Case Study Flashcards
What was the date of the inspection?
Date of inspection: January 2018
What were your clients objectives?
- to minimise void periods
- seek a tenant with a good covenant
- obtain a rent close to market rent
What checks did you undertake to ensure there were no conflicts?
Pre-instruction, I undertook a Conflict of Interest checking using our internal database. I used the property address and client names to establish this and in accordance with the RICS PS - Conflicts of Interest 2017
How did you act with Integrity?
I was honest and straightforward from the outset, including my initial marketing recommendations and updates throughout.
How did you ensure you were providing a high standard of service?
To ensure I was providing the best advice, I obtained clear instructions from my client. I defined my scope of service within written terms of engagement and my marketing recommendations. I communicated regularly throughout with both parties, via phone, emails and written correspondence.
How did you act in a way that promotes trust in the profession?
I acted in a professional manner throughout, ensuring my clients objectives were met.
How do you treat others with respect?
I was always very polite and respectful throughout, but especially when dealing with the negotiations. I needed to maintain a good rep-ore with the prospective tenant to ensure suitable terms could be agreed.
How did you take responsibility?
I acted very diligently prior to commencement, I undertook extensive research to identify the planning history, energy performance, business rates, land registry documents and flood zone.
If there had been a conflict, what would you have done?
- Conflict avoidance – consider whether conflict is irresolvable with your impartiality uncompromised. Decide whether to decline or accept instruction
- Written advice to both parties – if you accept instruction write to both parties disclosing nature of the conflict, outline how you propose to manage the conflict and request written confirmation of informed consent
- Conflict management – set up information barrier in accordance with the provisions agreed with both parties
What would be contained within the Terms of Engagement?
Agency basis, remuneration and complaints handling procedure
How did you communicate with your client?
I initially provided my advice in a marketing appraisal and then discussed the recommendation on the phone with my client.
Once instructed, I used a combination of phone calls, emails and face to face meetings.
What was the age and construction of property?
- Most likely constructed in the Victorian Period. Late 1800s or early 1900s
- More recent extension to the rear of the property (consent granted in 2001)
- Flemish bond masonry – formed by laying headers and stretchers alternatively. Solid wall construction
- Trench or strip foundations would be most likely due to low load and age of the building
- Flat roof with asphalt covering
What are the common defects associated with this type of property? What would you you look for to identify these?
- Penetrating damp : water pooling on roof, asphalt dries up and cracks or gutters become blocked and overflow = Damp and discoloured patches on ceilings and walls
- Subsidence: ground becomes unable to support the load e.g. if drain collapses or a tree is planted = Vertical cracks
- Ground heave: ground expands and pushes up as moisture content increases e.g. if trees are cut down or die = Vertical cracks
- Timber: roof structure and floor joists. Wet rot = damp to touch; dry rot = fruiting bodies, mycelium strands and cuboidal cracking; infestations of wood boring insects = small circular holes / piles of saw dust
- Spalling: damaged brickwork where the surface of the brick starts to crumble because of the freeze/thaw action
How would you describe Ipswich?
- Historically background in insurance and financial
- Becoming a technology area
- 1 hour from London via train
How would you describe the situation of the Property?
- Situated off one of the aerial routes connecting the town centre with the A14
- Situated in a predominantly residential area
- East of the town centre
How could you tell that there was a gradient in the quality of the retail provision?
- Shift from predominantly national occupiers to more local occupiers
- Higher volume of footfall
- Quality of the buildings ranges from aesthetic period properties to poorly maintained properties constructed in the 20th century
Describe the specification of the car showroom accommodation?
- Single glazed frontage with a powder coated aluminium frame
- Painted and plastered walls
- Floor is carpet tiled at the front with wooden parquet flooring at the rear
- Suspended title ceiling with recessed fluorescent lighting
- WC
What source of errors are associated with using a laser measuring device?
- Human error – not using the device appropriately i.e. not measuring a horizontal distance
- Systematic error – devices should be regularly checked for accuracy of calibration by checking a known distance and recording the results in a log
What is Market Rent?
‘The estimated amount for which an interest in real property should be leased’
• On the valuation date
• Between a willing lessor and a willing lessee
• On appropriate lease terms
• In an arm’s length transaction
• After proper marketing
• When the parties had each acted knowledgeably, prudently and without compulsion
What is Market Value?
‘The estimated amount for which an asset or liability should exchange’
• On the valuation date
• Between a willing buyer and a willing seller
• In an arm’s length transaction
• After proper marketing
• When the parties had each acted knowledgeably, prudently and without compulsion
Was the lease inside or outside of the 1954 Act?
- The lease was contracted out of the act
* This was completed via a statutory declaration
How did you arrive at an ERV of £30.00 and £35.00 per sq ft Zone A for the retail accommodation?
- I used my professional judgement to interpret the comparable data, taking account the Subject Property was located on a poorer pitch than the comparable evidence.
- ERV would have been approximately £29.50 prior to applying the 5% premium
- This range was corroborated by the rent review that was settled at the Property in December 2018
How did you arrive at an ERV of £14.74 per sq ft for the car showroom accommodation?
Strongest comparable evidence provided by the letting on Church Street in Theale at £13.24 per sq ft
• Similarities: let to a local tenant, situated on a high street
• Differences: property set back from the road, on the end of the high street but does benefit from a forecourt
How did you weight the comparable rental evidence at the time of valuation?
- Open market lettings
- Lease renewals
- Rent reviews
- Third party determinations
- Sale and leasebacks
- Inter-company transactions
If you were to conduct the valuation now, how would you weight the comparable rental evidence?
Guidance Note RICS Comparable Evidence in Real Estate Valuation (1st edition), 2019. Valuer should use professional judgement to assess importance of evidence on a case-by-case basis
• Category A: direct comparables
• Category B: general market data
• Category C: other sources
What is a net effective rent?
This is the rent that would be agreed between the parties for a letting of the premises on the relevant terms and conditions, but without incentives forming part of the transaction
Calculated as post fit-out, pre-incentive i.e. the difference between an allowance for tenant fit-out (usually 3 months) and the rent free period
Why did you use the outcome of the rent review (net effective rent) as your opinion of Market Rent (headline rent)?
Would have been minimal or no difference between net effective and headline rent. Would assume a 3 month period for tenant fit-out, which is in line with the typical 3-6 month rent free period for car showrooms
What impact would lease length have on rental value?
Tenant’s seek a discount if they have a long lease i.e. one which is longer than a lease that might be granted in the open market
Why did you not analyse the rental comparables on a net effective basis?
Rent free periods were not available for all of the comparable evidence and therefore I analysed the comparables on a headline basis to ensure that I was carrying out a like-by-like comparison
What is a net initial yield?
- Immediate return of the property based on the present income that the property produces
- Calculated as passing rent divided by Gross Purchase Price (inclusive of purchasers costs)
What purchaser’s costs would you include when calculating a net initial yield?
- 1% agents fees (+ 20% VAT)
- 0.5% legal fees (+20% VAT)
- Stamp duty:
Up to £150,000: Zero
£150,001 - £250,000: 2%
+ £250,000: 5%
What type of yield did you apply to value the car showroom component?
- Targeted an equivalent yield of 6.00%
- Equivalent yield is used to value reversionary properties and is an average time weighted yield
- Actual equivalent yield was 6.03%, rate used to capitalise the income
How did you derive the EY from the comparable evidence you used?
- Where a property is rack rented NIY = EY
* Can derive EY from comparable evidence by forming an opinion of what the Market Rent would be
The high street retail investment comparables date back to March 2017, how did you account for this?
- Examined the overriding yield trends
* Judged market sentiment from discussions with local investment agents
How did you account for the tenant’s fit-out when valuing the property?
- Under the yielding up clause the tenant was required to return the property in the same condition which it was let under
- Tenant improvements were therefore disregarded when establishing the Market Value of the Property
What is your understanding of covenant strength?
Assessing the ability of the tenant to perform the covenants in the lease e.g. rent, service charge and repairing covenants
How have you accounted for covenant strength in your comparable evidence?
- Covenant strength is reflected in the pricing of a property investment
- FTSE 100 companies are considered more likely to perform the covenants of the lease and therefore the asset achieves higher pricing
- P. Kingham Limited had a Dunn and Bradstreet rating of 1A1
How do you check covenant strength? Is Dunn and Bradstreet reliable and how up to date is it?
- Will be based on latest financial accounts – will be accurate as long as accounts are not misstated
- Could be up to 12 months old depending on the release date of the latest set of accounts
How did you arrive at 12 months as the void period?
- Conversations with local agents informed me of the typical void period of a retail unit
- Accounts for time to apply for a change of usage from generis to conventional retail
- Would cover marketing period and time to apply for planning permission
How did you calculate the rates liability?
Obtained the Rateable Value for the Property from the Valuation Office Agency (VOA) website. Multiplied this by the business rates multiplier:
0.48 x £24,000 = £11,520
(Property would benefit from the small business rates multiplier as the rateable value is below £51,000)
Why did you not account for business rates exemption on empty properties?
- I am aware that you do not have to pay business rates on empty properties for 3 months
- I did not include this exemption as it is related to the tenant, rather than the property itself
- Under the hypothetical scenario where the property is vacant, the tenant may have decided to vacate 3 months prior to the expiry of the lease, in which case the landlord would not benefit from the exemption
How would the length of the assumed term impacted what the value of the property is under the VPV scenario?
- The Market Rent would be capitalised into perpetuity from the beginning of the new lease
- The assumed term would impact the yield that would be applied to the Property as it would influence its attractiveness to a prospective investor
On what basis were you able to confirm that the Property was suitable for loan security purposes?
Based on the loan terms provided:
• Viable market for the asset assuming a reasonable marketing period
• Value of the asset would be able to cover the loan
• Income from the asset able to cover interest payments
• Lease length relative to the length of the loan
What do the symbols on your location plan denote?
- Blue flag – Golf Course
- Star – Other tourist feature
- Stag – Wildlife Park
- Flower - Garden
- Purple circles – Stations
- Green Road – Primary Route
- Purple Road – Main Road
- Orange Road – Secondary Road
- Yellow Road – Generally more than 4m wide
- White Road – Generally less than 4m wide
What do the PW and PO symbols on your street plan denote?
- PW – place of worship
* PO – post office
What’s the difference between a street plan and a GOAD plan?
- GOAD plan – incorporates individual buildings and their uses. Named after Charles E. Goad
- Street plan – shows names of streets, 1:7500 scale. Produced by Ordinance Survey
What does the pink dashed line on the OS site plan indicate?
Electoral boundary between Fairfield and South Croydon
Examining your comparable retail rental evidence, how was the basement space accounted for when interpreting the rental evidence ITZA from 206 High Street (Terra House)?
The basement space was treated as A/20 by the local agent who zoned the property. I was informed that this was consistent with the approach used for the rest of the street
What impact does the nature of the rent review have on the value of a property?
- RPI linked rent reviews have been shown to produce greater returns for landlords as a result of rents being linked to general inflation rather than the rental market
- RPI linked rent reviews are often disliked by tenants due to the lack of connection between the inflationary increase and the local property market
- May compensate elsewhere on the lease terms in order to get an RPI linked rent review
- RPI generally preferred by landlords to CPI as gives a higher rate of inflation
How would you calculate a WAUTC?
- Weighted average unexpired term certain
- Weights the time left on the lease by the proportion of income that the tenant contributes
- Σ (Tenant Income / Overall Income) x Length of Unexpired Term
