Real Estate Valuation and appraisal

School of Social & Political Sciences
University of Glasgow
PROJECT BRIEF 2018-2019 

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 London’s West End, Edinburgh City Core and Downtown Manhattan office markets;
• 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 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.

44-46 Whitfield Street, London, W1T 2RJ

This property comprises a five-storey building, located in London’s West End office market. The total property contains approximately 1,050 sq m (11,476 ft2) of office space with 37.9 sq m (408 ft2) communal reception area on the ground floor. The tenancy schedule is as follows:

1. 1. A 10 years lease was recently signed by The Elf Factory for 220.4 sq m (2,300 ft2) of office space on the ground floor. The lease, due to start on 3rd December, has been set at the current annual market rent on indexlinked terms. The net rent is to be reviewed annually and paid in arrears.
2. 2. The first floor (213.7sq m/2,300 ft2) is currently occupied by The Elf Factory. The net rent currently paid is £189,750 per annum and in advance. The 15 years lease started 3rd May 2017 with 5 yearly rent reviews.
3. 3. A 10 years lease was recently signed by Skyscanner Ltd for the second floor which consists of 220.4 sq m (2,300 ft2) of office space. The lease, due to start on 3rd December, has been set at the current annual market rent on IRI lease terms. The rent will be paid in advance.
4. 4. The third floor was taken by Epoch on 1st September 2016. This space represents 188.2 sq m (2,026 ft2). The FRI lease was set at £152,963 per annual in arrears with 7 yearly rent reviews. The length of the lease is for 21 years.
5. 5. The fourth and fifth floors (255.7 sq m /2,752 ft2) were taken by Channel Capital Advisors on 2nd March 2017 £240,800 per annum and in arrears. The FRI lease is for five years with annual rent reviews.

You estimate a current gross initial yield of 4.75% for this newly renovated building, an implied growth rate of 3.55% per annum on non-index-linked rents, a long run average RPI of 3%, and a required rate of return of 8%. You also reckon it will take 12 months after an existing lease ends to find a new good quality tenant under current West End market conditions, and you are required to explicitly allow for rental income voids. The seller is asking for offers over £16,750,000.

Your client has asked you to critically appraise the market rent for the office space in the London West End market, 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 London’s West End with the Edinburgh City Core and Downtown Manhattan (New York) office submarkets 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 undertaken 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:

3/4 29 College Street, Glasgow, G1 1QH.

This luxury three bedroom apartment is situated on the third floor of a stunning conversion. The spacious 113 sq metres property consists of an open plan lounge and dining area (5.2m x 5.5m) with adjoining kitchen area (5.0m x 2.5m); bedroom 1 (4.8m x 4.7m) and en-suite shower room; bedroom 2 (4.7m x 2.8); bedroom 3 (4.8m x 3.9m) and bathroom (2.5m x 1.7m). Additional features include a mezzanine floor (3.5m x 4.4m) accessed via a spiral staircase off the open place living space, feature windows, high ceilings, integrated kitchen appliances, building elevator and video/audio controlled entry system. The flat is in excellent condition, currently vacant and available for sale.

Unit 3B, 3 Watt Place, Blantyre, G72 0AG.

The property comprises a newly refurbished detached warehouse. The warehouse area is arranged over the ground floor (2,431 sq m/26,172 sq ft GIA) with office accommodation occupying the ground and first floors (808 sq m/8,694 sq ft), an enclosed yard (1,418 sq m/15,263 sq ft) and separate parking facilities. The unit was let on 5th September 2015 on a 21 year lease with seven yearly rent reviews. The current FRI rent is set at £176,045 per annum. Your client is interested in buying both the heritable and leasehold interests.

Carlton George Hotel, 44-46 West George Street, Glasgow, G1 1DH

This property, situated in the heart of Glasgow City Centre, comprises a seven storey hotel accommodating 64 bedrooms and public house situated on the ground and basement floors. The property is owned by your client but rented to a tenant until May 2029. You estimate that annual earnings before, interest, taxation, depreciation and amortisation of £845,000 are fair and maintainable for a reasonably competent operator in this property, and that 6.5% is a suitable capitalisation rate for the heritable interest whereas 8.25% is more suitable for the leasehold interest.

28 St Andrew Square, Edinburgh, EH2 1AF

This category A listed office is located on St Andrew Square and in close proximity to Princes Street and Edinburgh’s business district. Built in 1898 and refurbished in 2003, the 6 storey period red sandstone structure has an IMPS 3 area of 4,622 m2 (49,750 ft2). Your client previously occupied this space but it is now surplus to requirement and vacant.

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 London property which assumes that the investor plans to buy the property and sell after a holding period of 20 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 4.8% for the London 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 20th Year, prior to sale, which a building surveyor has estimated at a cost of £1,325,000 (estimated as at the end of 2038 when the costs will be payable). Please note that the space will be unusable from the end of Year 19 until the property is sold at the end of Year 20 so you cannot collect rent during this last year.

c. Valuations of the market values, as at 3rd December 2018, 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 3 Watt Place, 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 Carlton George Hotel, Glasgow assume the rent represents 55% of the Fair Maintainable Operating Profit.