RentZones: The debate about the use of zoning, particularly with respect to rent reviews, may prompt one to pose the question: "To zone or not to zone?" or, alternatively, whether rentals should instead be considered on an overall basis.
To understand how the current situation has been arrived at, it may be useful to consider the background surrounding the zoning of retail property.
Initially, the zoning of retail property was undertaken by rating valuers in the early part of the last century. It was based on the assumption that a retailer would sell a given number of widgets in the opening section of his shop, namely that part of the shop which all persons entering and exiting must pass through, which typically comprised six metres square.
It was believed that within the next six square metre zone, fewer widgets would be sold, perhaps only 50 per cent compared to that of the entrance zone, with a gradual reduction in potential sales as one moved further through the property.
As a result, rental values were seen to be decreasing proportionately as one went deeper into a retail outlet. This differed from office or warehouse properties where a standard rental rate was applied.
By way of example, let us examine a retail outlet comprising six metres internal width and a depth of 15 metres. The zones are therefore the following: Zone A - 6m x 6m (36 sq m); Zone B - 6m x 6m (36 sq m); Zone C - 6m x 3m (18 sq m).
By assuming a rent of €1,000 per sq m, a rental of €58,500 per annum is arrived at by applying a rate of €1,000 per sq m to the Zone A area, €500 per sq m to the Zone B area and €250 per sq m to Zone C.
Zoning was adapted as an instrument for analysis by valuers in the UK in order to allow comparisons between shops of equivalent layout and frontage. Allowances and adjustments would be made to cater for any differences.
While the use of retail zoning spread to Ireland in the late 1980s, it only gained widespread usage during the 1990s, which reflects the continuing debate and controversy surrounding its applicability and usefulness. The frequent reference to "ITZA" by the valuation profession is a pseudonym meaning "In Terms of Zone A", and refers to the expression of rents in terms of those prevailing with respect to Zone A. The application of a multiplier to the areas of the various zones to arrive at a single figure is based on a given percentage, namely with Zone A equalling 100 per cent, Zone B equalling 50 per cent and Zone C having a multiplier value of 25 per cent associated with it.
With respect to the example stated above, the ITZA derived would stand at 58.5 sq m, namely 36 sq m at 100 per cent, 36 sq m at 50 per cent and a further 18 sq m at 25 per cent. In the case of floor areas with a depth in excess of 18m, these are treated as a "remainder" by some, with perhaps 12.5 per cent of the Zone A rate applicable. In the UK, four zones of 6m are used with a rate of 16.67 per cent applied to the Zone D, with a multiplier of 6.25 per cent applied to the remainder. While this may appear to be straightforward, a number of problems may nevertheless be identified.
Firstly, there is a basic adage in valuations, which unfortunately few valuers apply, namely that "you value as you devalue". Lettings or rent reviews are analysed and a Zone A figure derived, yet this is then applied almost indiscriminately without taking cognisance of variations in factors such as size and frontage. Taking the example above, it would be erroneous to apply the rate derived from a letting such as the one set out to a unit of, for example, 40 sq m or indeed one with 10m frontage and only 10m depth. In other words, like is not being compared with like. All three shops will be associated with entirely different turnover levels.
The effect of "shadow areas" (retail areas which are hidden or otherwise obstructed) as well as the effect of return frontages, have not begun to be considered.
Unfortunately, valuers have recently adopted a slavish approach to zoning and its application. While it is indeed a useful tool with respect to valuations, it cannot be claimed to be more than that. Valuers need to apply a more scientific approach to the use of zoning and should have the ability to stand back and examine matters "in the round".
After all, very few retailers, if any, would stand in a shop and ponder over the precise multiplier of Zone A rent that would apply to a specific floor area. Rather, they would consider the turnover likely to be generated by a particular shop and from this derive a rental figure, which would understandably vary depending on the precise nature of the business. Rent is a factor of turnover and the ability of a particular retail premises to generate it.
Thus, while zoning should be considered, cognisance must be taken of the level of overall rentals prevailing. This would encourage property professionals to apply the principles of zoning in an even manner, resisting the temptation to use it as a blunt instrument. Ideally, rents would be related to turnover, varying to reflect the business type. In addition, shorter and increasingly flexible leases would be more commonplace. But as they say, sin sceal eile!
Hugh Markey is director of retail at Lisney
