Chapter 12:Valuations for Financial Statements and for Secured Lending Purposes

Questions

Property Valuation, Second Edition. Peter Wyatt.

Please read the large print

This is a first draft.
This document basically consists of a question bank of real estate appraisal and valuation problems used by Pat McAllister and Peter Wyatt whilst teaching at various institutions.
It was produced in June 2012 by four students who, in a short space of time, took a lot of fragmented materials to try to produce a coherent, single document – many thanks to Sarah Bolitho, Ben Warwick, Rachel Ward and Josh Tyler for their hard work.
It isn’t their fault that some of the answers are missing – it’s ours.
We are happy to offer it as a learning resource to real estate students and their lecturers more broadly, in the hope that it may make this stuff a little easier.
It is work in progress. In particular, we appreciate that there is a lot of scope for improvement in terms of the sequencing of the questions. A weakness is that similar topics are sometimes covered in different sections. We think that it is best used as a place to pull out groups of questions and answers from the different sections and to adapt them to your particular needs.
Sorry - we are too busy to offer any support. But, feedback and suggestions are welcome.
Obsolescence is often a problem in setting appraisal questions. We have tried to make sure that dates of valuation etc are specified but a few may have slipped through.
We should admit that we have been inconsistent in handling transaction costs. Sometimes we have included them, but mainly we’ve ignored them. Where we have included them, it is generally at the level prevailing in 2012.
A lot of the material is very UK-centric. We need to be much more global in our outlook in future.

Peter Wyatt Pat McAllister

Question 1

A single storey freehold factory in owner-occupation has 2,000 square metres of gross internal area (GIA). You have obtained information that similar premises of 3,000 square metres GIA have recently let on a 15 year FRI lease at a rent of £65,000 per annum subject to the payment of a premium of £15,000 on entry. The site of the subject property could be redeveloped as a factory of 2,500 square metres within one year, giving an estimated annual rent of £40 per square metre on FRI terms. Costs, including building, contingencies, financing and fees are considered to be £250 per square metre. Investment yields for this type of property average 10%.

Question 2

The following comments are extracted from the notes found in three separate company reports and accounts for last year with regard to the treatment of each of the company’s fixed assets of land and buildings.

British Library

The three freehold premises located in Yorkshire, and Essex which are used for office accommodation have been valued using existing use value at £27 million. The freehold interest in the new library, reading room and book depository at St Pancreas, London has been valued using a depreciated replacement cost basis at £390 million.

House of Fraser plc

The valuation of the freehold and long leasehold retail property portfolio has been on the basis of existing use value at £89 million.

Capital Shopping Centres plc

Completed investment properties (10 shopping centres in UK) are valued at £3,100 million on an open market basis at the end of each year.

Question 3

A property is a large four-storey warehouse building situated in the East Midlands. It is owner-occupied and comprises 2,400 square metres of gross internal area (GIA). You have obtained the following comparable information:

a)The tenant of a similar warehouse with a 2,000 square metres GIA has recently surrendered the remaining two years of an FRI lease at a rent of £100,000 per annum and has taken a 10 year FRI lease at a rent of £134,000 per annum with a five year rent review. Yields average 11%.

b)The site could be redeveloped to include a large single storey distribution warehouse of 3,000 square metres. The development cost, including building, contingencies, finance and fees would be £300 per square metre.

Question 4

You have been instructed by Fletchers Removals Ltd to value their property asset which is located two miles east of Bristol city centre in a mixed use area of offices and residential property. They purchased the freehold interest in the property 14 years ago. It comprises two attached brick-built single storey buildings dating from late 1980s, originally designed as warehouses. The 0.79 ha site has shared access and parking areas. Building 1 is currently let as it was surplus to the company’s immediate occupation requirements and was converted by the tenants on entry as a condition of the lease to good quality open plan office accommodation. Building 2 has been retained as a warehouse by the company. The table below provides some further details about the premises.

Unit / Use / GIA area / Lease details / Current rent pa / Tenant details
1 / Office / 517 m2 / Let for 15 years from 1996 with 5 yearly reviews on FRI terms / £49,870 pa FRI / Bristol Architectural Services plc
2 / Warehouse / 1689 m2 / Owner occupied / The company have spent approximately £160,000 in the last 2 years, installing external loading facilities to meet their business needs
Electricity substation / 50 m2 / Let to Powergen on a 99-year lease from 1967 with a review at year 25 / £390 pa

Last year planning permission was granted for conversion of both buildings to 28 residential flats: the site being valued at £2,300,000 at that time.

Bristol Architectural Services plc have made an offer to surrender their existing lease and take a 15 year lease of both the office and warehouse at a rent of £100/m2 (30% below market levels) to reflect their conversion costs of the warehouse to office space.

In terms of comparable evidence, an industrial estate comprising five recently built warehouse units with a total area of 1,450 m2 is fully let and producing a current rent of £84,000 pa net. The freehold interest recently sold for £1.028m to an investment company. Secondly, a former public house site of 230 m2, located in a more prime residential area than the subject property, with planning consent to erect six two-bedroom flats has just sold for £525,000 at auction.

Question 5

You have been instructed by Royal Northern Bank plc to value, for loan security purposes, the freehold interest in a mixed use property located in the city of London on Fleet Street EC4 a quarter of a mile from St Paul’s Cathedral. The property is located within the Fleet Street conservation area in a predominantly office and retail location. The property is a Grade 2 listed 19th century building attached on both sides and is stone-faced with a slate roof. A loan for 10 years is being considered with no repayment of capital before the expiry of the loan. A loan to value ratio of 75% is being offered and interest of 6.5% will be charged on the loan.

Tenancy Schedule
Unit / NIA m2 / Current Rent / Lease / Tenant
1. Ground floor retail unit with basement storage / 58.49 ITZA
50.43 m2 / £65,000 internal repairing terms / Let 8 years ago on 15 year lease with 5 yearly reviews / Orange Retail Ltd. (on assignment from Clinton Cards)
2. Ground floor retail with basement space / 67 m2 ITZA
24.8 m2 / £79,500 internal repairing terms / Let 14 years ago on a 20 year lease with 5 yearly reviews, with a break at the second review in favour of the tenant subject to 6 months rent penalty / NatWest Bank plc
3. First floor office / 102 m2 / £42,000 internal repairing terms / Recently let on a 10 year lease with 5 yearly reviews / Metro Cash and Carry Ltd.
4. Second floor office / 96 m2 / £38,120 internal repairing terms / Let 14 years ago on 15 year lease with 5 yearly reviews / Stationery Supplies Ltd.
5. Third / fourth floor residential 2-bed penthouse with balcony and roof terrace / 126 m2 / £26,000
Tenant has no repairing obligations / Assured shorthold tenancy for 1 year / Universal Pictures
Property is let fully furnished under terms of the lease

Recent market evidence:

A retail unit of 44 m2 ITZA in this street recently let on a 20 year lease with 5 yearly reviews at a rent of £62,000 per FRI and subsequently sold for £1,240,000
The freehold interest in a prime office investment located within the City producing £61,359 per annum gross, fully let at market rents, sold for £1.09 million
The freehold interest in a mixed use block of less high specification within a less-than-prime part of EC4, comprising four ground floor shops, two floors of offices and two self contained flats on the upper floors, producing a total of £225,565 per annum gross sold for £3,110,000. One retail unit was vacant.
The leasehold interest, with 92 years unexpired at a ground rent of £10 per annum, in a vacant high specification one bed flat in a purpose built in 1982 housing development sold for £333,000 in this part of the City