Case Study Questions Flashcards
Describe the property?
Comprises a newly constructed detached unit of steel portal frame with profiled cladding elevations with a profiled sheet roof on a self-contained site.
There was an external concrete yard with perimeter fencing.
Had circa 10,000 sq ft of warehouse space and 3,00 0 sq ft of office space
What was the process of preparing for an inspection?
Bring in surveying safely, assessed whether there were any risks prior to inspection and whether I need PPE. Made sure it was in my calendar with correct contact details, location etc.
Made sure that I had the most up to date plans which included the tenants fit out prior to inspection.
What did you look for when on inspection?
Looked for any defects i.e. cracks/areas of damps
Made sure the tenant were complying with their lease
Took measurements/pictures
What impact does the rental guarantee have on value?
Provides certainty of income for the 10 year term, if the tenant defaults on their rent Barclays Bank will secure the rent.
What was the site cover and how did you calculate it?
27%
Took the GIA area of the ground floor and convert into acres. Then divided it by the total acres in the interest purchasing.
What was the office content and how does this compare to the average?
23% with the average being around 25%.
What is the benefit of new builds?
Building warranties, usually between 6-10 can have structural, electrical etc warranties.
What makes a good comparable?
One that is recent, similar, independent (i.e. sold in an arm’s length transaction.
Must consider the quality, number of comparables available and the market conditions at the time.
What benefits of with RPI linked review clause?
The benefit is that rents rise when inflation rises and benefits are so that the landlords rent keeps in pace with the cost of living. This is particular positive with the current market with inflation of 6.8%.
Another benefit is increased certainty.
What does capped and collared mean in relation to RPI?
If the retail price index is under 2% then the rent will rise by 2%
If the retail price index is above 4% it will only increase by 4%
The new build nature of the asset, do you think it will positively or negatively impact on value?
In this instance it had a positive impact, because of the new build nature, they had warranties attached to the building.
How does informal tender differ from formal tender?
With a formal tender the bids are sealed, and you bid without knowing what other parties have bid, and the bidder only has one opportunity to bid whereas in an informal tender, as such in my case study there are multiple rounds of bid.
Formal bids are often used by statutory bodies.
Why do you not measure office content on a NIA basis?
In the RICS Code of Measurement practiser it outlines that offices within industrial units should be measured on a GIA basis. More accurate when comparing it to other industrial units. It also avoids misleading potential purchasers or tenants into thinking they’re getting more space than they are.
What is net effective rent?
It is a measure of the expected income from the tenant taking into consideration rent free periods.
How would you calculate net effective rent?
I would would work out how many months in the term. I would minus the rent-free period from this figure and divide by total number of months in the term. Then times by the passing rent per annum. This gives you the net effective per annum.
What were in the heads of terms?
Property
Vendor and solicitors and agents
Purchaser and solicitors and agents
Condition including it being subject to contract, technical survey, receipt of satisfactory searches, vendor will top-up outstanding rent free period, building warranties were made available to the purchaser
Tenure
Tenancy
Timescales – surveys to be undertaken within 5 working days of agreement of HoT, Exchange of contracts to take place within 10 working days from receipt of legal pack.
Completion to be 10 working day thereafter.
What else would you do different next time?
Prior to inspecting I looked up some comparable evidence. However, found more at a later date. I would allocate more time before an inspection to ensure I do an expansive comparable check - then can do an external inspection on each.
What did you include in your purchase report?
Why did you consider option A if it had 2 years left on the lease?
It ticked off the other investment criteria:
- strong occupational demand in the location - Amazon, M& S other big securing space there
- Single - let to a good covenant
- At the lower end of their budget
Looks like from the picture that there is significant fit-out?
License to alter was given.
What’s the difference between headline rent and net effective rent?
Headline - basic rent that is agreed between the tenant and landlord. it is the rent that would be payable if there was no rent free period.
Net effective - is the actual rent that is paid taking into account the rent -free period
How did you asses comparables
- Identify comparable properties. This includes properties that are similar in terms of size, location, and condition.
- Gather evidence for each comparable property. This evidence should include the sale or lease price, date of transaction, and other relevant information.
- Evaluate the reliability of the evidence. Use the RICS Hierarchy of Evidence to determine the reliability of each piece of evidence.
- Weight the comparable properties. The weight of a comparable property is determined by its reliability. More reliable comparables should be given more weight.
Why Stockport?
It was the most comparable property in terms of lease length, condition and specification of the property, the client was looking at stock across the market and were not location specific. It is also a competitive market with limited stock so looked at stock across the country.
What was the specification of the comparable property?
Semidetached unit with a single bay- with steel portal frame.
Part brick part profile cladding.
Roof being corrugated metal profile panels.
What went into your ToE?
Services that we were to provide – investment agency services for a proposed acquisition.
Stated sole acquisition right.
Fee/ abortive fees (100% fee if the contract has exchanged)
All reasonable disbursements were to be paid by the client.
Do you think that yield is in line with the market?
Yes
KF yield table across the year prime yields for industrial units (20 years, with RPI linked RR) are around 4.75%
This is in line with Market Evidence with prime yields in the south east achieving 4.75% to 5.5%
What do you mean by tricky investment market?
Inflation and interest rate peaking.
Coupled with supply chain and energy price increases
Created uncertainty of investors and as a result meant a lot of investors were sitting on assets waiting for the investment mkt to improve.
What did option 1 achieve?
£2,000,000 - 5.87%
What due diligence did you do up front?
We had inspected/ the other party had only done an external inspection.
The client had their solicitors look over the lease ahead of bidding
Why is it not a Red Book valuation?
As this would be a conflict of interest. As we are advising on the sale
I note that you established the client’s investment criteria, what rate of return / yield were they looking for?
I note that you identified two property options for acquisition, please can you advise how you went about quantifying the pros and cons of each option – did you run an appraisal to be able to provide figures to the client?
Covenant strength of tenants
EPC
Location - occupational market
Condition/specification of the property
How did you approach the strategic advice you were giving to your client on the bidding process?
How are purchaser’s costs calculated – you adopted 6.47% in your valuation?
Stamp Duty - £149,000
What are the current Stamp Duty Land Tax levels for commercial property?
Up to £150,000 – 0% / £150,001 - £250,000 – 2% / Portion over £250,001 – 5%
What is your sense of the current industrial market in the south east?
It is dependent on the location/type of asset
Market is still there for prime assets
What do the RICS say firms (not members) should do in relation to money laundering?
RICS Countering bribery, corruption, money laundering and terrorist financing Professional Standard 1st Ed (February 2019)
Have a written policy that covers enhanced, customer and simplified due diligence, identifying PEPs
Have appropriate governance and system controls in place
Provide recurring training for staff
Keep reports of suspicion confidential
Identify the beneficial owner
Appoint a money laundering officer
What did you include in your Terms of Business?
a standard document relevant to the company. It covers off Fisher Germans policies and relevant the service providers business dealings.
What was your agreed fee basis?
1% of the purchase price + VAT
Can you give me an example of how you acted in accordance with one of the RICS Rules of Conduct during your inspection?
Acted with integrity and honesty
You measured the property on a Gross Internal Area basis, why didn’t you measure in accordance with IPMS All Buildings or IPMS 2 – Industrial?
Because it is yet to be adopted by the RICS
How did you analyse the occupational lease?
Analysed the lease terms, rent, rent review clause & obligations of the tenant & landlord under the covenants
Talk me through your analysis of covenant strength
We use Red Flag internally which reported the tenant had a bronze rating.
Looking closely into the financials it was evident they had carried out heavy investment into R & D which is the likely reason for the bronze rating.
Rental Guarantee
What other fee basis are you aware of?
Could have agreed a fixed fee
Talk through the assignment clause?
The Landlord is not obliged to consent to an assignment to a proposed assignee
where the proposed assignee:
(a) is not of sufficient financial standing to enable it to comply with the Tenant’s
covenants in the Lease; and
(b) does not produce Satisfactory Accounts;
Did you verify the funds?
Letter from the bank manager/ check their accounts
What additions were made to the property to secure an EPC of A?
Electric heating system
Insulation
LED lighting
PV
Did you only present 2 examples to your client?
I presented 5 but three of these were quickly discounted as they didn’t mean the client’s criteria
Why is Avonmouth a strong industrial location?
Good transport links
Paying into road infrastructure
Port location
What legislation did you relate to your case study?
Estate Agency Act 1979 - clarity in ToE and disclosure of any personal conflicts.
What is your minimum PI cover required for your firm?
£1,000,000 because we have a turnover of over £200,000
What is your maximum uninsured excess required by the RICS?
No set limit because our turnover is over £10m turnover (in the preceding year)
How did you apply the £1.50 to the rent?
We applied a premium to the rent on the industrial unit.
If headline rent = £12.87
Then the market rent excluding the surplus land is £11.37
Net effective = £12.05
Why did you use this method and not DCF?
The client didn’t have a targeted hold period we therefore valued this into perpetuity.
What advise did you give to the client on the market?
There was economic uncertainty with high inflation and interest rates which had an impact on the market.
On one hand there was the risk associated with uncertainty on the other there was an opportunistic market which resulted in repricing across sectors.
Did you overpay?
The property achieved a strong price which was as a result of the bidding negogitaitons however i believe the property was
What was the rent per sq ft on the other unit?
£5.40 psf
Opportunity for slight reversion
What was the specification of the other unit?
Steel portal frame with part brick, park profiled metal cladding with a corrugated roof.
Built in 2005.
Eaves height of 8.65m with electric roller shutters.
Had office content
Describe the unit?
It was of steel portal frame, with profiled metal cladding elevations and roof
Had a concrete yard area with parking
It had two electric loading doors, 8m clear eaves, 50 kilonewton floor loading capacity
Office space fitted to Grade A spec
LED lighting, 450 KVA power
What’s the difference between the RPI linked and other rent review?
RPI is directly linked to retail price index (The ‘Retail Price Index’ (RPI) measures the average change from on a monthly basis in the prices of goods and services purchased by most households in the United Kingdom. )
Whereas other rent review clauses are to open market rent.
(The starting point is that the hypothetical lease is based on exactly the same terms as the existing lease and on the property in its current state.)
What was the rent free period given and what was typical for this location?
Rent free period given was 6 months
Market is between 4-6 months
Out of the comparable evidence which is the most similar rental evidence in your view?
St Modwen park - despite it being a May 22 rental evidence it was most similar in size c.14,000 sq ft. A new build unit, similar spec but it was on a terrace of units and had limited vehicle turning space. (£8.79 on a psf basis)
Talk me through your rental evidence?
Two smaller comps 2,000 -4,000 recently transacted, neighbouring the subject site, new build nature but much smaller therefore give rise to a higher rent
More + and M3 both much bigger units and second hand.
St Modwen Park, two units brought together, similar size combined but subject property give rise to a higher rent due to detached nature and
Talk through yield evidence?
Evidence was from 4.75% to 5.30%
Vision profiles, Gloucester - modern detached secure unit let on a similar term and had an EPC of A. Better covenant strength without a rental guarantee.
Unit 1A Tungsten Brackley - (Sarah you saw it) - more of a trade counter. Let on similar term to a good covenant strength.
Rowley Regis - also a trade counter but similar size to the property, let to a good covenant.
Your best evidence was a sale and leaseback, is there any issues with this?
I understand this isn’t an arms length transaction but there was limited stock in the market and therefore provided good evidence.
What is Castle Donnington like as a comparable?
East Midlands (south from notts)
Near M1 and East Mid airport
Established Industrial park with national occupiers.
