Commercial property - industrial and distribution

Question 1

What are the three main classifications of industrial property under the Town and Country Planning (Use Classes) Order 1987 (as amended)?

Answer 1

Class B2: General industrial
Class B8: Storage or distribution
Class E(g): Light industrial, offices, R&D

These classifications define how different types of industrial properties can be utilized within planning regulations.

Question 2

What does Class B2 refer to?

Answer 2

Use for industrial processes not within Class E(g), excluding incineration, chemical treatment, landfill, or hazardous waste.

Typically large, heavy industrial factory space.

Question 3

What activities are excluded from Class B2?

Answer 3

Incineration purposes
Chemical treatment
Landfill
Hazardous waste

These exclusions help to delineate the types of industrial activities permissible under Class B2.

Question 4

What is Class B8 used for?

Answer 4

Storage or distribution, including open air storage, with no manufacturing processes undertaken.

This class focuses solely on storage and logistical operations.

Question 5

What does Class E(g) cover?

Answer 5

Uses that can be carried out in residential areas without harming amenity:
* E(g)(i): Offices for administrative/operational functions
* E(g)(ii): R&D of products/processes
* E(g)(iii): Industrial processes

This classification allows for a mix of light industrial and office uses in residential settings.

Question 6

What type of properties are typically associated with Class E(g)?

Answer 6

Nursery/starter units with flexible use, including workshops, substantial office space, stores, and trade counter units.

These properties are designed to accommodate a variety of business functions in a flexible manner.

Question 7

When was the latest amendment to the Use Classes Order mentioned?

Answer 7

1 September 2020

This date marks the most recent changes made to the Use Classes Order, affecting planning and development regulations.

Question 8

What should valuers consider in addition to these classifications?

Answer 8

Specialist buildings such as cold stores, food preparation buildings, and abattoirs.

Valuers need to recognize unique property types that may not fit neatly into the standard classifications.

Question 9

What are some examples of specialist industrial premises?

Answer 9

Cold stores, abattoirs, breweries, power stations, mill buildings, foundries, printworks, and food preparation plants.

Question 10

Why might alternative industrial use of specialist properties require substantial work?

Answer 10

Because specialist properties often need structural changes to be adapted for a different industrial use.

Question 11

What should valuers consider when assessing specialist industrial premises?

Answer 11

The level of demand for the specialist use in the relevant location.

Question 12

What might a property command if there is identifiable demand for its specialist use?

Answer 12

A premium over standard industrial units, reflecting the benefit of existing specialist works.

Question 13

What should be considered if there is no demand for the specialist use of a property?

Answer 13

Whether the specialist works should be removed to create a standard industrial space.

Question 14

Should specialist plant and machinery be included in the valuation?

Answer 14

No, they should not be included.

Question 15

What structural feature related to specialist machinery should valuers be aware of?

Answer 15

Pits in the floor or other structural changes made to accommodate the machinery.

Question 16

What is not an accepted method of valuation for secured lending purposes?

Answer 16

Depreciated Replacement Cost (DRC).

Question 17

How can specialist features affect the marketability of an industrial property?

Answer 17

They can either add value (if in demand) or require removal (if not in demand), affecting the overall marketability.

Question 18

What type of valuation approach should be avoided when valuing specialist properties for lending purposes?

Answer 18

Any approach based on DRC (Depreciated Replacement Cost).

Question 19

What is a net initial yield and when is it typically used?

Answer 19

A net initial yield reflects the rent paid relative to the rental value and is commonly reported in property press and comparables databases.

Question 20

How does lease length affect yield?

Answer 20

Generally, the longer the lease, the stronger (i.e., lower) the yield.

Question 21

What impact does over-renting have on yield?

Answer 21

If the passing rent exceeds the rental value (over-rented), the yield may move outward (e.g., from 6% to 6.5%).

Question 22

What is the yield impact if a property is under-rented (reversionary)?

Answer 22

The yield may move inward (i.e., be stronger/lower), reflecting potential future rental growth.

Question 23

How does tenant covenant strength influence yield?

Answer 23

A stronger tenant covenant generally results in a stronger (lower) yield.

Question 24

How should guaranteed rental increases in a lease be considered in valuation?

Answer 24

They should be reflected in the yield, while also considering lease length, rental value, and covenant strength.

Question 25

Why is it important not to double count when valuing?

Answer 25

Because factors like specification should be reflected in rent, not yield, and covenant in yield, not rent.

Question 26

What is the role of freehold capital rates in valuation?

Answer 26

They serve as a useful cross-check when using direct comparison methods.

Question 27

Why should valuers consider long-term use beyond the current lease?

Answer 27

Because valuing income in perpetuity may be risky if the property's long-term usefulness is uncertain.

Question 28

What two perspectives should be considered when assessing future demand for a property?

Answer 28

The occupier’s and the investor’s perspectives.

Question 29

What location factors should be considered when assessing rental value comparables for industrial properties?

Answer 29

Access to major road networks and population centres, estate positioning, and prominence for advertising purposes.

Question 30

Why can interpolation for location be difficult?

Answer 30

Because remote locations often have few comparables nearby, making direct comparisons challenging.

Question 31

How does the age of a property affect its rental value?

Answer 31

Older buildings are generally expected to be materially discounted compared to modern facilities.

Question 32

Why must size differentials be carefully considered when comparing rental values?

Answer 32

Because rental value per square foot can vary significantly between small and large units, even between 1,500 and 5,000 sq. ft.

Question 33

What is a common issue with multi-storey buildings in city centres when using property databases?

Answer 33

The multi-storey nature may not be obvious from database information, affecting comparability.

Question 34

What aspects of specification can affect a property’s rental value?

Answer 34

Eaves height, site cover, office content, loading facilities, and whether it's a specialist building.

Question 35

How does planning permission influence rental value?

Answer 35

It determines permitted uses and can be impacted by the potential threat of new competing developments.

Question 36

What is the significance of a property’s EPC rating in rental value assessment?

Answer 36

Poor or missing EPCs may indicate the need for capital expenditure to make the property lettable or saleable.

Question 37

Can prominence within an estate affect rental value?

Answer 37

Yes, it can attract a premium, especially for properties that benefit from advertising visibility.

Question 38

Why must valuers be cautious when comparing buildings of different sizes?

Answer 38

Because size differences can significantly influence the rental rate per square foot, making direct comparisons misleading.

Question 39

What are some examples of specialist industrial premises?

Answer 39

Cold stores, abattoirs, breweries, power stations, mill buildings, foundries, printworks, and food preparation plants.

Question 40

Why might alternative industrial use of specialist properties require substantial work?

Answer 40

Because specialist properties often need structural changes to be adapted for a different industrial use.

Question 41

What should valuers consider when assessing specialist industrial premises?

Answer 41

The level of demand for the specialist use in the relevant location.

Question 42

What might a property command if there is identifiable demand for its specialist use?

Answer 42

A premium over standard industrial units, reflecting the benefit of existing specialist works.

Question 43

What should be considered if there is no demand for the specialist use of a property?

Answer 43

Whether the specialist works should be removed to create a standard industrial space.

Question 44

Should specialist plant and machinery be included in the valuation?

Answer 44

No, they should not be included.

Question 45

What structural feature related to specialist machinery should valuers be aware of?

Answer 45

Pits in the floor or other structural changes made to accommodate the machinery.

Question 46

What is not an accepted method of valuation for secured lending purposes?

Answer 46

Depreciated Replacement Cost (DRC).

Question 47

How can specialist features affect the marketability of an industrial property?

Answer 47

They can either add value (if in demand) or require removal (if not in demand), affecting the overall marketability.

Question 48

What type of valuation approach should be avoided when valuing specialist properties for lending purposes?

Answer 48

Any approach based on DRC (Depreciated Replacement Cost).

Question 49

What yield should be adopted when valuing an income stream?

Answer 49

An appropriate equivalent yield (the weighted average yield), while also considering the initial and running yields.

Question 50

What does the 'running yield' reflect?

Answer 50

Yield at future events like lettings, rent reviews, lease expiries, and break options.

Question 51

What factors should inform the valuer's judgement of the cash flow?

Answer 51

Past, present, and future occupancy; estate condition; voids and associated costs; and quality of income.

Question 52

What should be done when voids (current or anticipated) exist?

Answer 52

Allow for irrecoverable costs such as repairs, rates, service charges, and letting fees.

Question 53

Why is the average unexpired lease term important in valuation?

Answer 53

It indicates income security and future re-letting risk—considering break options if relevant.

Question 54

What is an 'income pinch-point'?

Answer 54

A time when several units may become vacant simultaneously, affecting cash flow stability.

Question 55

What estate management factors influence valuation?

Answer 55

Quality of management, landlord-tenant relationships, and maintenance levels (especially with FRI leases).

Question 56

Why might a permanent void allowance be necessary?

Answer 56

Because some estates may always have a vacancy component—e.g., 10% perpetual vacancy.

Question 57

Why is initial yield not always suitable for valuing multi-let properties?

Answer 57

It doesn’t reflect voids or differences between passing rent and ERV, which can mislead investors.

Question 58

What tool is recommended for valuing multi-tenanted industrial property?

Answer 58

A valuation calculation programme to handle complexities like lease events and multiple tenancies.

Question 59

What are the two alternative approaches to industrial development sites?

Answer 59

Residual appraisal and direct comparison.

Question 60

Which approach to industrial development sites is recommended?

Answer 60

The direct comparison approach is recommended.

Question 61

What is the direct comparison approach based on?

Answer 61

It is effectively based on a rate £/acre from land sales.

Question 62

What can affect the value derived from a residual appraisal?

Answer 62

The cost, rental, and yield inputs.

Question 63

What should be considered when evaluating evidence of land sales?

Answer 63

The area of land, access to the motorway network, planning consent, servicing, site clearance costs, developable area, unusual ground conditions, contamination, and supply of land.

Question 64

What is the significance of the area of land in land sales?

Answer 64

Quantum is likely to be an issue.

Question 65

What types of planning consent should be considered?

Answer 65

Detailed, outline, or 'zoned' in the Local Plan.

Question 66

What is important regarding land servicing?

Answer 66

Access to mains services should be considered.

Question 67

What should be assessed regarding site clearance?

Answer 67

Any site clearance costs.

Question 68

What factors should be evaluated regarding the developable area?

Answer 68

Whether the site is traversed by pipes, drains, watercourses, overhead cables, etc.

Question 69

What should be checked for unusual ground conditions?

Answer 69

Any unusual ground conditions should be assessed.

Question 70

What is a concern particularly for brownfield sites?

Answer 70

The likelihood of contamination.

Question 71

What should be considered about land supply in the area?

Answer 71

The supply of land in the area should be evaluated.

Question 72

How does land sold on a 'design and build' basis compare to speculative development?

Answer 72

It may exceed the price of comparable land where development is speculative.