Valuation Level 3 - Mixed Use Barnes

Question 1

Describe the property

Answer 1

Victorian mid terrace property arranged over ground and two upper floors and of traditional brick construction under a pitched roof

ground floor was a retail unit with a two bedroom flat over ground and first floors

retail unit was metal frames with single glazed frontage and tiber framed windows on upper floors

Internally the retail unit was open plan, timber flooring, painted walls it was in shell and core condition waiting for tenant fit out.

Question 2

What was the surrounding area like?

Answer 2

High street characterised by independent retail, and café occupiers which serve the residential area,

good local occupancy rate high demand for retail units.

Question 3

Talk me through this valuation

Answer 3

I was instructed by a client to value a mixed use retail unit in Barnes for loan security purposes

I carried out a conflict checked, ensured I was competent before issuing the terms of engagement.

I inspected and measured the property on an NIA basis, I also zoned the unit.

The property has just recently let on a new 15 year lease with 6 months rent free.

I researched comparable evidence within the local area to establish a market rent and yield for the retail unit. I then used the investment method to capitalise the rent for the term.

I researched comparable evidence to establish the market value of the flat with the current AST in place. I also valued the flat on the special assumption of vacant possession.

I had regard to intact freeholds in other affluent south west London locations and cross checked this on a cap val psf basis.

I finalised the report with my advice and that the property was suitable for loan security property.

Question 4

How did you account for the rent free period?

Answer 4

accounted into my timescales

Question 5

What was the headline rent?

Answer 5

£37,500

Question 6

what was the net effective rent?

Answer 6

£36,250

Question 7

How did you calculate the net effective rent?

Answer 7

total rent of entire lease, less any incentives , divided by years.

Question 8

What did your yield profile look like?

Answer 8

Net effective rent was 0% because there was no income in the rent free period.

Running yield and Reversionary was in line with the recent comparable market evidence

Equivalent yield sat just below the reversionary.

Question 9

What advice did you provide?

Answer 9

• commercial element is newly let attractive to investors
• located in affluent suburb
• tenant had not yet moved in, risk of default and associated holding costs.
• obtainVP of maisonette and sell off on long leasehold to owner occupier
• further interest rate rises could reduce investment sentiment further.

Question 10

What is an intact freehold?

Answer 10

The whole building

Question 11

How did you treat purchasers costs?

Answer 11

for the intact freehold I took off purchasers costs off the commercial then added the residential element on top as the most likely purchaser would be an investor

Question 12

What discount did you apply to the residential element?

Answer 12

I discounted 5% from market value for the residential element as for the investors vacant possession is not guaranteed in the medium term.

Question 13

Why did you not assume purchasers costs on residential element?

Answer 13

prevailing market conditions for residential property is owner occupier, they would look at it on a VP value basis with costs on top.

Question 14

Who would purchase this type of property?

Answer 14

investors who have been typically private individuals who attracted by the affluent location mixed use good owner occupier demand and affordable rents.

Question 15

Talk me through the valuation calculations for this property

Answer 15

as there was 6 months rent free I capitalised the reversionary yield into perpetuity and differed the rental income by 6 months.

I accounted for expiry void plus rent free period, totalling a 12 month void. I calculated the cost and then bought it back to the present value.

Question 16

How do you choose your discount rate?

Answer 16

I deferred it back to the rack rented yield as that was the opportunity cost to the investor.

Question 17

Why would you not discount at the interest rate?

Answer 17

Every investor will have a different opportunity cost, I chose the opportunity cost of the investor I was valuing for.

Question 18

How did your VP value differ to the value with an AST in place?

Answer 18

My VP value was higher

I applied a discount to the VP value to account for that investors need a desirable return on their investment.

Question 19

What discount did you apply?

Answer 19

In this case it was 5% however this could vary depending on how many flats their are, desirability and letting prospects .

Question 20

Is your building listed or within a conservation area?

Answer 20

Not listed or within a conservation area

Question 21

What was your reversionary yield?

Answer 21

6.82%

Question 22

What was your equivalents yield?

Answer 22

6.5%

Question 23

What was your blended yield?

Answer 23

5.56%

Question 24

What was the cap rate of the overall freehold?

Answer 24

£700psf

Question 25

How did you test covenant strength

Answer 25

low liabilities
profit from the last 3 years was three times the amount of the annual rent

do not provide advice on covenant strength as not a specialist in this area.

Question 26

If you were carrying out a valuation and there was for example a large crack in the wall what would you do?

Answer 26

on inspection I would photograph and try to find cause of the crack

send a photo to my client and recommend they seek specialist advice from a building surveyor.

Can proceed presuming there is no structural issues on that bais and adapt report post investigations.

Question 27

what’s the difference between an assumption and a special assumption?

Answer 27

assumption is something you presume to be correct

special assumption is something you know is not the case at the time of valuation