Critical analysis questions

Question 1

What are the bases of value?

Answer 1

Market Rent, Market Value, Fair Value, investment value

Question 2

What is the difference between first floor offices and mezzanine office? Would you adjust your approach to valuation?

Answer 2

yes, I applied a full rate to the 1st floor office space. For mezzanine storage areas, a half rate is which was seen in comparable evidence and advise from agents. Depends what is happening in the market.

Question 3

What terms in a lease might affect rental value?

Answer 3

Unexpired term, rent review clause, restrictive use clause, break option

Question 4

Rental value - why did you not look any further than unit 6 Camberley Business Centre?

Answer 4

I perceived unit 6 to be a direct comparable. It has 1st floor office space, with a industrial unit on ground floor. I considered all factors and assessed a full rate to be applied to the office space. Was agreed on the same terms as the subject property with the property being almost identical.

Question 5

Should there be an adjustment in consideration of size?

Answer 5

This is a matter for debate. Yes you would expect a larger unit to achieve a little less on a psf basis.

Question 6

How would you have expected the property to have performed since Febraury 2022?

Answer 6

At the end of Q” 2022 the market fell away, so the value is less today than in Q2 2022.

Question 7

What is MSCI and how is it used?

Answer 7

MSCI is MOrgan stanley capital international which is a research firm that analysis the market in terms of stock indexex, portfolio risks performance analytics.

Large property companies feed data to the MSCI.

Question 8

Describe a prime industrial unit?

Answer 8

Unit of steel portal frame, with sheet metal cladding, blockwork to c3m, loading capacity of 30kn/m, clear eaves heigh of c8m +, 40% site coverage, full height loading doors, 10-15% office content.

Question 9

What is an equivalent yield?

Answer 9

An equivalent yield is the average weighted yield when a reversionary property is valued using an initial and reversionary yield. The equivalent yield is based on the weighted average of the two and therefore tends to be higher than the initial.

Question 10

When would you equivalent yield be stronger than your NI yield?

Answer 10

When it is reversionary

Question 11

When would your reversionary yield be stronger than your NI yield

Answer 11

when a property is over rented.

Question 12

When would your equivalent yield be outside of your NIY and RY?

Answer 12

This is dependant on the void periods entered into your calculation on argus.

Question 13

What are the limitations to using Argus software?

Answer 13

If you do not know how to use the software it will produce an incorrect valuation,
Wrong inputs = incorrect valuation.

Question 14

Would you expect the freehold capital rate for a let investment to be higher than for a vacant unit? Why?

Answer 14

Yes, let investment means cap rate is higher. With VP, the value tends to be lower therefore reflecting a lower capital value rate. VP there is no income and therefore you are assuming void periods which reflects a lower value. Some people may outbid the investment market because they want that specific property.

Question 15

What makes a property suitable for loan security purposes?

Answer 15

Generally it is: quality of location, building, condition, EPC, marketability (letting & sale).

Another factor is income stream.

Other factors- loan terms - which we didn’t know.

Question 16

How do arrears affect value?

Answer 16

When you beyond Q3 then it is a worry if arrears are not paid. Rent is contracted, and your val is based on rent receivable. Shouldn’t apply your yield to your net rent. May marginally adjust your yield to reflect the arrears.

Question 17

How does a leak impact value>

Answer 17

Depends on the severity of the leak. If the leak is causing structural damage, this could impact on capital expenditure costs which would impact value

Question 18

what are important works that people are considering when upgrading their properties>

Answer 18

M&E - mechanincal and electrical - lifts , services etc.

Question 19

What are the components to a residual valuation?

Answer 19

Gross development value, derived from client inputs such as market rents and sale prices. Build costs are another component which include, contingency, section 106, CIL/ MCIL, professional fees and finance. GDV – costs – profit = land value.
The GDV – costs of getting there. Costs: base build costs, disposal finance etc…
Maidstone – client inputs floor areas. Tottenham – client inputs were floor area.

Question 20

What is material uncertainty?

Answer 20

This is contained in the RICS global standards 2021 under VPGA 10.

Valuers should comment on any material uncertainty that may affect the valuation such as the impact of COVID 19. It relates to the risk surrounding the valuation of the asset. In a period of uncertainty, where would it be inappropriate? Where you have enough market evidence.

Question 21

PI cover, what did you agree?

Answer 21

Capped at 50% of the MV.

Agreed on an ad hoc basis. Anything with an estimated value of £5m plus we try to cap our liability at 33% of the estimated MV.

Min £1m, max £50m.

Question 22

What DD checks may you carry out prior to the inspection?

Answer 22

Location checks, contamination checks, comps checks.

Location where is it, access routes, transport links
Contamination, environmental hazards, flooding
comparable evidence/ local market evidence

Question 23

What deleterious materials are there?

Answer 23

High Alumina cement
Woodwool shuttering
calcium chloride

Question 24

When woud you not zone a shop?

Answer 24

In a shopping centre for a large store like John Lewis .

Not used on all retail pitches – so you would consider not zoning a unit on a retail pitch in a small town. In order to establish whether it’s suitable to zone in that area you would contact agents to see if comps are on zoning basis or sq ft

Question 25

What types of statutory DD did you carry out?

Answer 25

EPC checks, Flood risk, rating, invasive plants

Question 26

Where did you measure the eaves height to?

Answer 26

The hornch of the eaves.

Question 27

Were the offices over part or whole of the 1st floor.

Answer 27

part only. Space under the 1st floor was usable.

Question 28

How long was left on the lease?

Answer 28

9 months and 2 days, ULT 0.76 years.

Question 29

Did you discount the 1st floor mezz in assessing your rent psf?

Answer 29

No, I applied a full rate to the 1st floor office. I deemed it appropriate to apply a full rate as this was fully fitted office space. If it was a mezzanine floor used as open storage, I would have considered applying a half rate to the 1st floor.

Question 30

Why is there a difference in rents between unit 6 and unit 11?

Answer 30

Unit 11 was discounted due to the 1st floor mezz used as storage.

Question 31

Why did you think the yield would be similar for 5B Shakespeare despite longer ULT?

Answer 31

It had the same configuration as the subject also within a similar location. Although the ULT was longer for 5B, I deemed the security of income to be similar with similar covenant strengths.

Question 32

Why is a multi-let property more attractive?

Answer 32

Provides security of income and a diverse income stream.

Question 33

Why might a multi-let property be less attractive?

Answer 33

the tenants tend to have a weaker covenant strength for multi let units. The covenants of the tenants tend to be worse for smaller multi-let properties.

Question 34

What notices are served if a tenant wishes to agree a new lease?

Answer 34

Section 26 by the tenant. Section 25 by the landlord. I have not carried L&T out as a competency so cannot therefore comment, however I do understand that a section 26 is served by the tenant.

Question 35

Did you allow for PC’s and why?

Answer 35

All commerial properties you need to allow for PC’s. Which included stamp duty, legal fees and agency fee.

Question 36

Would the yield be different if the tenant agreed a new lease?

Answer 36

If the tenant agreed a new lease (signed) prior to the valuation, I would consider applying a slightly stronger NIY to the future cash flow. In 2022, any difference was marginal.

Question 37

Do you think your capital value should be higher?

Answer 37

No, it was in line with comparable evidence I analysed at the time.

Question 38

Why might it not be comparable? 29 central avenue

Answer 38

The unit is larger than the subject which could attract a different occupier. For example, a larger company with a better covenant strength.

Question 39

What was included in your TOE?

Answer 39

Date of the valuation, property address, fee agreed, level of PI cover, complaints handling procedure, bases of value.

Question 40

What other statutory DD did you do?

Answer 40

EPC checks, Rates, planning, flood risk

Question 41

Did this impact the value of the property – flood risk?

Answer 41

No. I discussed with borrow that insurance was in place for such risk

Question 42

What would the impact on value be if the office was larger than 50%?

Answer 42

If you have more than 20% office content, the market is reduced. Not helpful, could reduce value.

Question 43

How did you agree the fee for your instruction?

Answer 43

By negotiation.

Didnt undercut the market, no collusion and no price fixing.

Question 44

Who pays for the shared parking? Is there a service charge?

Answer 44

Parking belong to the unit.

Question 45

How would you calculate your net effective rent?

Answer 45

Straight line method. Take into account the rent free periods.

You would take off 3 months fitting out period from the rent free.

Question 46

If there was not enough rental evidence or yield evidence, what would you do? And how would this impact your valuation?

Answer 46

I would extend my comparable search. For yield evidence, I would look further afield at similar locations with similar industrial units/ parks. For rental evidence, I would look slightly further out, and apply a discount depending on location.

Question 47

Why did you not include VP value? Did the client not request the VP value for loan security valuation?

Answer 47

The client did not request the VP value at the time.

Question 48

On your threats, you mention potential costs and income void associated with the vacant property, did you allow for this in your valuation? What are the potential costs?

Answer 48

I allowed for 6 months void period and 3 months rent free on expiry. Commercial premises are exempt for 3 months on business rates and a further 3 months for empty industrial premises. The potential costs are business rates if the property is vacant for more than 6 months.

allowed for lettings costs of 15%

Question 49

You have mentioned that the tenant is currently on an FRI lease. In your SWOT analysis an opportunity you mention is to agree a full repairing and insuring lease, what are the benefits to this?

Answer 49

Reduces the liability of the freeholder’s repairing obligation. Terms under the lease are fully exclusive.

Question 50

Did you allow for fit out in your rent free?

Answer 50

No. The office space was fully fit out, 3 months rent free was in accordance with the current market conditions.

Question 51

Why are the capital value rates so different?

Answer 51

The comps are all further affield, so reflects rates for that area with regards to the rent as well.

If you look at unit 15, this is directly comparable. Cap rates should be considered when they are close to the subject property.

Question 52

Why did you target NIY of 4.75%?

Answer 52

This was in line with the market at the time and evidence. The intention of the evidence is to support the yield that I adopted. I casted the net further afield.

Question 53

Why was your cap val rate similar to unit 15?

Answer 53

there was a short ULT on our property. although the industrial market was strong we assumed the property would be re-let fairly quickly or not be vacant due to the current tenant renewing.