Case Study (submission) Flashcards
1
Q
What was the date of valuation?
A
22 January 2020
2
Q
What was the date of inspection?
A
8 January 2020
3
Q
What was the basis of valuation in the instruction letter?
A
• Market Rent • Market Value • Market Value on the Special Assumption of Full Vacant Possession
4
Q
What section of the “Red Book” is relevant for valuations for secured lending purposes?
A
VPGA 2
5
Q
What additional information must a report for secured lending purposes include?
A
• Disclosure of any conflicts of interest identified / agreement put in place to avoid a conflict of interest • Valuation methodology adopted • Where a transaction has recently occurred on the Subject Property or been provisionally agreed, the extent to which that has been accepted as Market Value • Comment on the environmental considerations • Comment on the suitability for mortgage purposes • Any circumstances the valuer is aware of that could impact the price
6
Q
What sections of the “Red Book” did you adhere to?
A
• PS 1: when does a valuation have to be “Red Book” compliant? • PS 2: must act in accordance with the RICS Professional and Ethical Standards, must act independently by identifying and managing conflicts of interest, must comply with the minimum terms of engagement • VPS 1: minimum terms of engagement • VPS 2: must undertake inspections to verify information being relied upon • VPS 3: minimum requirements to be stated within a report ALSO VPS 4/5! • VPGA 2: valuations for secured lending
7
Q
What does VPGA 2 state with regards to conflicts of interest?
A
• Any previous, current or anticipated involvement with the prospective borrower of the property to be valued must be disclosed to the lender • ‘Previous involvement’ usually defined as within the last two years but can be longer
8
Q
Explain the process of a conflict of interest check?
A
Check property name and name of the borrower in accordance with VPGA 2
9
Q
If there had been a conflict, what would you have done?
A
- Conflict avoidance 2. Written advice to both parties 3. Conflict management
10
Q
What was contained within the Terms of Engagement?
A
According to VPS 1, the minimum matters must be included in Terms of Engagement: • Identification and status of the valuer • Identification of the client • Identification of any other intended users • The asset to be valued • Currency • Purpose of the valuation • Basis of value • Valuation date • Extent of investigation (i.e. whether inspection will be conducted) • Nature and source of information to be relied upon • Assumptions and special assumptions to be made • Format of the report • Restrictions for use, distribution and publication • Confirmation of Red Book / IVS compliance • Fee basis • Complaints handling procedure to be made available • Statement that the valuation may be subject to compliance by the RICS • Limitation on liability agreed
11
Q
What matters may you have discovered during your due diligence that would have adversely impacted on the value of the Property?
A
• Environmental – if it was located in an area at high risk of flooding (Environment Agency website) • Contamination – if it was situated on a former landfill site (would have commissioned a Groundsure report if necessary) • Planning – if there was planning permission granted which would adversely impact the property (Gateshead Council website) • Lease terms – prolonged lease with no rent review provision would have an adverse impact on the property (Land Registry) • Title Deed - onerous restrictions, encumbrances or outgoings contained within the Title Deed. (did not receive a Report on Title which indicated that there were none, but check the Title which appeared to indicate there were no problems)
12
Q
What does the “Red Book” state about the inspection of Properties?
A
According to VPS 2, valuers should take the necessary steps to verify the information being relied upon for a valuation to ensure the information is professionally adequate for its purpose
13
Q
What was the age and construction of property?
A
• Constructed in 1999 (who informed me/how did I know?) • Steel portal frame construction with brick and blockwork walls below profile metal sheeting clad upper walls. • Mono-pitched profile metal clad roof incorporating approximately 10% translucent rooflights. • Stretcher bond masonry externally - cavity construction. • Likely a pad slab foundation system (incorporating a raft) to support the concentrated weight of the steel portal columns. • DGMF windows?
14
Q
What are the common defects associated with this type of property? What would you look for to identify these?
A
• Roof leaks around roof lights: dripping water (on to floor), stained areas around rooflight, moisture. Could get sun damaged, that would indicate potential leaks. • Damaged cladding panels: dents in panels (plastesol sheeting) • Cut edge corrosion: internal profile construction exposed (metal/insulation), rusting edges as no longer protected by outer plastic coating. • Water damage from poor guttering or burst pipes: become blocked and overflow = damp and discolored patches on cladding and walls. • Settlement/cracking in brick work panels: small hairline cracks (diagonal), if more than 1/4 inch wide could indicate a more serious structural issue. • 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 • Blocked valley gutters: not applicable for this building as there are no valley gutters.
15
Q
How would you describe Team Valley?
A
• An originally heavy industrial estate developed by the Government in 1930s, under the management of UK Land Estates has evolved to become a modern business park (warehouse/industrial/office/retail) and has been the north-east’s premier industrial (and now business) estate for many years. • Comfortably the regions largest industrial estate, covering 700+ acres and spanning 2 miles north-south. • Strategically positioned in the region: bounded to the west by A1(M) with junctions at both north/south ends, whilst also forming part of the Tyneside conurbation (western edge of Gateshead) and having relatively easy access to both Gateshead and Newcastle city centre (2/3 miles west/south) • Nearest mainline rail station is in Newcastle, 34 buses per hour to Newcastle/Gateshead/wider area. • Mainly private sector employers, over 700 companies employing 20,000 people, ranging from local to national businesses. • Full range of unit sizes from smaller starter units up to large factories, with trade, warehousing and manufacturing occupiers, with skilled and manual and service trade to high end manufacturing and professional services, world leading research and development. • Significant out of town retail provision at Retail World, large Sainsbury’s and Maingate (Premier Inn, retail, gym) smaller number of office users and leisure.
16
Q
How would you describe the situation of the Property?
A
• Situated on the western side of Earlsway, one of the main routes running north-south through estate, towards northern end, just to south of junction with First Avenue, which connects to A1 half mile west. • Surrounding properties mainly comprise modern industrial units, with many trade occupiers. (prime part of estate?) • Neighbouring occupiers include Crossling, Aalco, TCM, ATS Euromaster, Park Electrical Distributors and Templeman Retailing and Vending. (which are national tenants?)
17
Q
How could you tell that the unit was in one of the best parts of Team Valley?
A
• The best locations in terms of accessibility are at the northern and southern ends (closest to A1), and on the 3 main circulatory roads north to south (Earlsway, Queensway, Kingsway), subject immediately south of First Avenue (north connecting road to A1) and directly off Earlsway. • Additionally, most of the units nearby were modern, built in last 5-30 years, and Earlsway Trade Park c. 100m to the north was recently constructed by UK Land Estates. • Large proportion of national and regional businesses (look up examples if have time).
18
Q
What is development activity like on Team Valley?
A
• UK Land Estates continues to refurbish existing premises and build new units for businesses on Team Valley. • Like most of region, little development in recent years. • UK Land developed Dukesway Central (2017) - 10 acre site, 200,000 sq ft industrial contructed. • UK Land marketing Kingsway North (key northern site), first phase will comprise 3 industrial units of 128,000 sq ft., distinctive units with Grade A offices. • Enterprise House currently being redeveloped to provide newly refurbished high quality office space on the first floor, and new retail units on the ground floor (completed Spring 2019?)
19
Q
Describe the specification of the accommodation?
A
Main warehouse space: • Minimum eaves height of 5.5m • Single 4.5m electric roller shutter door • Painted block walls to 2.2m • Suspended strip lighting and Powermatic gas fired warm air space heaters. Offices: • Single storey integral offices to front of building, includes WCs, staff kitchen and 4 cellular offices. • Painted concrete floors, plastered and painted walls and ceilings. • Flourescent strip lighting with ceiling mounted air conditioning units. • Double glazed aluminium framed windows. Mezzanine/Shared Space: • Steel frame timber floor constructed over entire floor area. First floor stud framed small office space. • Metal framed stairs to first floor mezzanine. • Access doors constructed into separating wall to adjoining unit at ground and mezzanine levels.
20
Q
What source of errors are associated with using a laser measuring device?
A
• 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
21
Q
What did you include / exclude from your GIA measurement of the car showroom accommodation? How did you measure and account for the mezzanine? How did you measure the office space, and how did you consider the proportion?
A
Gross Internal Area (GIA) is the area of a building measured to the internal face of the perimeter walls at each floor level Exclude: • Perimeter wall thickness and external projections I reported the Gross Internal Area including the mezzanine (10,402 sq ft) as GIA includes mezzanines with permanent access, but for the purposes of the valuation excluded the mezzanine floor area (5,201 sq ft) as I considered it was of limited value to the market at large, and the lease stipulated it’s removal and rectification at lease end. I measured the office space on a GIA basis as they are ancillary to the main industrial use. I reported the ratio to be 18%.
22
Q
What is Market Rent?
A
‘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
23
Q
What is Market Value?
A
‘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
24
Q
What is Vacant Possession Value?
A
Market Value of the property under the Special Assumption that the property is vacant
25
What were the conditions of the rent review clause?
• Review date: 20 December 2024 • Upwards-Only Open Market Rent Review – rent reviewed on what the commercial property would be let for on the open market i.e. if rent assessed as being lower than currently achieved, rent will stay the same • Assumed term of 10 years - could limit rental growth. • Disregard tenant improvements if landlord consent has been granted for the works • Time is not of the essence i.e. failure to exercise right within the time limit means that the right is not lost • That the property is a standalone unit which is the condition of a shell unit (without any mezzanine) (i.e. excluding the fact that is shared with next door, and the tenants works). • Independent Expert determination.
26
What were the conditions of the break clause?
• Tenant must serve written notice within 6 months of the break date (20 May 2026). • Must have paid Annual Rent due payments.
27
What is a full repairing and insuring (FRI) lease? What is the Estates Management Charge? What was the charge for Service Road maintenance?
• Tenant has responsibility for all costs of repairs and insurance. • Landlord will also maintain insurance and recover cost of premium from the tenant • ESTATES SERVICES RENT/MANAGEMENT CHARGE: CAN'T FIND IN LEASE, DISCUSS WITH SOMEONE WHAT THIS MEANS, AND WHETHER IT MEANS EFRI? • 25% of the cost incurred by the Landlord in maintaining, repairing and renewing the Service Road. (the service road means the roadway and footpath shown coloured brown on the plan (Craster Court road).
28
Was the lease inside or outside of the 1954 Act?
• The lease was contracted inside of the act • This would give the tenant security of tenure at the end of term
29
What would the landlord have to do to terminate the tenancy given that the lease is inside the 1954 Act?
Would have to issue tenant with a Section 25 notice no more than 12 months and no less than 6 months before the date for the termination of the tenancy
30
What grounds would the landlord have to refuse a new lease from the tenant given that the lease is inside the 1954 Act?
Section 30 states that there are SEVEN grounds for opposition to grant a new tenancy: 1. Breach of repairing covenant 2. Persistent delay in paying rent 3. Other substantial breach 4. Provide suitable alternative accommodation 5. Uneconomic subdivision i.e. landlord could get more from renting out the property as a whole (compensation payable) 6. Demolition or reconstruction (compensation payable) 7. Owner occupation (compensation payable) Would have to compensate tenant 2 x rateable value as they have been in occupation for longer than 14 years
31
What use class does the property fall under?
• B8 use class (informed by local planning authority website). Lease stated permitted as B1-B8, assumed correct for purposes of valuation given strong relationship between UK Land and Gateshead Council (?). • Therefore planning said Warehouse (granted 1 December 1998) whereas lease said business, industrial and warehouse.
32
What recent transaction had taken place/what was the current instruction, and what were the terms of the superior lease and head lease?
• Borrower (St Cuthberts Newcastle Estates Limited) had recently made a cash purchase of property, requested valuation from client (Lloyds Bank). • Held for 125 years FRI from 1 Feb 1999 (less 3 days) at peppercorn, approx. 104 years unexpired. • Fully qualified assignment/sub-letting of whole permitted. • B1/B2/B8 use class restriction. • Payment of estate maintenance charge + 25% contribution for maintenance/renewal of service road. • Head lease above on similar terms - 1 Feb 1999 - freeholder (One North East), long leaseholder (City and Northern Projects Limited).
33
When did the occupational lease commence, between who and who, at what rent/unexpired term and with what incentives (net rent)?
• Occupied by Euro Car Parts Limited on a 10 year 5 month FRI lease commencing 20 December 2019 at 31,194 p.a. (6 psf), 10.33 years unexpired at valuation date. • Open market RR on 20 Dec 2024 (4.92 years), • T.o. break 20 May 2026 (6.33 years)
34
How did the lease deal with the tenants alterations/shared occupation?
• Tenant occupied adjoining Unit 3. • At lease end - unless required otherwise by the Landlord by service of a notice no later than 6 months before lease end, the Tenant shall: • Remove its fixed machinery, plant and equipment. • Remove any alterations and additions it has made to Property (whether before or after lease date) as shown on annexed Plan A, to return Property to layout on annexed Plan B, including: • reinstatement of wall with Unit 3 • removal of internal mezzanine • removal of extension to staff amenity unit on ground floor • reinstatement of roller shutter • separation of Service Media (shared) and alarm system
35
How did you arrive at a Market Rent of £6 per sq ft?
• I used my professional judgement to interpret the comparable data, taking account the Subject Property location, specification, lease terms and size to conclude that it sat broadly in the middle of the best available evidence. • This was corroborated by the open market letting of the Property in December 2019.
36
How did you weight the comparable rental evidence at the time of valuation?
1. Open market lettings 2. Lease renewals 3. Rent reviews 4. Third party determinations 5. Sale and leasebacks 6. Inter-company transactions
37
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
38
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
39
What are the other comparable industrial estates in the region and why?
Washington, Birtley and Newburn are the competing locations as they are also along the same A1 corridor. Highly regarded but generally at a level slightly below Team Valley, primarily because of the long-established track record of Team Valley/size of the estate/proximity/transport links to Newcastle?
40
The rental evidence is quite dated - why did you not include evidence from competing locations?
Although I discovered some more recent evidence on competing estates (Washington, Birtley and Newburn), I considered that as Team Valley was the strongest location regionally, this was a more important factor of comparison than transaction date.
41
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
42
Why did analyse the rental comparables on both a headline and net effective basis? !!
As I was able to analyse the most comparable evidence on a net effective basis I decided to give more weighting to evidence analysed on this basis, and therefore adjust for differences in order to ensure it was analysed on a like-for-like basis.
43
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)
44
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%
45
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
46
Why did you analyse on a net initial yield basis?
• Rack rented, fully income producing, reversion in 6.33 years. • Incorporating explicit void period unnecessary given relatively long term certain. • Active investment market for investments of this type. • Typically analysed by investors on this basis, and sales evidence the same.
47
What type of yield did you apply to value?
• Net Initial Yield...more?
48
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
49
The 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
50
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
51
How have you accounted for covenant strength in your comparable evidence?
• Covenant strength is reflected in the pricing of a property investment • Many of the investment comparables were let to national level covenants similar to Euro Car Parts Limited, and primarily had 'Very Low Risk' Experian Credit Risk Scores. Worthington Armstrong (UK) Ltd was the exception, being a 'Below Average Risk' prominent local business operating solely from one site, which I factored into my yield analysis of the investment.
52
How did you arrive at 12 months as the marketing void period?
• Conversations with local agents informed me of the typical void period of an industrial unit • Accounts for 9 month marketing period and 3 month rent free.
53
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: 0.491 x £28,000 for 9 months = £10,311 (Property would benefit from the small business rates multiplier as the rateable value is below £51,000)
54
Why did you not account for business rates exemption on empty properties? NOT WHAT I DID, CONSIDER, MAYBE ASK SOMEONE...
• 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
55
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
56
What impact does the nature of the rent review have on the value of a property?
Subject had 10 year assumed term - this could reduce rental uplift potential. Other comps were all open market upwards only, no other terms given.
57
Examining your comparable investment evidence, wow would you account for the outstanding rent review on Unit 16, Octavian Way? INTERESTING, CONSIDER ANSWER.
The rent review was upwards only and so it is assumed that upon settlement, the rent would increase. It would be assumed that this was priced into the purchasers calculations, meaning that the unit is likely to have traded at a lower yield than it would have done if it did not have an immediate reversion i.e. would have bought off a deemed yield rather than a contracted yield
58
What is the difference between an Equivalent Yield and a True Equivalent Yield?
Equivalent: Assumes rent is paid annually in arrears True Equivalent: Assumes rent is paid quarterly in advance
59
What is the difference between Initial Yield (Deemed) and Initial Yield (Contracted)?
• Initial Yield (Deemed): where there is an outstanding rent review, this is yield based off what you anticipate the rent review to be settled at • Initial Yield (Contracted): this is the yield based off the current passing rent
60
How did you account for the fact that the tenant owned the adjacent property?
• The tenant would be assumed to be a special purchaser, as the asset would have special value arising from its ownership which would not be available to other buyers • Market value would ignore any price distortions caused by special value • Additionally, the lease stipulated separation of the units upon expiry, so not an issue....
61
How would your approach have changed if you'd carried out the valuation in line with the latest RICS Valuation - Global Standards?
Under VPS 3, I would have to explicitly state the impact of sustainability factors on the value within the valuation methodology. Would comment on: • The property having EPC rating of D, meaning it meets the typical sustainability criteria expected • The very low likelihood of flooding Disability access? No problem I think...
62
What did you assume would happen at the tenant break in 6.33 years?
Given the length of time before the next lease event, I opted to capitalise the income into perpetuity. As the break option was approximately 6 years away, it was appropriate to be silent on any void costs that might occur.
63
Why would a bank want to know the Vacant Possession Value?
Under the scenario where the tenant defaults, they want to know what the property would be worth relative to the loan. It may also be helpful for their internal cashflow loan underwriting analysis at lease end.
64
Why were you competent to value an industrial unit?
• Acting under supervision from colleagues who were able to verify your approach • Spoken to agents who were more specialised in this area and were able to update me on the local market
65
What factors influence the level of rent for an industrial unit?
• Specification: age, eaves height, office content, parking spaces. • Location: access arrangements to road network, both to the estate and within the estate itself. Visibility for the main estate roads. • Lease terms: length, incentives, tenants repairing obligation, tenant covenant strength.
66
How could you verify the age of the property?
• Land Registry • Historical OS maps • Local Council records • Informed by the tenant
67
What was the drainage provision at the property?
• Roof would be pitched by a minimum of ??? degrees in accordance with building regulations • Gutters round the perimeter of the roof would lead to the downpipes, before passing into an underground drain
68
If works on the property were required how would you include this in your valuation?
• I would obtain contractors estimates or speak with a building surveyor to estimate the cost of undertaking the works • The cost of undertaking the works would be deducted from Market Value
69
Who were the agents you spoke to when collecting comparable evidence?
Local Industrial Agents: Knight Frank, Cushman & Wakefield, Naylors, Gavin Black, Avison Young.
70
What were the opening hours for the subject property?
Mon - Fri: 8am - 6pm Sat: 8am - 4pm Sun: 10am - 4pm
71
What was the purpose of the valuation?
Loan security
72
Provide an example of some of the assumptions which you made when reaching your opinion of value?
• Tenant is capable of meeting their obligations, and that there are no arrears of rent or undisclosed breaches of covenant • The building is structurally sound and there are no structural, latent or other material defects • The building has been constructed in accordance with all statutory and bye-law requirements and there are no breaches of planning control • The property is connected, or capable of being connected without undue expense, to the public services of gas, electricity, water, telephones and sewerage • That the property is not subject to any unusual or especially onerous restrictions, encumbrances or outgoings contained in the Freehold (Leasehold?) Title • There is no latent contamination that could adversely affect the property, (flood risk, perhaps not worth putting in) full buildings insurance could be obtained at reasonable cost.
73
Were you asked to provide an indication of the reinstatement costs?
• Yes, but no liability was given with the estimates as they were purely a guide for insurance purposes (400,000,/ ? per sq ft?). • Property had not been inspected by a quantity surveyor or such other person so were unable to provide any liability
74
Did you receive a Report on Title? If not, what did you assume and recommend and why?
Didn't receive Report on Title, but had sight of leasehold documents etc. Assumed not onerous and stated the terms we understood from the documents, but advised that a Report on Title would be better, and would be pleased to review one if one was provided. The Report on Title would provide a summary of the legal title providing an overview of the history of ownership, encumbrances on the property, and any other relevant elements of legal history Will show any onerous encumbrances/restrictive covenants that burdens the land it restricts. This could have a material impact on value.
75
What different types of onerous encumbrances/restrictive covenants could there have been on the title? MAYBE ASK MALCOLM - WHAT ARE TYPICAL FOR A UNIT LIKE THIS?
• Restriction on the use of the land e.g. may place a restriction on the property that it cannot be used by a business which directly competes with the seller • Restricting the number/type/height of buildings that can be erected on the land affected • Easement giving another party the right to cross or otherwise use the land for a specified purpose • Encroach where the property owner has violated the property rights of the neighbour by extending the structure onto the neighbours land or property
76
How does valuation by targeting an equivalent yield work (VP CALC)?
• Equivalent yield is a weighted average of the Net Initial Yield and Reversionary Yield • Will target an EY for the entire income stream to determine value
77
What tenure did your client hold?
As the term of the lease was over 100 years it was thought not to have a material affect on value. I reviewed the lease terms of the comparable properties, which were all similar in nature in terms of ground rent/service charge.
78
How much was the ground rent?
Peppercorn
79
What were some of the key lease terms?
Rent, insurance and estate services rent (+ road) payable on standard quarterly days (25 March, 24 June, 29 September, 25 December) Repair - to keep premises in good and substantial repair Alterations - no structural alterations to exterior or interior. Yield up - yield up at the end of the lease in accordance with the covenants (removal of fixed equipment, make good shared facilities etc.) as per annexed plan. Use - B1/B2/B8 or as a warehouse within B8. Alienation - assign only if placing same obligations on assignee as under original lease (AGA), total restriction on sub-letting (check against what I actually stated) Restriction - no disposition without a certificate signed from landlord
80
What level of liability did you offer with the valuation?
Indemnity limit of 5m, with an excess of 5,000 in respect of valuation work - no liability cap? Perhaps deemed unnecessary given the relatively low risk nature of the instruction (already purchased, recently, prime, 'straightforward')
81
How did you approach the mezzanine floor scenario/why?
.... check lease etc.
82
How did you measure the eaves height?
...
83
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
84
Examining your comparable rental evidence, what were the pertinent details of Unit 8 Princes Park, Princesway and how does it compare to the subject property? Why does it have the same rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: March 2019 • Size sq ft: 6,081 • Headline/net effective rent psf: both 36,500 (6 psf) • Tenant (Experian score): I-Choose Ltd (Very Low) • Transaction type: Open Market, FRI • Term length/incentives (to break): 5 years/3 mo. RF (3 years to break, 6 mo. notice) • Specification (age, eaves, office content): Late 1990s, 6.3m eaves, 24 parking spaces, 31% office content. • Location comparison: Similar. • Located nearby. • Slightly poorer lease terms to subject, but slightly better specification, and similar size so no quantum allowance made, resulting in similar rent achievable.
85
Examining your comparable rental evidence, what were the pertinent details of Unit E Aquarius, Kingsway North and how does it compare to the subject property? Why does it have a lower rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Jan 2019 • Size sq ft: 8,142 • Headline/net effective rent psf: both 45,000 (5.53 psf) • Tenant (Experian score): M-Seals UK Ltd (Low) • Transaction type: Open Market, FRI • Term length/incentives (to break): 5 years/2 mo. RF (3 years to break, 6 mo. notice) • Specification (age, eaves, office content): Late 1990s, 6m eaves, 13 parking spaces, 15% office content. Originally single unit, split, slightly inferior narrow layout. • Location comparison: Similar. • Located nearby. • Let on slightly better terms than the Property, but larger and inferior specification, allowance for quantum, therefore would achieve a lower rent.
86
Examining your comparable rental evidence, what were the pertinent details of Unit 5 Earlsway Trade Park, Earlsway and how does it compare to the subject property? Why does it have a higher rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Dec 2018 • Size sq ft: 1,905 • Headline/net effective rent psf: headline N/A, net 12,400 (6.50 psf) • Tenant (Experian score): HQBS Ltd (Low) • Transaction type: Open Market, FRI • Term length/incentives (NO break): 5 years, stepped from 10k to 14.5k • Specification (age, eaves, office content): Recently completed workshop unit, 5.5m eaves, 3 parking spaces, 10% office content, high site coverage (others generally similar). • Location comparison: Similar, particularly nearby. • Located nearby to property. • Significantly smaller unit so an allowance for quantum had to be made. • Superior specification, similar lease terms, therefore would achieve a higher rent
87
Examining your comparable rental evidence, what were the pertinent details of Unit 4 Derwent Court, Earlsway and how does it compare to the subject property? Why does it have a lower rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Dec 2018 • Size sq ft: 5,810 • Headline/net effective rent psf: headline 35,000 (5.79 psf), net N/A (.psf) • Tenant (Experian score): Undisclosed • Transaction type: Open Market, FRI • Term length/incentives: Undisclosed terms • Specification (age, eaves, office content): modern industrial unit, 6m eaves, 16 parking spaces, 10% office content. • Location comparison: Similar, nearby. • Located nearby. • Similar size, no quantum allowance, and similar specification. • However, given less weight as unaware of lease terms/tenant, assumed this would explain the lower rent achieved if discovered.
88
Examining your comparable rental evidence, what were the pertinent details of Unit 5 Bamburgh Court, First Avenue and how does it compare to the subject property? Why does it have a higher rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Sept 2018 • Size sq ft: 5,083 • Headline/net effective rent psf: headline 34,750 (6.84 psf), net N/A (.psf) • Tenant (Experian score): Undisclosed • Transaction type: Assignment, FRI • Term length/incentives: 3.25 years, undisclosed terms • Specification (age, eaves, office content): 1987 built, 5.25m eaves, 15 parking spaces, high 55% office content. • Location comparison: Similar, nearby. • Located nearby. • Similar size, no quantum allowance, but slightly poorer specification. • Additionally assignment of existing lease, therefore less weighting applied as terms likely not negotiable etc. (perhaps think about more if have time). • Higher as assignment, and much more attractive remaining term, but included as evidence that tenants are willing at take on space at this level if the terms are good.
89
Examining your comparable rental evidence, what were the pertinent details of Unit 1, Eastern Avenue Trade Park and how does it compare to the subject property? Why does it have a higher rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Jan 2018 • Size sq ft: 3,210 • Headline/net effective rent psf: headline/net both 8.57 psf (27,500 p.a.) • Tenant (Experian score): E.D.C. Scotland Ltd (Very Low) • Transaction type: Open Market, FRI • Term length/incentives: 10 years, 3 mo. RF, 2 yearly RPI linked rent reviews • Specification (age, eaves, office content): Mid-2000s built, 6m eaves, 6 parking spaces, low office content, high site coverage. • Location comparison: Similar. • Similar location. • Quantum allowance (smaller). • Superior specification. • Somewhat anomalous high rent though, given the unattractive 2 yearly RPI linked reviews and 10 year unbroken term. MAYBE CONSIDER MORE. • Overall would however expect it to achieve a higher rent than the subject (size/spec).
90
Examining your comparable rental evidence, what were the pertinent details of Unit 1 Derwent Court, Earlsway and how does it compare to the subject property? Why does it have a lower rent? • Date: • Size sq ft: • Headline/net effective rent psf: • Tenant (Experian score): • Transaction type: • Term length/incentives (to break): • Specification (age, eaves, office content): • Location comparison:
• Date: Sept 2017 • Size sq ft: 15,148 • Headline/net effective rent psf: headline 94,700 p.a. (6.25 psf), net 89,965 p.a. (5.93 psf) • Tenant (Experian score): Hammond Expanders (Low) • Transaction type: Lease Renewal, FRI • Term length/incentives (to break): 10 years, 12 mo. half-rent, year 5 tenant break option, 6 months notice • Specification (age, eaves, office content): Modern detached industrial unit, 6m eaves, 16 parking spaces, 25% office content, high site coverage. • Location comparison: Similar. • Similar location nearby. • Similar specification overall - more modern, but 25% office content. • As a significantly larger unit an allowance for quantum would have to be made, therefore lower rent would be achieved overall. • Additionally, as a lease renewal, less weighting given than to open market lettings, also a historic transaction.
91
Why did you pick Unit 8 Princes Park, Unit E Aquarius Trade Park and Unit 5 Earlsway Trade Park as the most relevant rental transactions?
• Transaction date: most recent evidence. • Transaction information: provided with relatively full transaction information from first hand sources. • Hierarchy of evidence: assignment at U5 Bamburgh and LR at U1 Derwent less relevant (as well as being more dated evidence)
92
Potential question - advised opinion of MR was based on 5 year FRI term incorp. 3 month RF, 9 month marketing period... why?
...
93
Examining your comparable investment evidence, how would you account for the significant ground rent for Unit 1/2 Brunel Street, Scotswood?
• Capitalised net rent, and was taken into account in the yield chosen.
94
Examining your comparable investment evidence, what were the pertinent details of Unit 5 Teesway North Industrial Estate, Stockton-on-Tees and how does it compare to the subject property? Why does it have a higher yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Nov 2019 • Type: Auction • Tenure (years rem.): Freehold • Size (sq ft): 9,946 • Price (sq ft): 510,000 (51.28 psf) • Tenant (Experian score): Edmunson Electrical Ltd (Very Low) • Lease terms • length/type: 25 year FRI • unexp. term/certain: 4.53 years (both) • review type/date: Upward only, May 2019 • rent (psf): 38,300, 3.85 psf • NIY (income analysis): 7.17% (under-rented) • Specification (age, eaves, office content, site coverage): 1970s trade counter unit, 5m eaves, 10 parking spaces, 15% office content, lower site coverage. • Location comparison: Well established but inferior. Similarities: • Let to a similar quality national covenant with a similar term certain, albeit slightly shorter. • Slightly larger, but similar lot size. Differences: • Located in a well established but poorer estate overall compared to subject - further from A1, albeit on A19, and smaller, less establish industrial area than around A1 corridor in Newcastle. • Inferior older specification. • Under rented, therefore yield would be slightly higher following reversion. MORE TO ADD? ASK MA. • Given above differences, initial yield would be higher than subject.
95
Examining your comparable investment evidence, what were the pertinent details of Unit 1&2 Brunel Street, Scotswood Road and how does it compare to the subject property? Why does it have a higher yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Feb 2019 • Type: Open Market • Tenure (years rem.): Long leasehold (120.98 years) • Size (sq ft): 12,170 • Price (sq ft): 677,500 (55.67 psf) • Tenant (Experian score): Speedy Hire Plc (Very Low) • Lease terms • length/type: 2 coterm. 15 year FRI • unexp. term/certain: 1.68 years (both) • review type/date: none remaining - but GR 5 yearly RRs at 20% market rent. • rent (psf): 53,807 (66,321-12,424 ground rent), 4.42 psf • NIY (income analysis): 7.55% (rack rented) • Specification (age, eaves, office content, site coverage): two 1960s industrial units refurb'd 2005, 5.3m eaves, 9 parking spaces, 15% office content, similar site coverage. • Location comparison: Busy trade location but marginally inferior. Similarities: • Slightly larger but quite similar lot size. • Similar quality covenant. Differences: • Much shorter unexpired term. • Older inferior unit, also two units, albeit held by one business. • Busy trade location, but poorer road access off Scotswood Road, no direct access to A1. • Somewhat onerous ground rent terms, albeit linked to Market Rental prospects. • Given above differences, initial yield would be significantly higher than subject.
96
Examining your comparable investment evidence, what were the pertinent details of Unit 16 Octavian Way, Team Valley and how does it compare to the subject property? Why does it have a higher yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: July 2019 (note - this is wrong date order in report, should have been above Brunel St (Feb 2019) • Type: Open Market • Tenure (years rem.): Long leasehold (95.24 years) • Size (sq ft): 9,877 • Price (sq ft): 730,000 (73.91 psf) • Tenant (Experian score): Clear Channel UK Ltd (Very Low) • Lease terms • length/type: 10 year, FRI • unexp. term/certain: 5.26 years (both) • review type/date: upwards only, Sept 2018 • rent (psf): 52,900 p.a., 5.35 psf • NIY (income analysis): 6.88% (under rented) • Specification (age, eaves, office content, site coverage): 1988 detached industrial unit, 5.3m eaves, 16 parking spaces, 40% office content, similar site coverage. • Location comparison: Similar. Similarities: • Slightly larger but quite similar lot size. • Similar quality covenant. • Similar quality location. Differences: • Only marginally shorter unexpired term. • Inferior specification unit, slightly older, lower eaves and much higher office content. • Under rented, therefore yield would be slightly higher following reversion. MORE TO ADD? ASK MA. • Given above differences, initial yield would be a bit higher than subject.
97
Examining your comparable investment evidence, what were the pertinent details of Unit 5, Newburn Riverside Park and how does it compare to the subject property? Why does it have a lower yield? WAS NHS A 'SPECIAL PURCHASER'? PERHAPS WORTH CONSIDERING - I.E. BUILT 2009, WHO OCCUPIED PRIOR? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Sept 2018 • Type: Open Market • Tenure (years rem.): Long leasehold (140.30 years) • Size (sq ft): 58,665 • Price (sq ft): 4,675,000 (79.69 psf) • Tenant (Experian score): NHS Business Services Authority (Very Low) • Lease terms • length/type: 10 year, FRI • unexp. term/certain: 10 years/5 years • review type/date: upwards only in year 5/alongside break • rent (psf): 299,250 p.a., 5.10 psf • NIY (income analysis): 6.32% (rack rented) • Specification (age, eaves, office content, site coverage): 2009 detached industrial unit, 10m eaves, good parking provision, 27% office content, similar site coverage. • Location comparison: Similar. Similarities: • Similar quality covenant, albeit superior public funded income. • Similar quality location, slightly less established but only marginally, in similar A1 corridor area as Team Valley. Differences: • Much larger lot size, but also much better modern specification with ample parking and high eaves. • Rack rented, but with potentially 10 years income from NHS, which would be factored into investors yield. • Given above differences, initial yield would be significantly lower than subject - very prime investment for Newcastle.
98
Examining your comparable investment evidence, what were the pertinent details of 401 Princesway, Team Valley and how does it compare to the subject property? Why does it have a higher yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: March 2018 • Type: Open Market • Tenure (years rem.): Long leasehold (98.42 years) • Size (sq ft): 46,550 • Price (sq ft): 3,900,000 (83.78 psf) • Tenant (Experian score): Worthington Armstrong (UK) Ltd (Below Average) • Lease terms • length/type: 10 year, FRI • unexp. term/certain: 8.49 years (both) • review type/date: upwards only in year 5, in c. 3 years • rent (psf): 279,400 p.a., 6 psf • NIY (income analysis): 6.72% (rack rented) • Specification (age, eaves, office content, site coverage): 1990s detached industrial unit ext. 2017, 5.4m eaves, 50 parking spaces, 15% office content, similar site coverage. • Location comparison: Similar. Similarities: • Overall similar specification, perhaps slightly better given 2017 extension. • Similar quality location. Differences: • Much larger lot size. • Inferior quality covenant, but longer term certain. • Given above differences, initial yield would be marginally higher than subject - given larger lot size, and the fact that a large income is from a lower quality covenant, albeit a significantly longer term certain is in place.
99
Examining your comparable investment evidence, what were the pertinent details of Millennium Court, Team Valley and how does it compare to the subject property? Why does it have a lower yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Jan 2018 • Type: Open Market • Tenure (years rem.): Long leasehold (108.45 years) • Size (sq ft): 11,019 • Price (sq ft): 800,000 (72.60 psf) • Tenant (Experian score): Cromwell Group Ltd (Very Low Risk) • Lease terms • length/type: 10 year, FRI • unexp. term/certain: 1.18 years (both) • review type/date: upwards only in year 5 alongside tenant break, estimated to be c. 6 psf if implemented • rent (psf): 54,000 p.a., 4.90 psf • NIY (income analysis): 6.40% (under rented) • Specification (age, eaves, office content, site coverage): 1990s detached industrial unit, 5.4m eaves, 20 parking spaces, 35% office content, low site coverage. • Location comparison: Similar. Similarities: • Similar quality covenant. • Similar quality location. Differences: • Starting to get into larger lot size category. • Inferior specification - high office content primarily • Much shorter term certain, I was not made aware of the transactions details but given the low 6.4% and potential reversionary yield of 8.3% if rent review implemented it appears the investor had some confidence that existing tenant may renew lease (DID I NOT RECORD THAT HAPPENED ANYWAY?) • Given above differences, initial yield would be lower that subject given that overall quite similar, other than much shorter term certain - but appears somewhat misleading to me????
100
Examining your comparable investment evidence, what were the pertinent details of Unit 15, Octavian Way and how does it compare to the subject property? Why does it have a lower yield? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Tenant (Experian score): • Lease terms • length/type: • unexp. term/certain: • review type/date: • rent (psf): • NIY (income analysis): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: March 2017 • Type: Open Market • Tenure (years rem.): Long leasehold (96.62 years) • Size (sq ft): 7,290 • Price (sq ft): 575,000 (78.88 psf) • Tenant (Experian score): Pet Supermarket Ltd (Very Low Risk) • Lease terms • length/type: 10 year, FRI • unexp. term/certain: 9.08 years/ 4.07 years • review type/date: upwards only in year 5 alongside tenant break • rent (psf): 45,500 p.a., 6.24 psf • NIY (income analysis): 7.54% (rack rented) • Specification (age, eaves, office content, site coverage): 1988s detached industrial unit, 6m eaves, 16 parking spaces, 45% office content, similar site coverage. • Location comparison: Similar. Similarities: • Similar lot size. • Similar quality covenant. • Similar quality location. Differences: • Only marginally shorter unexpired term certain. • Inferior specification unit, slightly older, lower eaves and much higher office content. • Given above differences, initial yield would be significantly higher than subject. Additionally, a historic transaction.
101
Why did you pick Unit 16 Octavian Way, Unit 5, Newburn Riverside Park and 401 Princesway as the most relevant investment transactions?
• Transaction dates - generally quite recent, although I also had regard to most recent evidence (Unit 5 Teesway North Industrial Estate / Unit 1 & 2 Brunel Street). • I decided slightly older transaction information from Team Valley and nearby A1 corridor locations were of more relevance than more recent transactions in less comparable locations, given that is perhaps the biggest factor overall in between the investment comparables found.
102
Examining your comparable sales evidence, what were the pertinent details of Meridan House, Kingsway North and how does it compare to the subject property? Why does it have a lower rate per sq ft? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Aug 2019 • Type: Open Market • Tenure (years rem.): Long leasehold (130.40 years) • Size (sq ft): 34,780 • Price (sq ft): 2,310,000 (66.42 psf) • Specification (age, eaves, office content, site coverage): late 1990s detached industrial unit, 6m eaves, 60 parking spaces, 40% office content, superior fenced yard. • Location comparison: Similar. Similarities: • Similar location, nearby to subject. Differences: • Much larger lot size. • Similar specification overall, but difficult to compare - industrial space similar spec, but much higher office content, and also rare large fenced yard (rare for Team Valley, opportunity for certain occupiers...any more to add???)
103
Examining your comparable sales evidence, what were the pertinent details of Unit N290 Kingsway South, Team Valley and how does it compare to the subject property? Why does it have a lower rate per sq ft? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Sept 2018 • Type: Open Market • Tenure (years rem.): Long leasehold (90.80 years) • Size (sq ft): 19,012 • Price (sq ft): 780,000 (41.02 psf) • Specification (age, eaves, office content, site coverage): 1980s detached industrial unit, 3.65m eaves, 14 parking spaces, 25% office content, marginally higher site coverage. • Location comparison: Similar. Similarities: • Similar quality location. Differences: • Older, poorer specification (low eaves). • Larger lot size.
104
Examining your comparable sales evidence, what were the pertinent details of Unit 9 Octavian Way, Team Valley and how does it compare to the subject property? Why does it have a lower rate per sq ft? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Sept 2018 • Type: Open Market • Tenure (years rem.): Long leasehold (95.13 years) • Size (sq ft): 3,509 • Price (sq ft): 225,000 (64.12 psf) • Specification (age, eaves, office content, site coverage): 1988 semi-detached industrial unit, 5m eaves, 8 parking spaces, 15% office content, similar site coverage. • Location comparison: Similar. Similarities: • Similar quality location. Differences: • Older, marginally worse specification (5m eaves, 88 built). • Similar lot size.
105
Examining your comparable sales evidence, what were the pertinent details of Unit 8 Didcot Way, Boldon Business Park and how does it compare to the subject property? Why does it have a lower rate per sq ft? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: May 2018 • Type: Open Market • Tenure (years rem.): Freehold • Size (sq ft): 12,211 • Price (sq ft): 750,000 (61.42 psf) • Specification (age, eaves, office content, site coverage): 1990s detached industrial unit, 5.5m eaves, 27 parking spaces, 35% office content, higher site coverage. • Location comparison: Inferior. Differences: • Older, marginally worse specification (high office content). • Marginally higher lot size. • Established but inferior location.
106
Examining your comparable sales evidence, what were the pertinent details of Unit 2 Kings Court Team Valley and how does it compare to the subject property? Why does it have a lower rate per sq ft? • Sale • Date: • Type: • Tenure (years rem.): • Size (sq ft): • Price (sq ft): • Specification (age, eaves, office content, site coverage): • Location comparison:
• Sale • Date: Dec 2017 • Type: Open Market • Tenure (years rem.): Long leasehold (103.37 years) • Size (sq ft): 19,347 • Price (sq ft): 915,000 (47.29 psf) • Specification (age, eaves, office content, site coverage): early 1990s detached industrial unit, 6.1m eaves, good parking provision, 15% office content, higher site coverage. • Location comparison: Similar. Similarities: • Similar quality location. • Similar specification. Differences: • Larger lot size. • Historic transaction.
107
Why did you pick Meridan House and Unit 9 Octavian Way as the most relevant VP sales transactions?
• Two of the most recent transactions. • Similar location, and in broad terms, most similar specification of the comparable evidence.
108
Why would an asset of this type typically appeal to both investors and owner occupiers?
• Lot size - relatively small, popular with trade occupiers, and smaller industrial businesses with long term plans in a particular location. • Strong investment market in Team Valley, and industrial market in general for modern units of this type. • Any more? Perhaps ask MA or Andy.
109
What flood zone was the property?
Flood zone 1
110
What EPC rating was the property?
D rating.
111
What adopted road checks did you do?
Earlsway is an adopted highway, but access road into Craster Court is not adopted, and borrower is required to contribute to its maintenance, albeit the cost is currently passed on to the tenant.
112
How did you apply the hierarchy of evidence? CONSIDER THIS ANSWER AT END
I focussed on recently completed transactions for which full data was not available but which sufficient evidence could be obtained. I did not use any asking prices or historic evidence
113
How did you ensure accuracy? (measurement) CONSIDER THIS ANSWER AT END
I checked my measurements with the existing floorplans
114
How could you check if market conditions had declined?
With marketing agents and marketing reports for the area.
115
What are demand prospects on Team Valley/headline rents?
• Headline rents are approx. 6 psf. • Higher rates have reportedly been agreed on some pre-lets of new build units but we are led to understand that bespoke elements of tenant fit out have been rentalised in those cases. • Higher rents are also often achieved on smaller units, particularly in prominent locations which appeal to trade occupiers. • Re. subject property: tenant demand is strong, and there is a limited supply in Team Valley which has been pushing up rents over last few years.
116
Who would the building appeal to?
Well established regional businesses or larger national companies.
117
What is investor demand like?
Demand strong across along sectors, and whilst there was more limited activity in 2019 there was a noticeable hardening of yields over previous 12 months, particularly in industrial sector which has become more sought after as retail has fallen out of favour somewhat.
118
What are the additional lender reporting requirements of Lloyds, and what did you report? COULD BE MORE TO ADD, THESE ARE HEADLINES
• Market commentary (demand and supply, market conditions, development activity, rental and investment activity): stated in 'What are demand prospects on Team Valley/headline rents?' and Q on development activity. • Tenant demand and rental prospects for the property sector and type: see 'What is investor demand like?' • Letting period and incentives if the property fell vacant: see VP valuation. • Who the building would appeal to (tenants): see Q of same name. • Investor demand: see Q of same name • Who the building would appeal to (investors) and current demand prospects: property of a lot size attractive to private investors and property companies. There is good level of demand present from such buyers. • Future value prospects/commentary on value and income sustainability over loan: market value likely to fall slightly over next 5.67 years as term certain decreases. It would then rise again if the break option is not exercised. However, given the quality of the location and being an attractive size and specification for potential occupiers, we do not expect the value to fall significantly. • Vacant possession valuation - most likely purchaser: owner occupier. • Comment on suitability for loan security including loan terms: proposed loan 10 years, 70% LTV. Generally speaking property is quite low risk in context of overall commercial market. Advise however you consider VP value, likely to fall over next 5.67 years. Overall property provides good security. • Market Rent and Market Value (Valuer must outline the time period of what they consider the proper marketing period to be and provide appropriate rationale within the valuation report): MR: advised my opinion based on 5 year FRI term incorporating a 3 month rent free period and 9 month marketing period. MV: 6 months.
119
What was your Market Value valuation? Purchasers costs %, agents/legal/stamp duty %, total number? Net valuation, and rounded down to? Stamp duty amounts and % (X% and X%)
120
What was your Market Value VP valuation? Capital costs, and consisting of what 2 figures? Purchasers costs %, agents/legal/stamp duty %, total number? Net valuation, and rounded down to? Stamp duty amounts and % (X% and X%)
121
What was your equivalent yield and reversionary yield applied in VP valuation?
EY: 7.75% RY: 8.70%
122
What was the net initial yield range of your investment evidence, and primarily attributable to what?
6.32% to 7.55% Primarily attributable to differences in income security, unexpired term certain, location and specification.
123
What assumptions did you adopt for your VP valuation?
Hypothetical 5 year unbroken term. 12 month marketing void reflecting a 9 month void period and 3 months rent free. Holding costs comprising vacant business rates and a 15% letting fee alongside purchaser's costs of 3.76%.
124
What did your MV VP valuation come to (psf)?
345,000 (66.33 psf)
125
What strengths did you list for the investment?
• Located nearby to primary estate circulatory road on the premier regional industrial estate. • Let on rack rented full repairing and insuring terms to a ‘Low Risk’ national level covenant with 6.33 years unexpired term to the tenant break option, and 10.33 years to lease expiry. • Strong occupational and investor demand on Team Valley at present. • ‘Virtual freehold’ tenure. • Lack of construction of new industrial space regionally has resulted in limited supply and stable to increasing values. The growing demand for distribution space may place further stress on existing supply. • Relatively modern good specification industrial space. • There is currently a strong owner occupier market for this lot size should the property fall vacant.
126
What weaknesses did you list for the investment?
• The building is over 20 years old and will require refurbishment in the medium term. • The value of the investment may fall in the short term, until the tenant option to break the lease has elapsed. • The requirement for refurbishment in concert with a void period may stress the borrower’s ability to service the loan.
127
What threats did you list for the investment?
• There are a significant number of international occupiers on both Team Valley and nearby estates, most notably Nissan Motor Manufacturing UK, who could vacate in a post-Brexit economic climate with unfavourable trade agreements. • Increasing commodity prices and limited investment value growth could present challenges for future refurbishment.
128
What opportunities did you list for the investment?
• Potential to increase term certain through active asset management by way of removal of the break option in conjunction with the rent review alongside granting additional tenant incentives.
129
Why do lenders require this information (SWOT, specific market analysis etc.)?
o Lenders often do not have a detailed understanding of a particular property market or investment. The valuation report will normally be used to support work of internal underwriting teams, who conduct a very subjective process of risk analysis using detailed mathematical models. As measurement of this type of uncertainty is not conducive to a standardised approach, lenders do not usually seek third party advice. o Valuers have a useful role to play in identification of investment uncertainties and provision of relevant data that lenders can use to measure and assess those uncertainties in their own way. A SWOT analysis is popular, as it is a relatively simple way to set out uncertainties in the context of both positive and negative investment factors. o Emphasis is placed on uncertainties that will have biggest impact upon forecast cash flow and the borrower’s ability to service interest and capital payments on the loan.
130
How did you act ethically?
In keeping with the RICS Global Valuation Standards I ensured that my valuation opinion was objective and independent, and discussed the brief with my client throughout the instruction, ensuring that my report fulfilled the clients needs. I also ensured data was kept secure to ensure there would be no breaches of confidentiality, and openly and transparently explained the purpose of my inspection to the sitting tenant.
131
How did you act with integrity?
Respected client confidentiality: I ensured data remained secure throughout this task by storing confidential information in password protected folders and locked cabinets. I also made sure to not divulge any confidential information when making enquiries with other agents. In keeping with the RICS Global Valuation Standards I also ensured that my valuation opinion was objective and independent, ensuring that my report fulfilled the needs of my client.
132
How did you provide a high standard of service?
I regularly discussed report progress with my Client and considered their feedback. I also provided a SWOT analysis and identified a potential risk mitigation strategy to help my Client understand the loan risk profile. The verbal and written communication ensured my client could make an informed decision, and that I was able to fulfill the scope of the brief within the agreed timescale.
133
How did you act in a way that promotes trust in the profession?
When arriving at the property to inspect, I was clear and transparent with the tenant regarding the reasons for my visit.
134
How did you treat others with respect?
Every individual I engaged with during this instruction was treated with respect, and my conduct was free from discriminatory behaviour.
135
Was there an uncertainty commentary in the valuation? Why/what did it say?
As per VPS 3 o) Commentary on any material uncertainty in relation to the valuation where it is essential to ensure clarity on the part of the valuation user In the judgement of myself and my senior colleague, the valuation uncertainty was not above average, and therefore it was perhaps unnecessary to include additional commentary on valuation uncertainty. However, we decided to include commentary primarily because of the current Brexit uncertainty, which could lead to market shocks and may in some capacity impact the North East industrial sector, particularly as: • There are a significant number of international occupiers on both Team Valley and nearby estates, most notably Nissan Motor Manufacturing UK, who could vacate in a post-Brexit economic climate with unfavourable trade agreements. as stated in the SWOT analysis. I therefore advised that although current market conditions were strong and comparable evidence was adequate and consistent, the valuation was no more than average uncertainty. However, due to potential market shocks caused by Brexit in future, I advised the Bank to periodically review the valuation.
136
How would you provide an indicative estimate of value following a lease regear in a future report?
I would have made a hypothetical assumption that the break option was not present in the current lease. As a purely indicative figure, I would have not assumed any other changes to the lease, and would therefore have valued on a similar NIY traditional capitalisation basis, but assuming the property had an unbroken term of 10 years 5 months. I did not have time to do this under the current scope and timescale of the instruction, as it would have required gathering additional longer lease investment evidence. However, I would discuss the possibility at the outset of a quotation from a client to check whether such a service may be of use to them.
137
What would you do differently next time?
I would seek to further develop my local network of contacts, as a key challenge of this instruction was the lack of both comparable evidence and transaction details, which made the valuation more challenging/time consuming, and meant I could not conduct a rental valuation on a purely net effective basis/a VP capital valuation on a purely comparable method basis. This would also serve to further improve my local market knowledge. In future reports where there is the possibility of a lease re-gear I will provide an indicative estimate of Market Value once implemented. For this instruction this may have helped my Client understand the potential value implications of removing the break option. Improve my time management skills - if I had been better prepared for the inspection I may have been able to conduct drive-by inspections and make my measuring of the property easier.
138
How did you take responsibility?
Fortunately there were no concerns with the conduct of me or my firm throughout this instruction, as I believe I acted with the skill, care and diligence required of an RICS member. However, I recognise that if any complaints were raised, or issues discovered, I would always take responsibility for my actions, and seek to rectify any of the concerns raised.
139
You stated there was an annexed floorplan in the lease, yet you also stated that you did not have a floorplan to use upon inspection, and only obtained later. What is going on here?
There was no confirmation that the annexed floorplan was to scale. I later discussed this with the client, who was able to provide me with a floorplan that was confirmed to be to scale.
140
What were the property asset attributes (broadly)?
• Relatively long, secure and rack rented unexpired income, • Good location within a prime industrial estate, • Modern specification and small lot size.
141
Why are properties with leaseholds 80+ years considered virtual freeholds, and why did you not account for long leasehold tenure in your investment evidence?
Once the lease of a property dips below 80 years, not only does its perceived value drop, the lease becomes more costly to extend. And banks and building societies may refuse to provide a mortgage. That's because mortgage lenders like there to be at least 50 years left after a mortgage has been paid off (so at least 75 years if the mortgage period is for 25 years). Firstly, all of the evidence had long leaseholds of at least 90 years. Where possible I obtained the long leasehold title for each comparable to review the terms and confirm if they were onerous, particularly the rent review terms, and the review pattern (open market, or worse, doubling every X years).
142
Talk me through your safe inspection. When inspecting the property, what did you have to be conscious of given that the unit was operating as a car parts distributor?
1. In accordance with surveying safely 2nd ed, 2018 2. I carried out a desktop pre-assessment - links with Q - car parts distributor. PERHAPS FLESH OUT - HOW DID YOU DO THIS RISK ASSESSMENT? 3. Print off documents related to instruction - no floorplans unfortunately, WHAT ELSE? 4. Planned my journey 5. Told someone I was going & put it in my outlook calendar, left with my colleague 6. Consider the location - dealt with in another Q (I think) 7. Consider the external property - dealt with in another Q (I think) 8. Consider the internal of the property - dealt with in another Q (I think) • Ensure that the branch manager and staff were aware of my presence, to ensure that I would not accidentally get injured whilst car parts were getting moved around etc. • Large amounts of car parts in unit - had to continually check that poorly stored parts would not fall on me etc. • Decided to wear steel toe capped boots, hi vis jacket and hard hat to make me as visible as possible and protect me from any heavy unsecured parts stored. • Subsidence due to the weight of the parts. Would be shown by vertical cracking in the walls.
143
How would you carry out the valuation differently if you were instructed today?
* Conduct in accordance with Red Book Global 2020
* Potentially include a material uncertainty clause in accordance with VPGA 10. Use wording recommended by the RICS. Dependent on whether the industrial market was disrupted at the time of valuation (more so at pandemic beginning, less so now).
* Industrial/warehousing businesses and prime industrial investment market has been largely undisrupted by COVID-19. I would have to consider how an investor would perceive the tenant covenant, and would likely leave the yield applied at a similar level, or potentially decreased slightly as investor demand for perceived safer industrial investments has increased at the expense of other sectors.
* Market rent will have either remained the same or potentially increased marginally but unlikely to be the transaction evidence to demonstrate this.
* Market activity may have slightly slowed dependent on whether the valuation was undertaken at the beginning of the pandemic or in more recent months, and if so the void periods on the VPV scenario would increase to reflect the longer time it would take to re-let.
144
KT Qs - should I have used RB 2017? Think so
Why did you use the equivalent yield? What did this mean? What is the reversionary yield in that case, as in this example that doesn't make much sense.
Answer at some point.
