REAL ESTATE VALUATION AND APPRAISAL
REAL ESTATE VALUATION AND APPRAISAL
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REAL ESTATE VALUATION AND APPRAISAL
Project Aims
The aim of the project is to introduce you to the complex operation of the investment, use and
development markets by applying the techniques and methods associated with valuations and
appraisals to solve real life problems.
Output Objectives
When you successfully complete the project you should be able to:
• Systematically examine and compare conditions in the office markets in Central London,
downtown Manhattan and Singapore’s downtown core;
• understand how the performance of real estate markets is connected to broader economic trends
at the urban, regional, national and international levels;
• be proficient in the collection, interpretation, synthesis and preparation of material from a variety
of diverse sources;
• undertake the analysis and critical evaluation of market data;
• put into practice the income, direct comparison and profit methods of valuation; and
• critically appraise investments using a DCF model.
Project Details
You have been appointed by AREA Property Investment Ltd. This is a London based private property
investment company looking for advice and guidance on the management of their portfolio. They have
asked you to undertake a dcf appraisal of the investment value and traditional market valuation on the
following investment opportunity.
60 Gresham Street, London, EC2V 7BB
This 4-star (CoStar rating) building is arranged over ten floors offering office accommodation over the
first to eighth floors and a bar covering the ground floor and basement. The building contains 4,243 m2
(45,670 ft2) of high-quality office space and 1,074 m2 (11,568 ft2) of space currently let as a bar. The
current tenancy schedule is as follow:
B & G 1,074m2 (11,568ft2) which is currently let to Drake & Morgan Ltd. The 20-year
lease was agreed on 6th December 2017 at £375,000 and is quoted on a net basis.
The annual rent is paid in arrears and index-linked to the Consumer Price Index
(CPI).
Levels 1, 2 & 3 These three floors (2,441 sq m/26,276 sq ft) are currently let and occupied by
Landmark Ltd. These floors were let on an IRI basis that was signed at the end of
July 2018 for a period of 15 years with rent reviews every five years. The current
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passing rent is £1,391,145 per annum and paid in advance. Five parking spaces are
attached to this lease.
Levels 4 & 5 1,095 sq m (11,788 sq ft) across these two floors was let in May 2018 by Bank of
China. The 10-year lease is currently set at £858,112 (FRI) per annum in arrears
and has five yearly rent reviews. This space is let with six car parking spaces.
Levels 6, 7 & 8 The top three floors were taken by Alpha Financial Markets Consulting Ltd until
5th March 2039. This space represents an IPMS 3 office area of 707 sq m (7,606
sq ft). The FRI lease signed on 6th March 2014 was set at £357,891 per annum in
arrears with rent reviews every five years. Twelve parking spaces are let with the
office accommodation.
You estimate a current gross initial yield of 4.75%, an implied growth rate of 2.75% per annum on
non-index-linked rents, a long run CPI of 1.75% and a suitable target rate of return of 7%. You also
reckon it will take 12 months after an existing lease ends to find a new good quality tenant under
current London City market conditions, and you are required to explicitly allow for rental income
voids. The seller is asking for offers over £40,000,000.
Your client has asked you to critically appraise the market rent for the office space in the London City
submarket, the investment quality of this asset and likelihood of achieving the implied rental growth
rate. In addition, you are required to recommend how much your client should offer to purchase this
asset, and to evaluate and compare the rents achievable, market conditions and rental growth prospects
for prime offices in the City of London with the Downtown Manhattan (New York) and Singapore’s
Downtown Core where your client is considering alternative investment opportunities.
In addition to the investment appraisal and valuation of this prime office, your client has asked you to
undertake the valuation of a series of investments in the Central Belt of Scotland. They would like to
know the market value of the following interests:
Flat 7, 71 Lancefield Quay,
Glasgow, G3 8HA
This luxury upper-duplex apartment with two bedrooms is situated on
the Broomielaw, with views over the River Clyde. The spacious modern
property consists of 92 sq m (988 sq ft) gross internal floor area which
contains on the lower level:- two bedrooms, with the master (4.94m x
3.08m) having an en-suite shower room (2.19m * 2.16m) – 2nd bedroom
(2.96m * 4.94m) and both benefitting from fitted wardrobes. There is also
a family bathroom (2.65 * 1.58m). At upper level, there is a lounge/dining
room (7.38m * 6.22m) with stunning views over the river, and a galley
style kitchen (3.75m * 1.92m). There is a security entry system leading to
a secure residents’ communal staircase. A further security door leads to
the flat itself, where the accommodation is formed over two levels. The
flat is in excellent condition, currently vacant and available for sale,
and has an G Council Tax Band.
50 Carmaben Road,
Queenslie Industrial
Estate, G33 4UN
The subject property comprises a stand-alone facility, incorporating
offices and warehouse accommodation with a secure yard and car
parking. The property is set within its own ground surrounded by
security fencing and sits on a 3.26 acre site. The warehouse area is
arranged over the ground floor and mezzanine level totalling 3,246 sq
m/34,945 sq ft GIA) with office accommodation of 924 sq m/9,946 sq
ft) on the ground and first floors plus an enclosed yard with separate
parking facilities (210 sq m/2,262 sq ft). The site was let to a single
occupier on 6 April 2018 on a 21-year lease with seven yearly rent
reviews. The current FRI rent is set at £195,000 per annum. Your
client is interested in buying both the heritable and leasehold interests.
Radisson Blu Hotel, 275-309 This property, fronting on to St Enoch Square and within walking
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Argyle Street, Glasgow, G2
8DP
.
distance from Glasgow Central Station, comprises a new hotel
accommodating 249 bedrooms, ground floor reception, restaurant and
bar. The property is owned by your client but rented to Whitbread
(who own the Premier Inn chain) until March 2043. After allowing for
staff and other running costs, you estimate that annual earnings before,
interest, taxation, depreciation and amortisation of £2,317,000
represents a fair and maintainable profit for a reasonably competent
operator in this property. You also estimate that 5.25% is a suitable
capitalisation rate for the owner’s interest whereas 7.25% is more
suitable for the leasehold interest. You are required to value both the
heritable and leasehold interests.
.
59 Buchanan Street,
Glasgow.
Your client current owns 59 Buchanan Street within a three storey
sandstone building in the city centre. You have been asked by your
client for the market value of this retail unit which is leased by Molton
Brown. The shop consists of a total of 254 square metres (NIA) with
174 square metres on the ground floor and remaining space, spread
over two levels, is currently used as storage and office space. The
unit’s net frontage is 6 metres.
The unit, let on a 15 years net lease with a five yearly rent review, was
reviewed last week at the full market value.
You are required to present a professional report. However, this differs from professional valuation
reports as you are required to present annotated valuations that explain your assumptions and contain a
critical analysis of comparables and reflective discussion of the methods and principles you are
applying. The report should contain:
a. A very brief description of the properties you are required to value.
b. A traditional valuation and DCF investment appraisal for the Gresham Street property which
assumes that the investor plans to buy the property and sell after a holding period of 15 years.
Your appraisal must also account for 5.8% purchase costs and a further 2.5% for disposal costs
at the end of the holding period. Forecasts predict that suitable exit yields, post refurbishment,
will be around 4.25% for the Gresham Street office. You should also allow 5% of the market
rent for rent review costs on leases at every rent review (over and above annual management
costs). In addition, your client has asked you to allow for refurbishment of the property in the
14th year which a building surveyor has estimated at a cost of £3,250,000 (estimated as
December 2036 prices). Please note that the space will be unusable during these works, which
are expected to run from December 2035 and December 2036, so you cannot collect rent
during this last year. You expect to sell the property immediately after their completion.
Also, do not forget to include the car parking in your valuations and appraisals. These spaces
have value too. You estimate each space has a market price of £16,000 as at the
valuation/appraisal date.
c. Valuations of the market values, as at 6th December 2021, for the property interests your client
has asked you to value. These should be accompanied by a critical discussion of your
comparable evidence, assumptions and methods employed. When valuing the leasehold interest
at 50 Carmaben Road, your client has asked you to use a suitable Year’s Purchase formula that
makes adjustment for a 2% sinking fund and 21% rate of corporation taxation which the current
occupier is liable for. Remember, current practice tends to use a single Year’s Purchase formula
to value leaseholds but your client has expressly requested a dual rate Year’s Purchase and
allowance for taxation. When valuing the landlord’s and tenant’s interests in Radisson Blu
Hotel, Glasgow assume the rent represents 55% of the Fair Maintainable Operating Profit.
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Information
Part of this exercise involves you undertaking your own data collection and interpretation of market
evidence. Links to property companies are on the Real Estate Valuation and Appraisal Moodle pages
and in these corporate webpages you can search for suitable local market reports. You should also
undertake further information searches. This should include searching for recent transactions on
CoStar Suite, which should be accessed using the password emailed direct to you. You will be shown
how to use the CoStar database to search for comparable transactions at a CoStar workshop on
Wednesday 13th October 2021.
Submission Arrangements
Your valuation report should be submitted no later than 12.00hrs on Monday 6th December 2021.
There is a two-part process for this submission which is as follows: 1. Run the main body of your
report (excluding appendices) through Turnitin as draft and final versions before the submission date.
Guidance on using Turnitin can be found in the SPS Common Room. 2. Upload a copy of your
calculations which should form your appendices either as an excel spreadsheet or pdf of your
handwritten calculations to the “Assignment Appendices” facility in the same section of Moodle as the
Turnitin facility.
Any changes to the submission process, which might involve handing in hard copies of your valuation
report and calculations, will be communicated to the whole class through the relevant forums. It is not
known at the time of posting this (September 2021) whether this will be possible.
Students should ensure that a course coversheet is completed and attached to the front of both copies.
Note, you should run your coursework (excluding appendices) through Turnitin as draft and final
versions before the submission date. The course coversheet and guidance on using Turnitin can be
found in the SPS Common Room (Enrolment Key=’SPS’).
The late submission of coursework will be penalised. Assignments not submitted by the required
deadline, and without approved extensions, will be subject to a 2 points deduction for each working
day overdue, subject to a maximum of five working days. If an assignment has not been submitted
within five working days of the deadline, the student will be awarded zero (grade H).
Marking Criteria
Marks will be awarded for the assignment’s contents, conciseness, clarity and coherence of arguments
and the overall presentation. The report and valuations will contribute to 100% of your overall mark
for the course, and should be 2,500 words in length, excluding the calculations and data analysis in
the appendices, and references. The valuations in the main body of the report should follow the
standard format used in the course notes and be typed. It is recommended that you include your
workings in the appendices, which may either be hand written or word processed but need to legible,
so the markers can follow your calculations.
A penalty will be imposed on submissions that go above the 2,500 word limit. Submissions 10-14%
over 2,500 words will be subject to a 1 point deduction; 15-19% over a 2 points deduction; 20-24%
over a 3 points deduction and 25% or more will be awarded a fail (zero) and required to resubmit as a
second attempt. You should also note that while the appendices are not included in the word limit in
this assessment you are restricted to a maximum of 10 A4 sides. This should be more than enough
space for your tabled data and calculations so anyone who goes over the limited number of pages for
their appendices will receive a 2 points penalty deduction.
Your submission will be marked in accordance with the following criteria:
• Completion of the valuation and appraisal tasks. Remember, this is a valuation and appraisal
exercise testing your ability to apply the principles and methods developed in class so the
majority of the marks will be allocated to examine how well you perform these tasks. These
tasks account for 55% of the marks which are disaggregated as follows:
o The 60 Gresham Street DCF investment appraisal (20% of the marks);
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o The 60 Gresham Street traditional market valuation (10% of the marks);
o Valuation of a residential, hotel and retail unit (5% of the marks for each of these three
tasks);
o Valuation of 50 Carmaben Road industrial heritable interest (6% of the marks); and
o Valuation of 50 Carmaben Road industrial tenant interest (4% of the marks).
• The quality and quantity of market evidence you present to determine the market rents and
yields you apply in your valuations, and the logic you apply when critically evaluating the
suitability of these transactions as comparable evidence (10%).
• Your critical assessment of the Central London investment opportunity, Downtown Manhattan
and Downtown Core Singaporean office markets comparisons and quality of advice you give
your client (15%).
• The structure of your report, the clarity of writing and expression, and the depth with which
you critically discuss the methods you are applying. You are also expected to make use of
market, academic and professional practice information to support your arguments (15%).
• The level of professionalism demonstrated by the presentation of your report (5%).
This submission is just before the Winter Break so every attempt will be made to have your
submissions marked and returned to you by Monday 10th January 2022, which is 3 term-time weeks
after you submit. The University will be closed between 17th December 2021 until 10th January
2022.
N.B. On no account should you approach any tenants, owners or surveyors for information
regarding your site investigations. Any requests for material must be channelled through Alan
Gardner.
Further, there are mock real life scenarios in this brief with some facts altered for the purposes
of this exercise. If you find information that contradicts the details in the brief then ALWAYS
assume the brief is correct.