Loan Security SOE

Question 1

What was the SWOT example of this property - strengths

Answer 1

Strengths:
* Good quality location within the prestigious
Qmile development befitting from local office
occupiers, residents and the university.
* Attractive space suitable for retail or Class 3
uses.
* Well-let to a national coffee shop operator.

Question 1

Explain the level 3 retail example

Answer 1

• Client – bank
• Purpose = secured lending (should bank lend against it)
• Interest valued = freehold
• Inspected & measured property on GIA basis – check measurements as it was let in shell
• Determined investment method to be appropriate as property was held as an investment and was income producing.
• Tenant nero holdings – national coffee
• Class 3 (food and drink/retail)
• Sourced rental comps from local area to determine MR
• unexpired term certain of circa 3.4 years to lease expiry initial rent under the lease is stated as £40,000 per annum, due to step up to £45,000 per annum on 17 November 2018 and £47,000 per annum on 17 September 2019.
• restructured on the basis of a turnover rent, with the tenant paying 12% of gross turnover as rent = 40k
• Judged property was part reversionary, so applied T&R approach primarily (IY on the rest).
• Based on the comparable evidence detailed above, in our opinion the rent is reversionary.
• Our Market Rent figure is £48,400 per annum, based on £25 per sq ft
• As the lease has more than 3 years unexpired duration, we have not incorporated an expiry void.
• We have valued the income stream at an equivalent yield of 7.5% and made
• an allowance for purchaser’s acquisition costs in accordance with market practice

Question 2

What was the SWOT example of this property - Weaknesses

Answer 2

Weaknesses:
* Relatively short period of c.3.4 years until
lease expiry.
* Despite its high quality, footfall within the
Qmile development is lower than expected
with many of the apartments comprising
second homes.

Question 3

What was the SWOT example of this property - opportunities

Answer 3

Opportunities:
* Currently reversionary with opportunity for
rental growth at lease expiry.

Question 4

What was the SWOT example of this property - Threats

Answer 4

Threats:
* Turnover based rent results in variable
rental level.
* Future letting risk should the tenant not
renew.
* UK-wide economic conditions including high
inflation/cost of living crisis and increasing
interest rates.

Question 5

PII limit

Answer 5

50 million

Question 6

What was basis of value

Answer 6

Your report and valuation are to include the following bases of value:
· Market Value;
· Market Value on the assumption of vacant possession;
· Market Rent;
· Indicative Reinstatement Value of the properties (including professional fees and site clearance
costs) for insurance purposes.

Question 7

Office example level 3 WAULT

Answer 7

The Property is currently held on eight leases to seven separate tenants and offers a Weighted Average Unexpired Lease Term (WAULT) of 5.6 years to expiries, or 4.6 years to breaks (excluding 79a Princes Street).
There is only one vacant retail unit at the present time (4 Hanover Street).

Question 8

What was the marjet rent

Answer 8

£870,000 per annum
(Eight Hundred and Seventy Thousand Pounds) per annum

Question 9

what was the market value

Answer 9

£11,600,000

Question 10

what was the asset management opportunities

Answer 10

Immediate asset management opportunities include monitoring of the letting agent’s marketing of the currently vacant retail unit at 4 Hanover Street. Although retail requirements are thin, analysis of the quoting rent in order to secure occupation could prove crucial.
Otherwise, an approach to Ernest Jones to remove their break option in September 2022 would be (if successful) beneficial to improving investment value over this asset. However, we are aware that Virgin Media are not in occupation and therefore this Tenant is highly likely to exercise their break option. Otherwise, the only other Tenant with a lease event in the next 3 years is Office who are due for expiry in October 2024. An approach to re-gear this lease in the short-to-medium term may prove attractive to them, albeit the rent may need to be rebased as part of any negotiations.

Question 11

any lease issues affecting value>

Answer 11

The biggest issues with respect to investment value of this asset is with regard to void periods on break/expiry and reversionary (market) rents achievable. Against a lack of comparable evidence we have been conservative and applied 30 month current/expiry voids over the vacant unit at 4 Hanover Street and those with a either a break or expiry within the next 5 years period. These are inclusive of assumed 12 months’ rent free periods on the basis of achieving minimum 5 year term certain lettings. Void service charge shortfalls have been incorporated over the marketing element of the voids and agent letting fees have been deducted at 15% of the first years’ gross rental income. The Property is Category B Listed and therefore exempt from vacant business rate payments at this time. Rents on reversion are applied as detailed within the Market Rent section above.

Question 12

comment on lettability marketability

Answer 12

Given the issues discussed above in the Market Rent section and the current level of vacancy (c. 30%) along the length of Princes Street we have applied 30 month expiry voids over all tenancies (Princes Street and Hanover Street) with a lease event (break/expiry) in the next 5 years period. This void is inclusive of the time require for marketing and legal preparation in securing new tenants (18 months), plus an assumed rent free period (12 months).
For the first floor restaurant (expiry 2029) and serviced apartments (expiry 2031) we have not incorporated any expiry voids. These serviced apartments market has also fared-better than the retail sector since our original valuation in 2018.

Question 13

market comments Edinburgh retail

Answer 13

Edinburgh retail market has witnessed a sea change over the past 3 years as e-commerce and online shopping has shifted consumers shopping habits away from the High Streets. This has resulted in numerous CVAs and administrations closing many retail stores, both large and small, along the length of Princes Street. This growing vacancy level has been compounded by the recent opening of the St James Quarter in mid-2021 but the local planning authority has responded to this through consultation and it is now generally accepted that alternative uses (i.e. F&B, hotels and/or other leisure) will manage to secure planning consent to redevelop some of the vacant units for these uses, at greater ease than before.

Question 14

what did you capitalise the rent at

Answer 14

capitalised the income streams on a term and reversion basis with 6% being applied to the secure term income, but then softened the reversionary yield by 100bps to 7% to factor in the risks associated with letting success and achievable rent

Question 15

what was the NIY and EY

Answer 15

Our opinion of value reflects a net initial yield of 9.11% and an equivalent yield of 6.95%.

Question 16

Liquidity and Saleability

Answer 16

Based on the above we consider that a sale of the Property at our opinion of Market Value could be completed within 12 to 18 months of commencement of formal marketing.

Question 17

Could you comment on the loan details?

Answer 17

We have not been provided with details of your loan arrangements and cannot, therefore, comment specifically on the suitability of the Property to provide security for this loan. However, in general terms, we can say that we are of the opinion that the Property is a marketable asset and, therefore, considered to be suitable for loan security purposes. This should remain the position provided that adequate maintenance and active asset management is carried out for the duration of the loan.

Question 18

Castle Street example - Level 2

PII

Answer 18

20 MILL

Question 19

Castle Street example - Level 2

basis

Answer 19

MV
MV with VP
MR
IRV

Question 20

what was the WAULT and market rent

Answer 20

Property offers a WAULT of 5.7 years to expiry, or 4.25 years to breaks (based on rents)

£1,570,000 per annum

Question 21

covenant of tenants

Answer 21

Dun & Bradstreet (D&B) which highlighted that 78% of the contracted rental income is received from
covenants offering a 2A1 D&B rating, or superior. These covenant standings imply the majority of Tenants appear
to be capable of fulfilling the remainder of their outstanding financial leasehold obligations.

Question 22

what did you capaitlise the rent at

Answer 22

In terms of investment yields we have capitalised the current income streams at a yield of 6.00% but applied a
moderately higher yield of 6.25% to the reversionary income streams. The higher yield reflects the additional
uncertainty associated with the reversionary element, namely the prospect of additional voids not explicitly allowed
for and the unknown lease terms that might be achieved on new leases going forward.

Question 23

what was the MV

Answer 23

21 million

Our opinion of Market Value reflects a net initial yield of 6.49%, a nominal equivalent yield of 6.24% and a capital
rate of £522 per sq ft. This yield and capital rate profile is comfortably in line with the comparable investment
evidence obtained after the building quality, WAULT, lot size and timescales/market conditions are all taken into
consideration.

Question 24

Comments on marketability

Answer 24

Should the Property be released for sale on the open market in the current economic climate we feel a period of
6 to 12 months would be sufficient to achieve a sale at our opinion of Market Value.

Question 25

How did you do MV with vacant possession

Answer 25

According to research data from CoStar the ‘median months on the market’ for office accommodation within
Edinburgh’s City Core currently stands at 12.4 months.

we have adopted 12 month marketing
voids over all upper floor office suites. Similarly, market data implies that the vacancy rate and average letting
void for Princes Street/Castle Street retail stores is nearer 18 months. This is supported by the fact the former
HSBC unit, which occupies the opposite corner to the Property at 118 Princes Street, has now lain vacant for a
number of years.

These include 12 month voids over the office suites and car parking and 18 month
voids over the retail stores.

Market norms indicate that 6 months’ rent free is appropriate for
achieving 5 years’ term certain over the offices and 12 months’ over the retail but no rent free is offered over the
parking.

Service charge shortfalls (over the upper floor offices only) have been reduced to £10.00 per sq ft to reflect the
reduced level of utilities being consumed when vacant but vacant business rates have been deducted in line with
the appropriate multipliers and ‘holiday periods’. Holding costs over the retail stores’ marketing voids is applied
at a rate of £2.50 per sq ft per annum

Question 26

what was the MV with vacant possession

Answer 26

we have capitalised the Market Rents at a discounted yield of 8.00% which produces a Market Value
on the Special Assumption of Vacant Possession of, say, £15,000,000 after deduction of normal purchaser’s
costs at 6.72%.
Our Vacant Possession Value reflects 71% of Market Value and a capital rate of £373 per sq ft.

Question 27

what grade was the offices

Answer 27

Grade A

Question 28

market rent for offices

Answer 28

37-38

Question 29

market rent for retail ITZA

Answer 29

£125

Question 30

Market uncertainty comment?

Answer 30

due to construction cost inflation and the rising cost of debt weighing heavily on the market.
UK real estate stocks have fared badly since the announcement, along with the wider stock market. Recent events
have created an increased level of uncertainty in the property market and some softening of pricing particularly in
those sectors of the market that are assessed in line with gilt markets such as long dated income.

There are clear signs of downward pressure on values as on-going deals falter in the face of market uncertainty
and rapidly changing funding requirements. We anticipate market sentiment will continue to weigh heavily on
activity levels and thereby continue to place downward pressure on values. It is against this background that this
valuation has been prepared.

For the avoidance of doubt, due to the functioning nature of the market, our valuation is NOT reported as being
subject to ‘material valuation uncertainty’ as defined by VPS 3 and VPGA 10 of the RICS Valuation – Global
Standards.

Question 31

Property as security comment.

Answer 31

In general terms, we consider the Property to be a marketable asset and therefore suitable for secured lending
purposes.

The Property benefits from a number of strong attributes which we feel would appeal to investors. These qualities
include a reasonable WAULT to expiries/breaks, let to tenant covenants that are likely to be viewed, in the round,
positively.

In line with our vacant possession value, we anticipate that the value of the Property will reduce during the loan
term, as the WAULT reduces, unless active asset management is undertaken throughout the extent of the loan
period.

Notwithstanding the above, we are satisfied that the Property provides good security for a loan, subject to the
Lender being satisfied on the status of the Borrower and the specific terms being offered.