Introduction to Property-Mixed Real Estate Portfolio
Scenario:
Your firm’s new client has just inherited a mixed real estate portfolio. They have no knowledge of the real estate market, and they are intending to sell all of the interests as soon as possible. They then want to invest the proceeds in stocks, shares, ISAs, pensions
and cryptocurrencies instead.
You are familiar with some of the portfolio as you have acted on behalf of the tenant of the Bistro, for their most recent rent review. You have also acted for the landlord of the new office building having acquired the site, redeveloped it and let the building on their behalf.
Property 1: Bistro Bandaros
This small bistro occupies an edge–of–town location. It sells alcohol and food and is open every day except Mondays.
The past three years accounts have been provided (see below).
Item Y/e 31/3/19 y/e 31/3/20 y/e 31/3/21
GROSS INCOME
Meals 273,750 335,070 370,475
Drinks 73,000 90,337 110,412
EXPENDITURE
Purchases 156,037 191,433 216,399
Wages and National Insurance 112,320 115,960 124,540
Utilities 13,000 13,800 14,300
Business rates 7,000 7,000 7,000
Laundry 950 1,100 1,200
Insurance 1,500 1,550 1,560
Repairs 300 250 450
Stationery 150 230 250
Telephone 1,400 1,530 1,650
Owner’s remuneration 40,000 45,000 50,000
ASSETS
Fixtures and fittings 25,000 22,500 20,250
Stock 2,000 1,800 2,100
Local evidence indicates that the appropriate rate of return for a property such as this (YP perp) is 9% and the expected return on capital is 7%.
Property 2 80 High Street, Market town
This retail property is held on a 20 year full repairing and insuring lease (FRI) subject to five yearly upward only rent reviews. The lease has twelve years unexpired. The passing rent is £42000.
The shop has a frontage of 6m and a depth of 26m. There are two upper floors with the same dimensions. The stairs at the back of the shop take up a space measuring 4m x 1m on each floor. Toilet facilities are on the first floor and take up space measuring 2m x 3m.
The most recent evidence in the area is for a new five year lease on an internal repairing and insuring (IRI) basis where the rent ITZA equated to £360 psm and this appears to be in line with other evidence in the area.
There have not been many freehold sales recently but there was one of a similar unit last year where the All Risks Yield (ARY) was 8%, prior to that a freehold sale of a similar unit two years ago showed an ARY of 7.5%.
-Use a traditional valuation method to arrive at a proposed sale value.
Property 3: Plot of land for residential development
This plot of land is a former psychiatric hospital, now derelict, which has just received outline planning permission for residential development. An initial feasibility study, commissioned by
the owner, suggests that it will be possible to construct the following on this site:
• 20 1 bed flats
• 40 2 bed flats
• 10 3 bed flats.
Sales prices in the area are:
• 1 bed flats £150000
• 2 bed flats £200000
• 3 bed flats £240000
The local authority will require, as a condition of planning consent, that 20 of the 2 bed flats are allocated for affordable housing. These will sell for £108000.
The local authority will also require a contribution towards infrastructure under a S.106 agreement of £250000 but there is no Community Infrastructure Levy in this area.
Based on recent development in the area it is anticipated that building costs will be £950 psm for each flat based on IPMS 1 areas. The areas are:
• 1 bed flats 50 sq.m.
• 2 bed flats 60 sq.m.
• 3 bed flats 78 sq.m.
The development period is anticipated to be two years and finance is available at 8%. A developer’s profit of 15% should be allowed for.
-Making any necessary additional assumptions, provide your client with advice on the figure they might be likely to receive for this asset.
Property 4: Tertiary industrial property on long lease
An investment leasehold interest in a 9300 sq.m. IPMS2 (GIA) industrial property in an established commercial area. This 75 year FRI lease commenced forty years ago. As a substantial amount of work was carried out to bring the property into a usable condition the landlord agreed to a stepped rent whereby the rent increases to a specified figure every 25years. The current rent, which was fixed at the first rent review, is £66,000 and the second rent review is to a fixed rent of £88000. A 20 year lease is currently being marketed with offers invited for the rent in excess of £135,000 pa.
The following comparable evidence has been collated:
Unit B – a 12000 sq.m. IPMS2 (GIA) unit on the same road let on a new FRI lease 3 months ago at a rent of £180000 and sold shortly afterwards for £1286000 pa.
Unit 8 – a 10400 sq.m. IPMS2 (GIA) unit on an adjacent road sold last month for £1078000 and let on a 10 year FRI lease with nine years unexpired at £150800 pa.
Unit D 8100 sq.m. IPMS2 (GIA) unit next door just let on a new 10 year FRI lease subject to five–yearly, upward–only, rent reviews at a rent of £125,550 pa.
Property 5: New office building, New Town
This is the freehold interest in a new office building which was let to a strong covenant a few weeks ago for a term of 15 years on an FRI basis at a passing rent of £240,000 pa subject to five–yearly upward only rent reviews. The unit is 9600 sq.m. IPMS3 (NIA) and construction costs are estimated at £800 psm. Rental growth is anticipated to be 3% and properties such as this are selling at prices reflecting an all risks yield (ARY) of 6.5%. There are a number of
investors interested in this type of interest. They are targeting a rate of return of 9.5% achieved over a holding period of 20 years.
-Use both the traditional and the DCF approach to arrive at a proposed value for sale and provide a comment on any differences between the two and what you believe the sale value
should be and why.
Property 6: Logistics unit, 4 Orchard Way
This property has been let to a tenant at a current passing rent of £355,000 p.a. which was agreed when the lease commenced on 1 April 2020. The lease provides for five–year rent
reviews from the date of commencement. The unit has an IPMS2 (GIA) of 7600 square meters.
On the same industrial park, a comparable unit (8 Orchard Way) has just been let at £285,000 and then sold for £4,750,000 inclusive of costs.
A further property on the same park (1 Orchard Way) comprising 8000 square meters IPMS2 (GIA) has just been let on similar lease terms as the subject at a rent of £440,000 p.a.
Tasks:
Your new client has requested an indication of value, for sale purposes, for each of the properties outlined above.
1. Your line manager would like you to provide an initial draft letter to your client setting out:
• the steps to be taken prior to providing these indications of value in the report they
are requesting.
• the advantages of continuing to invest in real estate over stocks, shares, ISAs, pensions and cryptocurrencies
(15 marks) (approx.1000 words)
2. Assuming that all preliminary matters outlined in your letter have been satisfactorily resolved, provide a draft report setting out your opinions of value of each of the properties.
The valuations should include full annotations to explain your approach to the client. Your report should finish with clear recommendations on the next steps to be taken. (80 marks:
Property 1 Bistro Bandaras 10 marks, Property 2 80 High Street, Market Town 15 marks, Property 3 Plot of Land for residential development 20 marks, Property 4: Tertiary industrial property on long lease 15 marks, Property 5: New office building, New Town 10 marks Property 6: Logistics unit, 4 Orchard Way 5 marks, Property 5 Insurance valuation 5 marks)(Approx. 2750 words)
3. The insurance is due for renewal on Property 5 so your client also requires an insurance valuation to be provided on an indemnity basis(5 marks)(Approx. 250 words)
Referencing requirements for assignments
Statements, assertions and ideas made in coursework should be supported by citing relevant sources. Sources cited in the text should be listed at the end of the assignment in a reference list. Any material that you read but do not cite in the report should go into a
separate bibliography. Unless explicitly stated otherwise by the module teaching team, all referencing should be in Westminster Harvard format. If you are not sure about this, the library provides guidance (available via the library website pages).
Plagiarism covers both direct copying and copying or paraphrasing with only minor adjustments:
• a direct quotation from a text must be indicated by the use of quotation marks (or an indented paragraph in italics for a substantive section) and the source of the quote (title, author, page number and date of publication) provided;
• a paraphrased summary must be indicated by the attribution of the author, date and source of the material including page numbers for the section(s) which have been summarized.
READING AND KEY LEARNING RESOURCES
Essential reading list
Davidson A (2019) Parry’s Valuation and Investment Tables, Estates Gazette
IVSC (2021) International Valuation Standards. London: IVSC.
RICS (2010) Capital and Rental Valuation of Public Houses, Bars, Restaurants and
Nightclubs in England and Wales 1st edition London: RICS
RICS (2019) Valuation and sale price London: RICS
RICS (2020) Rules of Conduct for Members (currently under review) London: RICS
RICS (2019) Comparable evidence in real estate valuation London: RICS
RICS (2019) Valuation of development property London: RICS
RICS (2019) Valuation – Global Standards 28 Nov 2019 London: Royal Institution of
Chartered Surveyors.
Scarrett, D. & Osborn, S (2014). Property Valuation: The five methods. 3rd Ed. Abingdon,
Oxon: Routledge
