Estimated Rental Value (ERV)Estimated rental value (ERV) is the open market rent that a property can be reasonably expected to attain given its particular characteristics, condition, amenities, competitive position, location and local market conditions.
In an undersupplied market, in which demand exceeds supply, vacancy rate is decreasing and rents are rising, the estimated rental value may exceed the passing rent. This of course will depend on when lease contracts were signed by the existing tenants of the property and what market conditions and rent levels were prevailing at that time. Note that estimated rental value applies to new leases that are likely to be signed at the time of the ERV estimate, and as such they apply to a property’s vacant space that is expected to be absorbed over the period at the time that the estimated rental value refers to. The ERV may also apply to leases that are coming up for rent review. In an oversupplied market, in which supply exceeds demand, vacancy rate is climbing and rents are declining the ERV may be lower than the passing rent. Search Our Over 500-Page Website!
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How is ERV Used
ERV is used for estimating several property performance measures. First, it provides the basis for the estimation of the reversionary income, which according to INREV, is the estimated increase in rental income at the next review or renewal. Second, it is used for the estimation of the reversionary yield, which is calculated as the ratio of ERV over the gross property value. Finally, it is used for the estimation of the equivalent yield, which is defined as the internal rate of return that the property will produce assuming that rental income rises to the ERV at the next review without any further growth. INREV also recommends the use of ERV in reporting property vacancy rate. In particular, it is recommended that the vacancy rate of an income producing property is reported as a percentage of rental income by dividing the ERV of the vacant floor space with the sum of the passing rent and the ERV of vacant floor space. The other recommended metric for the vacancy rate is the ratio of ERV of vacant space over the total space ERV. INREV argues that the latter metric, which reports the vacancy rate as a percentage of ERV, is more appropriate from an investment point of view because it indicates the financial impact of vacant space and allows the investor to evaluate the reversionary potential of a portfolio on current market values.
Return from Estimated Rental Value to Property Investment Analysis
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