case study Flashcards
1
Q
- Can you talk me through your conflict of interest checks?
A
Check on property and client. This ensured I was acting in line with the RICS coi standard so I can act independently and impartially and provide a good quality service.
2
Q
- What type of conflict may arise in an instruction like this?
A
If my lease advisory team were advising on the rent review for Playsport. For rent reviews, if they’re acting for a tenant in the building and you’re acting for the landlord, that is a conflict and you would need to advise both parties and could only continue if you have informed consent from both parties, have set up information barriers and you still feel that you continue without the conflict having an impact on your work.
3
Q
- If a conflict had arisen, what steps would you take?
A
informed consent
4
Q
- If you received informed consent from both parties, does that mean you can definitely proceed with the instruction?
A
i make final decision
5
Q
- Why do you need to undertake Customer Due Diligence?
A
Prevent money laundering. This is when proceeds of criminal activities are disguised or converted and then realised as legitimate assets.
Comply with regulations and datandrds
to mitgate risks
6
Q
- What do these checks involve?
A
Identify and verify identity based on verified sources. Identify the beneficial owners of the client, for a company, name, address, company number, structure chart, adverse media.
7
Q
- What might be a red flag?
A
Hesitant to provide information, different currencies, rushing.
8
Q
- When might you need to undertake enhanced due diligence checks?
A
High risk third country or PEP (someone who has been entrusted with a prominent public function. Check if on sanctions list, further details from their solicitor on their source of funds.
9
Q
- What are the potential consequences for a breach of Anti Money Laundering Regulations?
A
5 years tipping off, 14 years assissting
10
Q
- You conducted Dun and Bradstreet reports on each tenant in the building. What are these reports?
A
Business credit report, info on financial health, creditworthiness, risk profile
11
Q
- Where do Dun & Bradstreet get their information from?
A
companines house
12
Q
- The reports suggested all tenants were of a ‘stable strength’. What does this mean?
A
All the tenants were of low to moderate risk with a good credit rating. All had minimal risk of a default and consistent financial performance.
- Solid financial standing with minimal risk of default
- Moderate low failure risk score
- Decent credit rating
- Consistent financial performance – no red flags of late payments
Over the next 12 months tenants are not at risk of failure or risk of severely delinquent payments. Eg. Failure risk score, PAYDEX and financial stress score. However, stability doesn’t mean always strong profitability.
13
Q
- Why was the fund selling?
A
Wider strategy to reduce exposure to office assets in secondary submarkets where substantial non-recoverable landlord cap ex is required in short to medium term, short, dated income with occupier retention risk owing to high sc costs and voids.
14
Q
- Were there any transactions within the subject building that you relied upon? The under offer was £32.50 why?
A
Main road, been vacant for 3 years. Formed part of my valuation however, not all.
15
Q
- The 2nd Floor Suite 1 let to Playsport Games Ltd had a rent review in June 2024. Had that been triggered yet by your client?
A
No when instructed and during the process.
16
Q
- XPS also have a rent review in September 2024?
A
- It was not triggered as my client informed me that they seeked professional advice and felt that the MR had not increased significantly and rent reviews can be timely and costly.
- Increase rent – professional fees, time costs, potential risks of disputes.
- Rule of thumb 15-20% above the passing rent to make the process worthwhile
- Rent reviews only net effective rents. Would need to workout the incentives and deduct.
17
Q
- Why would they not my client not active rent review?
A
Sometimes this is attractive to the new owner has they have flexibility to instigate and negotiate how they would like to on the rent review, for reversion.
18
Q
- What type of rent review?
A
Upward only. XPS was on £34.34 psf and playsport £33.74 psf.
19
Q
- Did your client have a rent review surveyor appointed?
A
On the rent review, it’s fine to say the rent review hadn’t been triggered. Firstly, time is usually not of the essence so rent reviews are often triggered later, once the landlord has established that rents have grown and they will secure their increase. Furthermore, you can mention that the landlord wasn’t keen on spending money on a rent review surveyor when they were selling the building. And, it would present the new owner with an asset management opportunity, contributing to the building’s appeal.
20
Q
- What is the hierarchy of evidence for lease renewals?
A
Open market, lease renewals, rent reviews, independent expert determinations, arbitrator awards.
21
Q
- Why are lease renewals above rent reviews?
A
- Lease renewal are open market, usually on new lease terms, strong evidence
- Rent reviews – hypothetical lease terms, medium to low alignment MR depending on assumptions, bound by original clauses.
22
Q
- What about the ground floor. That had just had a letting agreed in principle at £32.25psf. Surely a rent agreed in the open market on the building itself was your best evidence? Your appraisal of the market rent was £36.50psf?
A
I provided a blend rate and adopted this to the ground floor.
23
Q
- The most recent letting in the building itself was on the 2nd Floor Suite 2 to Arcadis at £37.85psf. Why was your market rent lower than the most recent completed letting in the building?
A
This was fully fitted, this floor ERV was £38.50 however, blended £36.50.
24
Q
- In advising your client, you considered the Net Initial Yield may range from 12% to 13%. Why did you recommend a quoting price of £6.5m based on a 12.44% Net Initial Yield?
A
I felt this was a realistic marketing price as setting a price too high may deter buyers. At £6.5m this was a rounded figure. We cross-checked this on a capital value basis as well.
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32. The final 3 offers ranged from £5.27m to £6.175m. All below your recommended marketing price of £6.5m. Why do you think the bids were so much lower?
- Interests rates still high.
- Secondary offices weakening.
- Limited alternative use options.
- Uncertainty / increased risk of the under-offer income.
- We tested the market and had significant interest.
- This is a liquid lot size however, risk appetite is low.
- This is market conditions, I looked on my data base at south east offices and I am aware that c.90% of all deals transacted at a discount.
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33. Do you think you got your pricing wrong?
No, I believe that I set this at a good level, we received significant interest which shows it was well placed in the market. I said optimistically and realistically to try not undersell the assset
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34. The bids must have been below your client’s expectations. How did they react?
- Ensured my client was fully informed about market conditions prior to marketing, to manage their expectations from the outset.
- Despite coming in below, I reviewed all offers in detail, not just assessing the price but also the strength of the bidders, conditions and their ability to proceed.
- Due to the funds strategy of looking to offload secondary assets and informing them of expectations of their wider market they were disappointed. We completed the deal in a timely manner.
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35. The offer from PropCo1 was highest but based on both debt and equity financing. Why would debt financing have an impact on your advice to your client
- Debt financing introduces additional risk factors that could impact the reliability of PropCo1’s offer. When assessing bids, I would consider the bidder’s funding structure, as a highly leveraged offer may present greater uncertainty compared to an all-equity purchase.
- A key risk is the buyer’s ability to secure the necessary debt. If their offer is contingent on obtaining bank financing, there is a possibility that the lender may not approve the required loan amount or may impose conditions that delay or jeopardize the transaction. Rising interest rates, changes in lender appetite, or stricter credit conditions could also affect the buyer’s ability to complete.
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36. Their timescale was only 3 weeks longer. Surely it would be worth waiting 3 weeks for an extra £165,000?
Potentially but my client wanted to proceed with this buyer due to their track record and no debt.
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37. When the property was being marketed, with the ground floor under offer, wasn’t your client offering a rent and rates guarantee on the ground floor
structure deal changed
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39. When the purchaser chipped the price by £0.5m, did you consider remarketing the property?
Yes however, discussed options with my client and under bidder not there and the market was slowing down for Christmas.
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40. You ultimately agreed a revised price just £325,000 lower. How did you reach that figure?
6% discount, 24 months rental guarantee, 12 months SC and 12 months rates plus additional risk
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43. What debt offer?
50% LTV
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46. Confused why would you price of the income but not include the WAULT?
The agreed rent provides a clearer picture of the income, however, until the lease is formally signed and completed, incorporating the wault could be misleading because the lease length isn’t legally secured, investors prioristed rental income over speculative WAULT.
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47. Did you consider the net effective rent of your comparable evidence?
Yes, I did for example, I looked at the headline rent over the lease term and deducted any rent free (allowing for a 3-month fit out). THIS IS TO THE NEXT LEASE EVENT & 3 month fit out always deducted from RF
- 30 London Square £41.50 psf / 3 months RF / 5 year term = NER is £41.50 psf (3 month tenant fit out)
- Bottle works £43.00 psf / 6 months rent free (including 3 month fit out) / 10 year term (117 months) = £41.93 psf however, to 5 year term is £40.85 psf
- 1000/2000 Cathedral Square / £36.25 psf / 12 months rent free (3 months fit out), term is 111 (months) = £33.53 psf and 5 year term is £31.00 psf
- Yes 1000/2000 was most comparable because it was of similar specification and transacted in March. It achieved a lower net effective rent because it is a business park so there is a slight discount. There isn’t a large difference as this CS is centred around the university research and therefore, is not comparable to other parks.
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48. Investment comparables – please run me through why the capital value is such a big difference?
Due to this being an office-to-office play, we put weight on the comparable evidence. There was limited evidence hence going to other markets. All my comps focused on a office to office play. HOLSITIC VIEW / CASE BY CASE BASIS
* 40 oxford road: same income, needs refurbishment, sold as an office refurbishment, the yield of blended 11.32% accounts for some vacancy and some tenants may be leaving however, one upside is that one tenant is looking to regear but albeit not signed. This is an office-to-office sale in a secondary market with low headline rents.
* Magna House Staines: better building with new electric plant, amenities, gym, only some vacancy.
* The place maidenhead – very comparable, fully let. We sharpened as our property was ‘fully let’ on a higher income of c. £34.00 whereas, this was c. £31.00. comparable as same income length, similar specification. We sharpened the yield as the location of tempus is better and the tenant strength.
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49. Where there any other comparables in Guildford?
Yes, there was 255 the high street exchanged for 8.2%, this was prime kit, brand new fully refurbished building in March. This showed the potential for refurbishing and the potential rents to be achieved. Also crossweys sold for £316 psf / 12.97% £6.050M. However, 25% was retail and some vacant so was not comparable.
38
50. Explain the flooding zone 3?
Half of the building is in zone 2 and 3. Report by Zurich insurance confirmed low risk due to defences. Our institutional client would not have bought if it was at high risk of flooding – the basement is at the highest risk and is a car park, it has not flooded ever, plant room 5th floor, critical equipment on concrete plinths raising above the height of the floor, concrete not seen as vulnerable. The report was intrusive and examined the defences. If parties required further info I advised them to speak to an environmental consultant.
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51. What is an institutional client?
Large organisation that invest or transact on behalf of others eg. Like pension funds. Long term horizions with lower risk.
40
52. You conduced a dual measurement what were they?
IPMS3 27,709 sq ft compared to 24,793 sqft this is a 11.005 difference.
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53. Why not auction?
it would be relevant if it was say a small lot size, in a market where you might want to appeal to local HNWI, need a quick sale, or if it's particularly unusual / not institutional. The market is focused on small lots eg. Average is £16.1m for 2024. IF DIDNT SELL RUIN PROPERTY ASPECT
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54. What was the air con?
VRV lower capital cost but higher running and maintenance costs
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56. What maps were used?
Street/location map 1:1250 or 1:2500 location plan
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57. Why no surveys?
The vendor had done a survey and was online. The purchaser had brought their internal house building surveyor round.
45
58. What is the difference between freehold and leasehold?
Freehold: exclusive possession, appreciate in value, can redevelop/alter premises subject to planning. However, will tie up large chunk of capital, large deposit, responsible for repairs and maintenance. Leasehold: exclusive possession of property for fixed period, greater flexibility, required less capital, LL responsible for structural repair and maintenance. However, rent review provisions, harder to alter premises, must return to original state.
46
59. Did you consider alternative use?
Yes, we did have consideration however, the income was still 2.6 years left and it is in a good office location. It was not in an article 4 however, it was not able to obtain this due to its position by the river.
You can say that you considered residential values with input from residential team but office values were higher and therefore those buyers were the best to target
47
60. What basis of agency instruction?
Sole selling rights – fee will be paid even if introduced by the purchaser and if the term ends and the property is sold to a purchaser introduced by the agent, fee still paid. Whereas, sole agency – fee only if agent introduced by term and if client finds then no fee.
48
62. How is the EPC D seen in the market?
s the property required some refurbishment this is standard.
49
63. Failure to complete can they get a deposit refunded?
No vendor can retain
50
64. What is a CPSE
commercial property standard enquiries, standard set a buyer will send to the landlord solicitor eg. Confirm the SC, has it ever flooded?
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65. What are the different flood zones?
Zone 1 – less than 0.1% annual probability of river or sea flooding
Zone 2 between 0.1-1% annual probability of river flooding or between 0.1-0.5% annual probability of sea flooding , requires a FRA for planning
Zone 3a – high probability greater than 1% annual probability of river flooding or 0.5% from sea – might need raised floors or defences
Zone 3b – functional floodplain – development not permitted
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66. You said you knew the buyer pool?
We were aware that this was likely to be an office-to-office transaction and new of the active purchasers and agents in the market.
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67. What is the air conditioning?
Fan coil low capital cost higher maintenance
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68. What do you mean by rolling refurbishment?
Some floors have been refurbished at different times due to lease expires. LED lighting, new metal tile lightings, new full access raised floor areas.
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70. What was their timeline and why was it longer?
2 weeks to exchange and 1 week to completion. We went under offer beginning of November however, there were delays due to the ground floor and searches.
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71. What are typical defects to look out for?
Efflorescence (white marks from salts in brickwork) or spalling (damaged brickwork due to crumble from freeze thaw)
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72. How do you calculate WAULT?
calculated by adding up all the contracted rental income (on the portfolio/building) between now and the first lease event, and dividing it by the contracted annual rent
58
73. How did you comply with GDPR with dot mailers?
the compliance department sometimes check with the individuals if they want to remain on the lists. I say that all individuals confirmed that they were happy for us to have their personal details and for us to send them mailing lists and that if they want to unsubscribe there is a button.
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74. What is the construction of the building?
'flat roof housing the buildings plant, with a decorative sloping plant screen to the perimeters, finished in slate.
For the foundations, without cutting a hole in the building (or reviewing as-built drawings) you just have to make an assumption off of the age, size, use and construction of the building.
Ground-bearing concrete slab basement. So reinforced concrete. HOWEVER, I would send to a building surveyor
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75. How did you value the car parking space
The landlord had agreed this, I checked comparable evidence with similar car parking and this was in line.
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76. What is an IRI lease?
Internal repairing and insuring. The tenant is responsible for only to the internal parts of the property (walls, floors, ceilings)
62
79. You said London square was extensively refurbished in 2018 wasn’t that 8 years ago now?
Yes, it was however, back to frame refurbishment. It is an established business environment. Arguably the site has not been used to its maximum capacity due to covid and therefore, is not as much wear and tear.
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80. Tell me what discount you applied to the place maidenhead?
25 bps less favourable micro-location
Stronger covenant strength tempus 25bps
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81. What discount magna?
- Better condition and spec 100bps increased
- Better location green space 25bps
- Sustainability 50 bps
- Remaining reflects vacancy and reversionary potential
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82. What discount 40 oxford road?
Similar submarket somewhat worse. Lower rents.
Potential for long lease extension – 50bps increase
Tenant covenant strength 50 bps
Some vacancy
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83. Guildford office market explain?
The market is driven by limited supply for Grade A, take up only been for pre-let new space. Limited demand for second hand which is why the ERV of Tempus is only slightly reversionary and quoting price was not achieved due to the higher risk.
- 24 months rent free typical for 10-year term
- Vacancy 6.8%
- TMT gaming
- Take up lowest in 2024, same as 2020
- Headline rents c. £45-50 psf
- Constrained office stock, business park now more life science,
Take up only 30k in 2024 compared to 160k take up in 2023, £50 psf headline rent vacancy 6.8% - 505 CAT b
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4. What is grade a
raised floors, 2.65 floor to ceiling height, car parking, lifts, reception, double glazed windows, steel or concrete framed.
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11. How long are searches valid for
6 months, environmental, highway, planning, utilities.
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12. Has the market got better?
No weak market for secondary value add assets. Risk appetite is low and money dealing with is opportunity. Fear of the wider market impacting pricing. IRR for secondary are 17.50-20%, refurb costs going up, prime more like 8-10% IRR.
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3. Insurance flooding
The landlord / my client had insurance provisions in their policy however, I am not qualified to provide advice on this.
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