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APC Eleanor + SOE > Case Study > Flashcards

Case Study Flashcards

1
Q

How did you complete the conflicts of interest check?

A

I completed the conflicts of interest check in line with my companies policy. This is to send a company wide email detailing the details of the property, the client and the borrower. Each person at the company has to fill in a microsoft teams form to confirm if there is a conflict or not.

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2
Q

Talk me through your clients service agreement

A

My clients service agreement sets out the guidance for a secured lending valuation for this bank. It details what must be included in the report and the investigations that are required. I covers all the required points of a red book terms of engagement. It includes the basis of value, structure of the report, PII cover depending on valuation figure, conformation the valuer is competent and the firms complaints handling procedure

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3
Q

Why did this mean that you do not use a terms of engagement?

A

The service agreement is common for large commercial banks as this covers all the basis of the terms of engagement and due to the size of the bank and level of instructions each firm they work with will sign their service agreement.

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4
Q

How did you confirm competence?

A

I worked under the supervision of my supervisor who is an RICS registered valuer

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5
Q

What was the EPC rating?

A

C

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6
Q

Was there any planning issues?

A

I did not identify any planning issues that would impact the value.
The property was under an article 4 direction, this was not a concern as there was no intention to look at a residential conversion.

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7
Q

What due diligence did you undertake?

A

EPC rating
Rateable value
Flood risk
Title plan
Contamination
Planning

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8
Q

Why did you complete a groundsure report?

A

It is a requirement under the service agreement

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9
Q

Talk to me about the location of the property

A

The property was located to the north of Watford’s town centre near the watford north railway station. The property was located in close proximity to junction 5 of the M1 motorway providing good access to London and the North

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10
Q

How did you age the property?

A

Information from the client

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11
Q

Talk me through the construction of the property?

A

The property comprises a single bay industrial warehouse of steel truss frame construction with brick and blockwork walls as well as metal profile cladding on the east side. There was a metal insulated rood with plastic corrugated sky lights.

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12
Q

Was there anything to look out for on your inspection (defects)?

A

Evidence of leaks around the roof lights
Damage to cladding panels
Evidence of blocked gutters or damage from poor guttering

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13
Q

Did you find any defects?

A

There was no defects that would adversely affect the property.
There was signs of aging

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14
Q

Why did you measure the eaves height?

A

Eaves height are important in an industrial property as it provides the occupier greater flexibility to store upwards. A requirement for occupiers to have good eaves height so it is important when analysing comparables.

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15
Q

What is eaves height?

A

The height between the floor surface and the underside of the roof covering or supporting purlins. Whichever is lower.

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16
Q

Is it common to have no office content? What is standard office contetnt?

A

No
5-10%

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17
Q

What is standard site coverage?

A

40%

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18
Q

Why did you measure to GIA?

A

This is the appropriate measurement standards according the RICS code of measuring practice, 2015

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19
Q

Why did Odhams trading estate achieve a higher rental value?

A

Odhams trading estate is comparable to the property in relation to its location and size. However, Odhams has a superior eaves height of 8m which would appeal to a bigger range of occupiers, it also benefits good parking provisions and internal office accomodation.

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20
Q

Why did you analyse net effective rents?

A

I analysed the net effective rent to devalue the headline rent to calculate the actual rent

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21
Q

How did you calculate the net effective rent?

A

I used the straight line method and deducted 3 months from the rent free period to allow for a fitting out period

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22
Q

Unit 10 shakespeare - why did you select a comparable much smaller than the Property?

A

Because there was a lack of directly comparable properties, this property was a recent letting in the locality so determined that this was appropriate to gauge the local market

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23
Q

Why did unit 10 Shakespeare achieve a lower rental level?

A

Because of its low eaves height and weak specification

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24
Q

How did you compare 2a Greycaine road to your property?

A

I considered this to be a good comparable as its located in the same area as the property and has similar specification. However, 2a was small and let for a short term of 3 years so I determined that 1a 6 would achieve a lower rental level

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25
Q

How did the hierarchy of evidence held to analyse comparables?

A

This guidance note outline three categories of comparables to determine which comparables are the most appropriate.
Category A - Direct comparables
Category B - Market trends / indicies
Category C - Evidence from other asset classes

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26
Q

What trends did you identify?

A

I identified that properties with good eaves heights would achieve strong rents and that properties transacting in this market where agreeing terms of 10 years with minimal incentives

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27
Q

Why did you anticipate strong demand?

A

Because there was minimal vacancies in the locality.
This property presented relatively cheap secure warehouse in close proximity to London

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28
Q

Why did you choose the middle of this range?

A

With reference to the selected comparables, I felt that Shakespeare estate represented the bottom end of the market as it was not appealing to the same tenant profiles, it has particularly low eaves heights and small space. In comparison, Odhams benefited an eaves height stronger than Shakespeare and Greycaine road. It also had good yard provisions.

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29
Q

K I 2
Why did you select the comparable method?

A

Becaus the property was owner occupied and did not have income stream to analyse.

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30
Q

Talk me through your internal database?

A

The internal database is used to input all comparable evidence that is identified by the team. It has a form to input all relevant information about the comp and links to the brochure. Each valuer must confirm the source of the information and make detailed notes of any discussions with the agent.

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31
Q

Unit 13 Shakespeare is a weaker specification - why does it achieve a similar capital value rate?

A

The unit is of a weaker specification, but it is in the same locality as the property and is of a smaller size. I applied a quantum discount as in the industrial market purchasers will pay more pre sq ft on a smaller property.

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32
Q

Why did 11 Wharf road achieve a better CV than the property?

A

Because it has a better eaves height, it is a detached warehouse on a self contained site and benefits office accommodation.

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33
Q

How did you account for the location of 11 Wharf road?

A

This property was in a neighboring location and it was also a similar location

34
Q

Did you consider enfield to be a stronger location?

A

No, I considered the locations to be comparable however, if I was comparing prime Watford to Enfield I would consider Enfield a weaker location

35
Q

Why did Kingly Park achieve a similar CV to the property?

A

Whilst Kingly Park is smaller than the Property, it benefits similar eaves heights and has office accommodation. It is in a basic and tired condition so I formed the opinion that this would achieve a slightly lower capital value rate per sq ft.

36
Q

Did you apply a discount for the high site coverage?

A

I did not apply a % discount, this was accounted for by referring to comparables that also had high site coverage

37
Q

Why was your property at the lower end of this range?

A

Because the property is of a weak specification with low eaves height and high site coverage

38
Q

What were the adverse ground conditions?

A

A legacy of contamination. The report identified that this is a former military land. These installations often stored fuel and other harmful contaminants in tanks. As such these former land uses present a risk of soil or groundwater contamination

39
Q

Why did you not advise the bank to instruct a building surveyor?

A

I discussed this with my supervisor and concluded that if the continuation of the current land use this would not be a serious or material concern. It would be prudent to instruct a building surveyor if the prospective borrower had plans to redevlop the property.
I discussed this with my client and advised that they take a view based on their internal risk decisions policy

40
Q

What would your advice have been if the purchaser had plans to redevelop?

A

I would advise that a specialist be instructed to perform an intrusive site investigation to establish the extent of the contamination.

41
Q

What were the trending yields?

A

5-5.5% for secondary industrial estates

42
Q

How did you work out the equivalent yields?

A

I inputted the sale and leave evidence of the comparables into KEL

43
Q

Why did you use equivalent yields?

A

Because it shows the overall picture of the yield and investment

44
Q

5B Shakespeare - Is there anything you took into consideration as this was an auction sale?

A

It was a gross price

45
Q

5B Shakespeare - Why was your property a more attractive investment?

A

Because the property was utilised as a warehouse / light industrial unit not a trade counter like 5B. 5B was in a tired position and sold at auction

46
Q

Why was the Property less attractive than 3-5 Chiltern Hill?

A

Because Chiltern Hill had stronger eaves of 6m and benefited good parking provisions

47
Q

How did you determine demand was strong?

A

Through discussions with local agents and the vendors agent. A well as a lack of availability in the market

48
Q

What were prime yields?

A

3-4%

49
Q

How did you determine the yield range?

A

Comparable evidence
Industry yield sheets

50
Q

Why would occupiers look to purchase rather than rent?

A

Because they are able to fit out the space to their requirements. In a market where rents are increasing, owner-occupiers may be able to obtain mortgage payments lower than the likely market rent

51
Q

Why did you select a 6 month void period?

A

Because the market was performing well with lots of demand and limited supply of budget warehouse space near London

52
Q

What are the changes to MEES regulations?

A

From 1st April 2023, all existing commercial leases must have a minimum EPC rating of an E. This property is compliant by the Government has indicated that the minimum MEES threshold will rise from an E rating to a C by 2027 and a B by 2030

53
Q

Why did you use a SWOT analysis?

A

Because it is a useful tool to analyse the internal and external factors that might affect the property

54
Q

What is VPGA 2?

A

This is the valuation application for secured lending valuations. It details the requirement to comment on any environmental consideration, acknowledge sustainability factors and comment on the suitability for the loan

55
Q

What is in a service agreement - what was the PII?

A

The service agreement is used by large commercial banks and it details the l;evel of service required by the firm when working for the bank, in the same way as a terms of engagement. It encompasses everything you would see in a red book terms of engagement, including that the valuer is competent, format of the report, basis of value the firms complaints handling procedure and an agreed level of PII cover depending on the the value of the instruction.

56
Q

What did moderate risk of contamination mean - how did this impact on your value?

A

The moderate risk of contamination was related to the identification of past contaminative land uses. In this case there was a former military land to the north.

I discussed this with my supervisor and took the view that this would not have a material impact on the value assuming the continuation of the existing use. However, if the prospective borrower wishes to redevelop the land, it would be prudent to instruct an intrusive environmental site survey to assess the extent of the contamination.

I caveated the report, and reserved the right to amend the opinion of value should the facts on the situation change.

57
Q

Is this a prime industrial location?

A

No this is a secondary industrial location.

The other tenants in the area largely consisted of MOT garages and local car repair shops.

58
Q

4.8M eaves? What is prime?

A

This is not prime, prime would be 8m.

59
Q

Prime office content?

A

5-10%

60
Q

Site coverage?

A

40%

Mine was 96%

61
Q

10 year lease on an investment basis?

A

I derived my opinion of the lease term from the comparable evidence, this showed that a lot of tenants were signing 10 year lease terms. The industrial market was performing well at the time of valuation.

62
Q

Any empty rates?

A

I did not include any empty rates fees as the void period selected was 6 months and there is 6 months rates relief for industrial properties.

63
Q

What is contained in reletting fees?

A

Legal (10%)
Agency (5%)

64
Q

How much empty rates relief for an industrial property?

A

6 months

65
Q

What were the terms of the loan?

A

I was not informed of the terms of the loan for this property. I advised the client on the suitability for this property for mortgage purposes.

66
Q

Any loading doors at this property?

A

Yes, 1 at the front of the property

67
Q

How would it differ if you valued now?

A

The industrial market has slowed down since the valuation in January 2022. I would expect the value to come down.
I am aware that from an investment perspective secondary industrial estate yields are trending weaker in the region of 6-7%

68
Q

What is PW on your map?

A

Place of Worship

69
Q

What would your advice have been to your client if the unit had an F rating?

A

I would have advised them that this property is not compliant with the MEES regulations should the prospective borrower wish to let the property.
CAPEX would be required to make the warehouse compliant if this was put to the lettings market.

70
Q

Please can you explain the differences between headline and net effective rate?

A

Headline rent is the rent that is reported for the property. The net effective rent reflects the actual rent payable when taking into consideration any rental incentives.

71
Q

For Unit 3 Odhams you have calculated the net effective rent - did you deduct all of the 6 months rent free?

A

I did not, I deducted 3 months rent free to allow for a 3 month fitting out period

72
Q

For Unit 3 Odhams trading estate you mentioned that you applied a discount to reflect the inferior specification - what discount level was this and how did you calculate it?

A

I determined the appropriate discount by analysing this property alongside the other comparable evidence to determine where my valuation of Greycai road would sit in this market.

73
Q

You mentioned that the unit did not have a large yard area - did you apply a discount for this?

A

I did not apply a specific discount for this. It was accounted for by selecting comparable evidence that also has a small yard space

74
Q

Please can you describe the hierarchy of evidence

A

The hierarchy of evidence is outline in the RICS Guidance Note comparable evidence in real estate valuation, 2019. It splits comparable evidence into three categories:

Category A - Direct comparables, recent evidence of the the same asset class in the similar location.
Category B - Indirect comparabled, including market indices such as MSCI or industry yield sheets
Category C - Other types of comparable evidence, it may come from other asset classes

75
Q

You have used evidence that was under offer - do you typically use this type of evidence given that is less reliable?

A

This evidence is less reliable as either party could pull out of the deal at the any time. However, there was a lack of directly comparable evidence so I felt that this evidence was still a good indication of the activity in the market.

76
Q

Can you please describe how you adopted the investment method and why this is used as part of your methodology?

A

I adopted the investment method to check my opinion of value when using the comparable method.

I applied a 6 month void period and a hypothetical lease term of 10 years at a rate of £10 per sq ft. I targeted an equivalent yield of 5.75% in this valuation.

77
Q

Why did you target an equivalent yield?

A

Because an equivalent yield gives a whole picture view of what the investment is worth. As the property is not tenanted an intial yield would not be appropriate.

78
Q

Did you account for any costs in you valuation?

A

Yes, I accounted for re-letting fees and purchasers costs.

79
Q

In your case study you have mentioned that you used an equivalent yield and a reversionary yield - please can you define these?

A

Equivalent yield - the weighted average of the initial and reversionary yield.
Reversionary yield - market rent DIVIDED BY current price

80
Q

Unit 5B has a large difference between the NIY and equivalent yield - what does this indicate?

A

That the investment is under rented

APC Eleanor + SOE (14 decks)

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