6.3 An inspection checklist is appended to the Practice Note (Appendix 1) and should be completed for all new properties and updated for maintenance work and stored in the property folder of the Electronic Document Records Management (EDRM) system.

6.4 The Survey Template can be found in EDRM. This will need to be completed as part of the inspection process. The checklist at Appendix 1 identifies the information that will need to be gathered in order to properly complete the survey.

Unit of Assessment

6.5 On inspection it is first necessary to consider the Unit of Assessment. See Rating Manual - Section 3 - Part 1: Occupation and The Hereditament.

6.6 The separation of the Automatic Teller Machine(s) (ATM) from the supermarket assessment requires the floor area attributable to the ATM(s) to be removed from the host assessment.

6.7 Accommodation Use Codes

The majority of properties in this category have only ground floor accommodation. Where a property has more than one floor, each floor should be recorded separately and the appropriate accommodation use codes (AUC) recorded. This is the recommended best practice and the summary of AUCs set out below in paragraphs 6.9 to 6.12 is given on the basis that best practice has been followed.

6.8 The Valuation Scale used for this type of property is VVSHYPER1. It is used to value superstores as well as large food stores. As a result some adjustment of the relativities of first floor accommodation in large food stores may be required. See paragraphs 6.10 to 6.15

6.9 Ground Floor Accommodation

TFA (Total Floor Area) is to be used to capture the GIA of the ground floor accommodation, within the main building envelope regardless of use. ASO (Ancillary Store Outside) is to be used for outbuildings with no internal access to the main store.

6.10 First Floor Accommodation

Care must be taken as the correct code will be dependent upon the valuation basis (see below).

6.14 The appropriate percentage to be applied in all instances will be dependent upon the correct interpretation of rental evidence. Co-ordination across geographical boundaries in this respect is vital.

6.15 Multi-Floor Large Food Stores and Single Line entries

Historically, some properties with more than one floor have been captured as a single line entry using the codes RF (Range of Floors) and TFA (Total Floor Area) or SOV (Sales (valued on overall basis)). This is not desirable and data capture should be amended to show the individual floors as separate line entries in line with paragraphs 6.8 to 6.13 above.

6.16 Plant and Machinery

The presence, or otherwise, of plant and machinery should be recorded on the survey sheets.

7. Survey Capture

7.1 Rating surveys should be captured on the Rating Support Application (RSA) and plans and surveys stored in the property folder of the Electronic Document Records Management (EDRM) system.

8. Valuation Approach

**8.1 The rental method of valuation is the basis for this class of property. When considering rental evidence it is imperative to understand all the factors which may influence the evidence including location, level of competition, physical attributes of the store and how those factors compare, positively or negatively, to other stores, thereby arriving at the correct valuation approach. Rents are analysed to an overall rate per m².

8.2 Rental evidence will emanate from several sources: new lettings, rent reviews will be common and to a lesser extent sale and leaseback transactions. It will be important to assess the reliability of each rent.

8.3 Size

Properties in this class are valued on an overall rate per m² with no end allowance for size. Whilst the majority of these stores fall between 1,000m² and 1,700 m², it does not mean that properties falling outside this range are to be valued at a comparatively lower price or with an end allowance for size.

8.4 Large food stores cannot be valued in isolation. Close coordination at the upper size range of this Class is needed to ensure consistency with the lower size range of the Superstores Class (SCAT code 139, over 2,500m² GIA).

8.5 The boundary between large food stores and superstores is blurred. Therefore consideration must be given to the interplay of size and competition in any given location. These factors and their interdependence will be reflected in the rental evidence and must be understood for all the stores.

8.6 Material Change of Circumstance (MCC)

8.6.1 An MCC appeal arising from a claim that the trade of an existing Large Food Store has been affected by the opening of a new food retailing outlet (Convenience, Large Food or Superstore/ Hypermarket) in the locality must be treated with care. Whilst turnover figures cannot be merely dismissed as irrelevant, they do not form primary evidence. If they are to be considered this must be along with all other information, and then weighted accordingly.

8.6.2 Care needs to be taken in deciding what the trading information demonstrates within the rating hypothesis. Certain key stages must be followed:

i.Was the property correctly assessed, prior to the MCC, having regard to available rental information and comparables? Statutory Authority for this action is outlined in Section 41(1) of the Local Government Finance 1988. See also Lane v Woolway (VO)RA/57/2005 where the Member confirmed that: “He [the VO] is merely insisting, rightly in my judgement, that any reduction in the assessment to reflect the temporary disability is calculated starting with the correct value, and not an incorrect one”

ii.What rental information is available on the appeal property and from the basket of rents originally used in valuing the property?

iii.How does the value of the property compare to similar properties in other locations which are already assessed having regard to levels of competition similar to the appeal property post MCC?

iv.Is there a proven MCC and has it had an effect on the appeal store? It may be that we request trade information pre and post the MCC to support our decision.

8.6.3 It is only where it can be proven that the property is assessed at a higher level than stores already with similar competition should a reduction even be considered. Any reduction must be then based on comparable assessments and rents, not on a percentage of trade loss. It follows that because of this, there is no correlation between the percentage of trade loss from a particular MCC and a derived percentage reduction in rateable value.

8.7 Customer car parking

Adequate provision for customer car parking is an essential feature of Large Food Stores, both on grounds of planning and store operator requirements. To that extent its presence can be said to be reflected in the value of the stores. It is accepted that at peak times there could be a shortage of spaces.

8.8 If there are unit of assessment issues with car parking related to Large Food Stores reference should be made to the specific guidance on car parking found in the Rating Manual Section 6: Part 3 - Section 200: Car Parks.

8.9 Where the car parking area has been identified as a separate hereditament it should be valued at a level appropriate to the locality.

8.10 It should be noted that the car park need not be in the control of the food store operator.

8.11 Fitting out

No differentiation in value is made between levels of fit out within the property. One basic rate is applied to main space throughout the store even for offices; stores and plant rooms etc (except plant rooms with ladder access).

8.12 Large Food Stores are valued for rating as fitted units. Rents for this class of property are frequently on a shell basis. Before any analysis occurs it is essential to discover the terms of the letting in relation to fit. It must also be borne in mind that a fitted rent on a particular property might not actually reflect the current physical state of that property. It could relate to the historical situation that existed when the original lease was entered into therefore ignoring considerable rateable tenant’s improvements which must of course be reflected in the rating assessment.

8.13 It is universal practice to add a percentage to the shell rent to get to the fitted condition at rent review. The percentages adopted are not agreed and rent review evidence varies considerably.

8.14 Key rents

All properties on which a key rent has been identified must be inspected.

8.15 Concessions let-outs

Where all the ingredients of separate rateable occupation are apparent then the hereditament so identified should be separately assessed. It will be a matter of local judgement as to the appropriate level of value. The best evidence is likely to be derived from the payments made for the units themselves. See Rating Manual: section 3 part 1 paragraph 4.4.

8.16 Access to the concessions is frequently common to the circulation area used by main store customers on the ‘public’ side of the checkout points. These areas are essential to the main store. It is not appropriate to concede an allowance for shared access.

9. Valuation Support

  • Rating Support Application (RSA)

  • Survaid

  • Class Coordination Team for Large Food Stores P:\VPs & CCTs\Commercial Valuation Panel\Class Co-ordination Teams\33 - Hypermarkets and Superstores\2017\Large Food Stores CCT Members as at April 2015.xls

  • National Specialist Unit

Section 520b: Practice note: 2017: Large food stores

1. Market Appraisal

(2008 to 2015)

1.1 Historically there has been almost continual growth in the food sector. Like for like sales of the major food operators have generally increased year on year and margins had been maintained. The sector as a whole was buoyant and was largely unaffected by the post 2008 recession.

1.2 During the period since 2008 there has been a perceived shift in food shopping habits, with shoppers shopping more often in a wider variety of stores and retailers. As a consequence, occupiers of large food stores have tended to benefit from this change in shopping trends.

1.3 Discount food retailers who occupy stores within this class, are increasing their portfolios by acquisition of existing stock and by new developments. The national supermarket chains have also changed their profile in this sector. Notably ASDA bought Netto in 2010 and the Co-op acquisition of Somerfield in 2009 meant they had to dispose of some stores due to competition rules. Some were sold to other food operators and some to non-food operators.

1.4 By 2015 the four retailing channels of online, discount, convenience and superstore/ hypermarket format were firmly established. The perceived shift in shoppers’ behaviours, (with a change to shopping ‘little and often’ as part of a multichannel approach to meet their grocery needs) has caused the market to fragment. Continued growth for 2015-2019 in the first three areas is predicted. As a consequence, occupiers of large food stores have tended to benefit from this change in shopping trends. This suggests that demand for large food stores will continue to grow.

1.5 This growth is fuelled from both the extension of existing stock and new openings. Two of the main operators in this Large Food Store class, Aldi and Lidl have seen their combined share of the grocery market rise from 5.4% in 2012 to 9% by March 2015. As a result, Aldi has overtaken Waitrose in market share (source Kantar Worldpanel/ BBC News).

1.6 Lidl opened 20 new stores in 2014, with plans for similar future expansion. In the same year Aldi announced it would open 550 new stores in the 8 years to 2022, an almost doubling of its UK retail estate. Also in 2014 Netto announced a return to the UK (after selling its retail estate to Asda in 2010). In a reported joint venture with Sainsbury 15 new stores will be opening.

1.7 Whilst it is true that the there have been some store closures announced by the major operators such as Sainsbury and Tesco during 2014/2015 these have been relatively small numbers and looking behind the headlines, the closures fell into ‘fairly marginal’ locations and in places that were already well catered for by existing food outlets.

1.8 The current market share of the leading discount food retailers in the Large Food Store Class for the three months ending March 2015 was

  • Aldi 5.3%

  • Lidl 3.7%

  • Iceland 2.1%

Source: Statisca.

1.9 It has been argued in previous valuation lists that there is less demand for properties at the lower end of the size range and therefore a lower valuation rate should apply. Proper consideration of rental evidence demonstrated that this was not the case. Indeed, in certain areas reverse quantum could be seen.

2.0 Changing demands of the retailers would suggest that this argument is even less likely to be the reality for the 2017 Rating List. Whatever arguments are posed, the rental evidence must be looked at to test the legitimacy of the argument.

2. Changes from the Last Practice Note

2.1 There was no Practice Note for the 2010 Revaluation.

3. Ratepayer Discussions

3.1 There have been no collective discussions with agents representing the main occupiers.

4. Valuation Scheme

4.1 The valuation scheme for this class of property is founded upon actual rents. The overall rate/ m2 adopted will vary according to the location and physical characteristics of the store. It will be necessary to adjust inclusive or shell rents in terms of rateable value.

4.2 The majority of large food stores are single storey. The market approach to valuation is based upon a single rate/m2 applied to the GIA of the property. The rate is derived from adjustment and analysis of rental evidence.

4.3 Some large food stores have accommodation on more than one floor. They will generally be older stores (pre 1990).

4.4 Careful attention must be paid to both the use and amount of accommodation on additional floors. If the additional accommodation represents a relatively small percentage of ground floor space (usually up to 20%) then the market will not view this as a disability. No allowance, by way of adjustment to the overall rate, will be required regardless of use. This is also the case if the additional accommodation, regardless of size, is used for retail, office or staff functions.

4.5 Where a large food store has additional accommodation used for storage on additional floors and this represents more than 20% of the ground floor space, then the upper floors are valued at a percentage of the ground floor rate.

4.6 This explicitly shows that the upper floor accommodation is not as valuable as the ground floor space. It has the advantage of allowing a more direct comparison to ground floor only stores.

4.7 It should be noted that an alternative method of valuation may have been used whereby a single overall rate is applied to the total GIA. This single overall rate is discounted to reflect the disadvantage of having accommodation over more than one floor.

4.8 Caution should be applied if this method has been used because it effects the less valuable additional floor space on the upper floors but ‘hides’ it in the overall rate applied. This method of analysis and valuation does not allow direct comparison to be made to ground floor only stores or those stores where a different rate has been applied to the upper floors.

4.9 It is therefore very important when looking at rental evidence and comparing stores to identify how multi-floored stores have been valued. The nature of the accommodation and how it has been treated must be fully understood. If they are to be used for comparative purposes for single storey stores, a full understanding of how the analysis and valuation was reached on multi-floored stores is essential; without it single storey stores may be undervalued.

4.10 Large food stores may be split into two broad categories:

i.Modern, purpose-built stores. These are often termed ‘concept stores’ by discount retailers. These are typically between 1,000m² and 1,700 m². They are almost exclusively ground floor only units.

ii.Older stores, built prior to the advent of discount operators. These may be single or multi-floored.

4.11 Rental Adjustment and Analysis

Adjustment and analysis is critical to this class of property. Rental evidence must be considered over a wide geographical area. This is the market approach. Rental evidence will reflect the location, including the amount of competition, the physical characteristics of the store and the availability of parking.

4.12 Rents for these properties are almost always on a shell basis. There is likely to be a rent review clause within the leases which states that a property is assumed to be fit for immediate use and occupation. Such a clause does not mean that the rent has been agreed as a fitted unit.

4.13 The rental evidence will be for a shell unit whilst the valuation for rating is as a fully fitted unit. Therefore, an upward adjustment from the shell rent must be made. Ideally, this addition should be made explicitly at the adjustment stage so that the resultant analysis will be on a fitted basis. It can then be applied more directly to a valuation for rating purposes. In general, an addition of 10% should be made for fitting out up to the second review or further if appropriate. See Rating Manual - Section 4 - Part 1: Practice Note 1 2010.