Commercial property - retail Flashcards
(118 cards)
1
Q
What are the four principal subsectors of the retail property asset class?
A
High street investment property, High street owner-occupied/vacant possession property, Retail warehouse investment property, Shopping centre investment property.
2
Q
Which is the most common subsector of retail property?
A
High street investment property.
3
Q
What is high street investment property in retail?
A
It is property located on busy streets, typically leased to retail businesses, and is the most common form of retail investment.
4
Q
What is high street owner-occupied/vacant possession property?
A
Property on high streets that is either owned by the retailer or vacant, as opposed to being leased to tenants.
5
Q
What is retail warehouse investment property?
A
Properties that house large retail stores, typically located outside city centres, offering large floor spaces and often associated with bulk goods.
6
Q
What is shopping centre investment property?
A
Properties that are purpose-built to house multiple retail units under one roof, usually with common areas and shared facilities for shoppers.
7
Q
What is the specialist retail sector property?
A
Properties such as department stores, factory outlet centres, food superstores, and trade parks, which are considered separately from the four main subsectors.
8
Q
Are department stores considered part of the main retail property subsectors?
A
No, department stores are part of the specialist retail sector and are considered separately.
9
Q
What are the two primary bases of valuation for high street investment property?
A
Market value (or fair value depending on the purpose of the valuation)
Market rent
10
Q
Where can the definitions and implications of market value and market rent be found?
A
In the Red Book Global Standards, specifically in VPS 4, Section 4 and 5.
11
Q
What is the definition of market rent according to the Red Book Global Standards?
A
Market rent assumes a new letting of the property 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, where both parties act knowledgeably, prudently, and without compulsion.
12
Q
What is the estimated rental value (ERV) of a property?
A
ERV is the estimated rent likely to be secured on rent review based on the terms of the current lease. It is not a Red Book Global Standards definition.
13
Q
How is estimated rental value (ERV) different from market rent?
A
ERV is based on the current lease terms and is an estimate of rent likely to be secured on rent review. In contrast, market rent assumes a new lease under specific defined conditions.
14
Q
Where should the definitions of the bases of valuation be included?
A
The definitions should always be included in the valuation report.
15
Q
What is the key to a successful outcome in retail property valuation?
A
Preparation is the key to a successful outcome in the valuation of retail property.
16
Q
What do pre-inspection enquiries save?
A
Pre-inspection enquiries save time and pay dividends in the long run.
17
Q
What should enquiries include regarding the town?
A
Research into the town to establish the location of the subject property in relation to the principal shopping locations in the town.
18
Q
What is the purpose of acquiring a street trader’s plan?
A
To check and update if necessary.
19
Q
Why are planning enquiries important?
A
To alert the valuer to possible future developments in the town that may affect the retail pitch of the property.
20
Q
Where can valuable planning information be found?
A
Local authority websites can reveal valuable information.
21
Q
What should be prepared regarding leases?
A
A lease summary (both the head lease and all occupational leases), together with any other relevant documents.
22
Q
What matters can a lease summary alert the valuer to?
A
The extent of the demise, non-recoverable outgoings, boundary or easement matters, presence of tenants’ improvements, lease date relative to the Landlord and Tenant (Covenants) Act 1995, completion date of tenants’ improvements, and whether the lease is contracted out of the 1954 Act.
23
Q
What implications may arise from the completion date of tenants’ improvements?
A
Implications that may arise in relation to section 34 of the Landlord and Tenant Act 1954 (Part II), as amended by the Law of Property Act 1969.
24
Q
Why is location crucial for retail property valuation?
A
Location is fundamental as it directly influences the property’s competitiveness, accessibility, and the level of demand it can attract from shoppers.
25
What should be investigated at the macro level when undertaking a retail property valuation?
A review of the town's status in the shopping hierarchy (e.g., regional shopping centre, subregional centre, or local market town).
26
How can the town's status within the shopping hierarchy be determined?
By reviewing reports such as CACI catchment information reports and PROMIS reports to understand the town's demographics, catchment area, and shopping provision.
27
Why is it important to establish the town's position in the national or regional hierarchy?
Understanding the town's status helps determine its level of competition and its ability to attract trade from the surrounding area.
28
How is the status of the town less important for properties in district centres or local shopping parades?
For properties in these areas, the location of the shopping centre or local parade in relation to principal competition becomes more significant than the overall town status.
29
Why is competition to the town considered a critical factor in retail property valuation?
Competition, particularly from out-of-town shopping malls or other centres, can significantly reduce the trade attracted to the town.
30
What should the valuer investigate about competing shopping centres?
The distance of competing shopping centres (both in-town and out-of-centre) from the subject property in drive time terms, and their relative strength and attractiveness.
31
Why is it important to investigate major retail developments in the subject town or nearby areas?
Major retail developments, like an unrestricted retail warehouse or shopping park, can significantly affect the town's retail environment and competitiveness.
32
What are primary and secondary catchments, and why should they be investigated?
Primary and secondary catchments refer to the geographical areas from which the town attracts its shoppers. The valuer should assess how much of the potential spending population is attracted to the town.
33
How do affluence levels and car ownership impact retail property valuation?
Higher affluence levels and car ownership increase spending power and ease of access to the town, which can positively influence retail property values.
34
Why should the valuer consider public transport facilities in retail property valuation?
Public transport options, including bus and train services, affect how easily shoppers from surrounding areas can access the town, influencing its retail attractiveness.
35
How can proposed highway improvements affect retail property valuation?
Planned improvements to highways can enhance access to the town, potentially increasing its retail appeal and property value.
36
Why are investigations into district centres or local parades more difficult?
These areas tend to have more localized catchment populations, and their shopping dynamics may be harder to assess through broad demographic data.
37
Why is the type and style of construction less important in retail property valuation?
For standard high street retail units, the key is ensuring the building is in good condition and provides suitable 'conforming' accommodation (size, shape, and functionality for potential occupiers).
38
What is meant by 'conforming' accommodation for retail units?
'Conforming' accommodation refers to properties that are appropriately sized, shaped, and equipped to meet the needs of potential occupiers, such as multiple retailers.
39
How do multiple retailers influence retail property valuation?
Multiple retailers require units with regular shapes and layouts, allowing them to replicate their store format with minimal disruption. Non-conforming units may be rejected, reducing potential tenants.
40
What is the significance of retail frontage in retail property?
An adequate retail frontage ensures prominence on the street, allows for fascia signage, and contributes to the unit's appeal. It is an important characteristic for 'conforming' accommodation.
41
What is the typical depth of a retail unit to be considered 'conforming'?
A retail unit should ideally be at least 3 times deeper than its frontage to provide sufficient sales accommodation.
42
Why might corner units not always be desirable for retailers?
Many retailers may block off return frontage display areas to improve internal layouts, reducing the appeal of corner units, although certain retailers (e.g., jewellers) may prefer them for maximum window display.
43
How important is storage accommodation in retail property valuation?
Storage accommodation should be adequate but not excessive. It typically needs to be a maximum of 50% of the retail floor space, with modern retailers adopting sophisticated stocking systems to reduce storage needs.
44
How does first-floor sales accommodation impact valuation?
First-floor sales accommodation is valuable in major centres but may not warrant a premium in smaller market towns, where the scale of retail operations is smaller.
45
What is the value of storage or non-sales accommodation above the retailer's needs?
These areas have minimal value unless they can be repurposed (e.g., converted to offices or residential accommodation) with separate access, which could generate additional rental income.
46
How does separate access to upper floors affect the value of non-sales accommodation?
If the upper floors have separate access and can be used for alternative purposes (e.g., offices or residential), they can add value. Without separate access, they are unlikely to contribute significantly to rental value.
47
What is zoning in retail property valuation?
Zoning is a method of allocating value to different areas of a retail unit, where the front part of the unit (Zone A) is more valuable than the rear sections (Zone B, C, etc.).
48
How is the 'net internal floor area' measured in retail property?
Measurements are taken based on the net internal floor area but require further adjustments for items excluded, such as pillars and stairs, ensuring they are deducted from the appropriate zone.
49
What does 'halving back' mean in zoning?
In zoning, value decreases progressively as you move further from the front of the unit, often by halving the value for each successive zone (e.g., Zone A is full value, Zone B is half, etc.).
50
How are upper floors generally valued in retail properties?
Upper floors used for trading may be valued at a fraction of the Zone A rate (e.g., A/10 or A/12), while those used for storage are typically valued at a separate storage rate based on local comparables.
51
How is the value for different zones calculated in zoning?
The value of each zone is based on its area, adjusted for pillars, stairs, and unusable space. For example, the value of Zone B is halved compared to Zone A, and the area is adjusted to reflect any physical obstacles.
52
What allowances are made when determining retail property zoning?
Allowances are made for factors such as:
- Masked areas by staircases or columns
- Interruptions like ramps or steps
- Frontage-to-depth ratio issues
- Oversized units for the location
- Return frontages onto other retail thoroughfares
53
What happens when calculating the market rent or estimated rental value (ERV) for a zoned property?
The rental value is determined based on the 'in terms of zone A' area, where the zoning analysis is divided by the rent, and comparable evidence is devalued similarly to arrive at the ERV.
54
How has the retail property market downturn affected zoning in smaller retail units?
Due to the downturn, many smaller retail units in localised parades are now valued on an overall basis rather than by zoning, with this method becoming more common in some areas.
55
What impact do tenant's fitting-out works have on the valuation?
Tenant's fitting-out works, like dry lining of walls, are generally excluded from measurements. The gap between the inside wall and the lining may need to be estimated, and this should be clarified in the valuation report.
56
How should upper floors be measured in retail properties?
All upper floors should be measured on a net internal basis. If the upper floors are closed off or converted, the measurement will depend on whether it was done by the landlord or the tenant.
57
How is measurement handled for larger variety stores and major space units (MSUs)?
Larger stores, such as department stores and MSUs, are generally valued based on gross internal floor area rather than zoning, particularly when the size exceeds 20,000-30,000 sq. ft.
58
What is the typical zoning threshold for larger retail centres?
The zoning threshold varies but is generally between 20,000-30,000 sq. ft. Larger retail centres may have a higher threshold, where properties above this size are typically valued on an overall basis.
59
Why is the state of repair and condition important in retail property valuation?
The state of repair is important as it affects the potential costs for the landlord or tenant. Neglected areas, particularly upper floors, may require allowances for repairs, especially if the tenant has not maintained them.
60
What happens if a retail property is on a full repairing and insuring lease?
Under a full repairing and insuring lease, the tenant is responsible for maintaining and repairing the property, including the upper parts. If not maintained, the landlord may face the cost of repairs, and this should be considered in the valuation.
61
How does the tenant's covenant strength affect the valuation of a property in poor repair?
If the tenant's covenant strength is weak, they may lack the resources to cover dilapidations, even under a full repairing lease. This may require an additional allowance in the valuation to account for potential repair liabilities at lease end.
62
What should be considered if a retail property is in poor repair and the lease is not full repairing?
If the lease does not impose full repair obligations on the tenant, the landlord may bear the repair costs. These costs should be considered in the valuation, with an allowance made for necessary repairs.
63
How does neglect by a tenant in a retail property affect the valuation?
Neglect by a tenant, especially in upper parts not in use, may lead to deterioration. The valuer must assess the extent of this neglect and include allowances for the cost of repair or refurbishment if the tenant is not liable for repairs.
64
What additional factors might require an allowance in valuation for a retail property?
An allowance may be needed for repairs if the property is in poor condition or if the tenant's covenant strength is weak, increasing the risk of unaddressed dilapidations at lease end.
65
Why should compliance with leases and agreements be considered in retail property valuation?
Ensuring compliance with leases and agreements is crucial to determine whether any breaches may incur additional costs. Non-compliance may result in rent reductions, repair costs, or legal liabilities for the landlord or tenant, which should be factored into the valuation.
66
How does the Equality Act 2010 impact retail property valuation?
The Equality Act 2010 requires properties to be accessible, and non-compliance with this legislation could result in additional costs for the tenant or landlord. These costs may need to be considered in the valuation, especially if the property needs modification for accessibility.
67
What should valuers check regarding fire and statutory regulations in retail property valuation?
Valuers must ensure that the property complies with fire and other statutory regulations. Non-compliance could incur costs for upgrades or repairs, which should be accounted for in the valuation.
68
How do planning requirements affect retail property valuation?
Valuers should confirm that the property has no unauthorized constructions, alterations, or changes to its authorized use. Any such issues could lead to costs for obtaining retrospective planning consent or restoring the property to its original state.
69
What types of lease covenants should valuers consider when valuing retail property?
Valuers should consider covenants related to repair and maintenance, subletting, property usage restrictions, and other terms in the lease. Breaches of these covenants may lead to penalties or additional costs, which should be factored into the valuation.
70
What happens if a retail property is non-compliant with legislation or lease agreements?
Non-compliance with legislation or lease agreements could lead to costs for the tenant (e.g., rent reduction or expenses for compliance) or the landlord (e.g., repairs or legal liabilities). These costs must be incorporated into the property’s valuation.
71
Why is it important to enquire about planning and highways matters when valuing retail property?
Planning and highways matters can significantly affect the property’s value, use, and future development potential. The valuer should ensure the property complies with planning designations and permissions.
72
What should a valuer check about planning permissions for a retail property?
Obtain a copy of the property’s planning permission (if recent), including a planning history, and check for compliance with any restrictions. This will help identify any variances from the planning use, such as unauthorized changes in use.
73
What major changes were introduced by the Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020?
The changes introduced a new Class E, combining multiple use classes (A1, A2, A3, B1), allowing properties to change use within the class without needing planning permission. It also introduced new classes F1 and F2 for non-residential institutions and local community uses, respectively.
74
What is the impact of Class E under the 2020 Use Classes Amendment on retail properties?
Class E allows for more flexible use of retail properties, such as changing from retail (A1) to cafes, restaurants, or offices without needing planning permission. This flexibility may lead to more diverse uses but could raise concerns, especially in areas with residential use on upper floors.
75
What are Class F1 and Class F2 in the revised Use Classes Order?
Class F1 includes uses for education, museums, libraries, public halls, and religious instruction. Class F2 is for local community uses like small shops selling essential goods, community halls, and recreational facilities.
76
Why should valuers check for Section 106 Agreements when the planning permission is recent?
A Section 106 Agreement may impose specific obligations on the property, such as affordable housing or infrastructure contributions, which could affect the property’s value or its future use.
77
What should be reviewed regarding rateable values and council tax when valuing a retail property?
Obtain the rateable values for all occupations at the property and check the current rate in the pound to calculate outgoings. For residential occupation, note the council tax band and charge.
78
What is the usual assumption regarding freehold properties in retail property valuation?
It is normal to assume good and marketable freehold title, unless advised otherwise. A report on title is typically not available at the outset of the investigation, so assumptions are made.
79
When valuing a long leasehold property, what document should be obtained and reviewed?
A copy of the lease should be obtained and a lease summary should be prepared to ensure the lease’s terms are properly considered in the valuation.
80
What key aspects should be included in a lease summary for long leasehold properties?
The lease summary should include:
- The outstanding term of the lease
- Rent and rent review provisions (including how ground rent is reviewed)
- Repairing covenants
- Other relevant issues (e.g., subletting clauses, permitted use)
81
Why is it important to have a lease summary for a long leasehold property?
The lease summary ensures that the key terms of the lease are understood and appropriately reflected in the valuation, affecting factors such as rent, repair obligations, and the lease's remaining term.
82
What should a valuer always obtain for each direct tenant at the property?
A copy lease for each direct tenant. If this isn't available, the valuer should rely on a tenancy schedule or summary, making appropriate caveats and recommending that the bank's solicitors obtain the copy leases for a loan security valuation.
83
What key issues should be highlighted in a tenant summary for retail property valuation?
The summary should include:
- Lease term and commencement date
- Current passing rent
- Rent review provisions
- Tenant and landlord covenants
- Break options
- Repairing and insuring terms
- Extent of the demise
- Landlord’s liability
- Tenant’s improvements
- Landlord and Tenant Act 1954 issues
84
What should be considered when there are multiple leases for a property?
Ensure there are no potential non-recoverable outgoings, such as repair, maintenance, or insurance costs. If these costs exist, make an allowance in the valuation, ensuring the service charge allows for a 'full recovery' position on all outgoings.
85
What should be done if there are vacant areas within a property?
Make allowances for outgoings such as rates, service charges, insurance, and reletting costs, as the landlord will need to cover these until the vacant areas are relet.
86
Why is a tenant’s financial status important in investment valuation?
The tenant's financial status is crucial as it directly impacts the security of income. Investigate the tenant’s financial health through reports like Dun and Bradstreet, rent payment records, and business longevity.
87
How can a valuer assess the financial strength of a local tenant?
For a local tenant, the following factors provide insights:
- Rent payment history
- Length of time the tenant has been in business and at the property
- Whether the tenant is expanding or contracting
- Availability of up-to-date accounts
- Visual inspection of the business's success
- Discussions with the tenant, especially for single-unit, owner-managed businesses
88
What is the first step when valuing a retail property?
Establish the 'in terms of zone A' floor area to standardize the valuation.
89
How should a valuer determine the rental tone for the area?
The valuer should use comparable transactions from similarly sized and configured units in the immediate area and use recent transactions as a basis for comparison.
90
What should a valuer do if comparable data is not available for the immediate area?
The valuer may need to use evidence from units in superior or inferior locations and adjust the data accordingly, based on factors like location deterioration or other variations in the market.
91
Which factors should a valuer adjust for when valuing a property based on comparable evidence?
Adjustments may be needed for:
- Return frontage
- Shape and configuration
- Excessive frontage to depth ratio
- Excessive depth/storage/first-floor accommodation compared to the location norm.
92
How is rental evidence typically calculated for standard retail units?
Rental evidence is generally calculated in terms of zone A for standard retail units.
93
How should the valuation approach change for larger units (10,000–20,000 sq. ft)?
The zoning approach still applies, but an allowance should be made for quantum when compared to standard-sized units (e.g., 2,500 sq. ft).
94
What method is appropriate for very large units (e.g., department stores, variety stores over 25,000 sq. ft)?
An overall rate based on gross internal floor area (rather than net area) is typically used for larger units.
95
How should storage areas be valued in the context of retail property?
Storage areas can either be:
- Factored as a percentage of the zone A basis, or
- Valued separately at a 'storage rate'. Excess storage space typically attracts a nominal value.
96
How should office or residential accommodation above a retail unit be valued?
If the accommodation can be sublet, it should be valued at full office or residential rental rates. If not, it may have a nominal value as retail tenants rarely need such additional accommodation.
97
What should be done with incentives (e.g., rent-free periods) in the rental comparables?
Devalue the incentives to calculate the net effective rent. For example, a rent-free period should be adjusted to reflect its impact on the overall rent (e.g., devaluing 9 months of a 12-month rent-free period).
98
How should stepped rents or capital incentive payments be analyzed?
Stepped rents and capital incentive payments should be devalued similarly to rent-free periods, often on a straight-line basis over the lease term.
99
How should incentive payments related to disrepair or fit-out costs be treated?
Incentive payments for disrepair or conversion should be devalued carefully, especially when higher costs are associated with newly constructed or shell units, which may lack previous tenant fit-out items.
100
What is the importance of lease renewals or rent reviews in the valuation process?
Evidence from lease renewals or rent review settlements on nearby units can provide useful data, but care should be taken when the review has a nil uplift or an upward-only clause.
101
How should a valuer consider affordability when determining market rent for a shop unit?
If the calculated rent is unaffordable due to the unit’s size, the valuer should adjust the rent to reflect local affordability—considering factors such as the typical rent tenants in that location can afford.
102
What is the main approach to capital valuation for retail property?
The capital valuation process typically involves capitalising the passing rent and the estimated rental value income streams using comparable investment yields derived from market transactions.
103
What yield is commonly used in the valuation of retail property?
The equivalent yield is the typical approach for retail property valuation, but significant focus is also given to the initial yield, especially for reversionary or over-rented properties.
104
What are the two types of yields used in the capital valuation process?
The two types of yields are:
1. Nominal equivalent yield (most common)
2. True equivalent yield
105
How do you derive the equivalent yield for a property?
The equivalent yield is derived from comparable market evidence, ensuring that the same devaluation basis is applied to the valuation being undertaken.
106
What are some key factors that influence equivalent yields for retail property?
Factors include:
1. The strength of the town and retail location
2. The attractiveness of the unit to alternative occupiers
3. The strength of the tenant covenant
4. The outstanding lease term (including break clauses)
5. The degree of reversion (expected rent increases)
6. The degree of over-rentedness (expected rent reductions)
7. Whether the property has an institutional lease or is multi-let
107
Why is the initial yield important in the current retail market?
The initial yield has become a key value driver due to the slowdown in rental growth in many areas, with the net initial yield reflecting current market conditions.
108
What is the difference between a reversionary lease and an over-rented lease?
Reversionary lease: Rent is expected to increase significantly at the next review, resulting in a low initial yield.
Over-rented lease: Rent is above market level and expected to fall at the next review, leading to a high initial yield.
109
How does the type of lease affect the valuation process?
An institutional lease (with no non-recoverable outgoings) typically results in a more stable investment compared to a multi-let property, which may have higher voids and service charge shortfalls.
110
What are the key elements that need to be calculated or ascertained for a valuation?
Key elements to calculate or ascertain include:
- The passing rent
- The estimated rental value (ERV)
- The market rent
- Any outgoings (repairs, ground rent, rates, service charge irrecoverability)
- Allowance for lease expiries (voids, letting costs, etc.)
111
What is the hardcore/layer method of valuation?
The hardcore/layer method involves:
- Taking the lower of the market rent, ERV, or net current rent and valuing it in perpetuity by reference to the equivalent yield.
- Any uplifts (e.g., over-rented or reversionary) are valued at a similar equivalent yield, with reversions deferred until the review date.
- The capital values of these income streams are then totalled.
112
How do you value a long leasehold property?
For long leasehold properties:
- The profit rent (income minus head rent) is valued for the length of the ground lease.
- Any reversion is valued similarly, considering the length of the lease and using a term and reversion methodology.
- If the lease is shorter, a sinking fund might be used to recover initial outlay at lease expiry.
113
What adjustment is typically made in the UK investment market regarding purchaser's costs?
In the UK investment market, a purchaser's cost adjustment is typically made, which includes:
- Stamp duty land tax: 4% (if capital value > £500,000; lower if less)
- Fees: 1.5%
- VAT on fees: 20% (resulting in an additional 0.3%)
The total purchaser's cost deduction is 5.8%, and it's applied by dividing the gross valuation figure by 1.058.
114
When valuing a property with a long leasehold, what is the method for leases shorter than 100 years?
For leases shorter than 100 years:
- Consider adopting a 'years purchase' method for a specific number of years, rather than valuing in perpetuity.
- If the lease term is even shorter, a sinking fund may be used to recover initial costs at lease expiry.
115
What should be included in the valuation report to comply with Red Book Global Standards?
The valuation report should include:
Caveats: Clearly state investigations undertaken and not undertaken, and assumptions made (e.g., uninspected areas, tenure assumptions).
Client instruction compliance: Ensure that the report aligns with the specific client instructions.
Realistic assumptions: All assumptions should be practical and defensible.
116
What type of assumptions might be included in a valuation report?
Assumptions could include:
Vacant possession: Assume that the property will be vacant, even if it is not.
Development assumptions: Assume all vacant space has been let on specified terms.
Current position valuation: Always provide a market value based on the actual, current situation alongside any assumption-based valuations.
117
Why should a clause restricting third-party use be included in the valuation report?
A clause restricting third-party use ensures that:
The report is used only by the instructed parties.
Third parties cannot rely on the report without proper authorization.
This clause should be discussed when confirming instructions with the client.
118
What specific market conditions should be considered in the 2023 valuation report?
The 2023 market addendum highlights:
The ongoing downturn in the market for retail property.
High street retail property is specifically impacted, and valuers should be aware of the market's general condition and challenges.
