Loan Security Level 3 Flashcards
Bristol - what did you flag in review of DD that would impact the advice?
Environmental assessments
- EPC (a) - impact operating costs and more energy efficient
- Flood risk (low risk) - not impacted value
Planning
- Check Property had the correct planning
Were there any lender specific requirements from the lender?
The bank did not have any specific details
we provided due diligence on anything that could materially impacts value
Full consideration of what risk there may be
Hoxton - what were you looking for in the certificate of title?
Clean and marketable title
Ownership structure - FH (not onerous)
Had no further consideration
What might be classed as an onerous clause?
- If it was leasehold there might be an onerous ground rent
- Restricted use for say 15 years
How did you comment on the future performance of the asset?
- Supply and demand (pipeline - how that might impact future demand)
- Considered future restriction on student visas - determined limited impacts due to strong domestic demand
- Limited pipeline would mean limited impact on future demand
Were you provided with the loan terms?
What wider market influences would be included in your advice/SWOT?
- Visa restrictions
- High inflation impacting developments = supply and demand imbalance = increased rates
Wider market influences?
- current situation in the middle east
- restrictions on visas
HIGHLIGHT ANYTHING THAT MAY COME TO LIGHT AND IMAPCT THE VALUE DURING THE TERM OF THE LOAN - that will be detrimental to the properties performance
What other things would you add to loan security valuation?
Taking the loan terms into consideration:
- Comment on the economic life
- Future proofing of the asset in line with the loan term
- ESG considerations take into above
- wider market influences
What strengths did you consider in terms of the economic life of the property?
- New build properties (good esg)
Wider influences piece that impacts your reasoned advice
- Contents (SWOT)
- Emphasis on lender requirements based on risk assessment needs
(ESG) - Lenders may now request a contamination report (Groundsure) check to see how the contamination may impact the property during the term of the loan
What are specifics lenders are looking at/requesting from you?
Economic life
ESG piece
Environmental
- is there a boiler system in place that may be obsolete?
- if an older building may pose risks
- EPC
Social
- will it still be demand in the future?
Governance
- any regulation coming in eg visas
- supply and demand - no evidence of falling demand
Essentially we are meeting the clients needs by providing them with a SWOT analysis so that they can do their internal risk analysis
What DD did you look at for Bristol?
Title docs
- FH
- Clean and marketable
Technical DD
- considered good condition
- HRB confirmation registration
- FRA low
Environmental
- low flood risk
- EPC (C)
Planning
- correct planning
What is a nomination agreement?
- A contract between a university and a student accommodation provider.
- The agreement ensures that the university has access to a minimum number of student rooms for a set period of time.
- In exchange, the accommodation provider receives a guaranteed income.
How does a nomination agreement impact risk?
- Makes it less risky as guaranteed income for term of agreement
- even if student fails to pay
How do rents differ for nomination agreements
Tend to be at a lower rate for the longer term agreements
WHat are the benefits to the provider?
- A guaranteed income for a set period
- Cost savings in marketing efforts
What were the terms of the nomination agreement?
50% rooms
10 years
Rent at 100% occupancy
Rent review CPI linked
51-week tenancies
What was in the Experian report?
Delphi score: 81-90 low risk
What advise did you give for Bristol?
- market would consider the low irsk credit profiling positively
- risk was further mitigated as rent is covered if student failed = secure income stream
- advised the remainder of the rooms would achieve strong rental growth due to:
strong demand and supply dynamics
good quality asset
good location etc
What else is included in the experian credit rating?
Company name
Credit limit
Delphi band ie low risk
Delphi score
Companies financials
What further advice did you give from the credit rating?
- I advised on the rating and what the market would likely consider the covenant at
- Caveat I am not to advise on lending decisions and risk
- They must understand their own appetite for risk
What was the description of the Bristol asset?
Former office conversion with side and roof extension
Concrete framed construction with a mix of brick and metal sheet cladding
Double glazed windows
8 storeys
what was the location of the Bristol asset?
Bristol has a total student population of 60,000
15 min walk to Uni
Exeter good university location
What were the strengths of the Bristol asset?
Super prime macro and micro location
- Established student area close to city centre and UoB
UoB ranked 16th Times Good University Guide
Relatively modern conversion
Modern internal finish and high spec
13 min walk to UoB and 5 mins to amenities
Large unmet demand (Bristol having to house students in Newport)
What were the weaknesses of the Bristol asset?
- Property is subject to a 10 year lease with index linked review
- Given the strength of the Bristol market, may not keep pace with increase in rents
- Operational inefficiencies – may have less appeal to larger institutional investors
What were the opportunities of the Bristol asset?
Reduce operational expenditure
What were the threats for bristol?
Relatively large pipeline - large unmet demand unlikely to impact
What are the benefits of a noms agreement?
Enhanced occupancy
- Guarantees a number of beds, reducing vacancy risk
Stable income stream
- Guaranteed income, even if student defaults on payment
Reduced marketing costs
how was the yield impacted?
Slight softening to lease in place
- BIC = 4.75& for DL
- we adopted 4.5%
How did you consider the lease yield?
Looked at comps for other noms
Main comp: Metalworks Bristol (4.75%)
15 year noms agreement
Marlborough House occupies a superior, proven location within Bristol,
Metalworks will provide a newer, well specified property on completion, with extensive amenities.
The term certain on Marlborough House is shorter, and the direct let reversion can therefore be accessed sooner.
We would anticipate Marlborough House subject to the existing lease achieving a yield close to 4.50%, taking into the factors outlined above, and considering the asset is operational with no funding risk unlike Metalworks.
What would be classed as an onerous lease title for Hoxton?
- Not clean and marketable
- is leasehold check if there was an onerous ground rent
- short lease length
How did you know there was a good level of demand in London for transactions?
2 schemes recently transacted
1. Pavilion Court, Wembley (May 2024) - 5.5%
Urbanest Hoxton occupies a superior location and thus would achieve a keener yield on 24/25 NOI.
- Vega Vauxhall - comparable (4.25%)
What advise did you give on Hoxton?
I advised:
- high quality asset and the strong historic occupancy levels of the asset, would positively impact value
- asset would likely achieve strong rental levels and thus would be appropriate for secured lending
Why did you consider it suitable for secured lending?
- Super prime London location
- Very strong demand and supply dynamics
- Multiple unis = high demand
- Modern, ESG building (future proof)
- no problems with DD
Did you comment on the marketability of Hoxton?
- Good demand from investors given that the scheme is income producing and stabilised.
- Good lot sizes that would appeal to a range of investors
- Prime location within Prime Zone 1 locations.
- We anticipate a sale could be concluded within 6 to 9 months.
We expect reasonable demand from banks to refinance the property given that London is an attractive market for PBSA investors, especially as the market is becoming more challenging due to current planning policies and affordability requirements.
What were the strengths of Hoxton?
- London has the most compelling supply and demand dynamics
- Zone 1 location
- High specification and amenity offering
- Fully let
- Diversified bed mix
- No affordable or ongoing nomination requirements (as defined under the London Plan)
- Strong value add potential with current addition of 65 beds
What were the weaknesses of Hoxton?
- Communal offering is inferior to some competing schemes
- Any value add through further development would be encumbered by the necessity to provide affordable bedspaces in line with the London Plan
What were the opportunities of Hoxton?
Potential for future rental growth based on strong supply and demand dynamics
What were the threats of Hoxton?
Operational running costs continue to be under cost increase pressure due to inflation and utility costs.
What were the loan details at Hoxton?
Term: 5 years (from 2022) with a 2 year extension option
What factors would impact the security of the loan?
Property
- Location (London)
- Condition/age
- Room mix
- Specification
Market factors
- Student demand
Financial factors
- Rental income and occupancy
- wider economic impacts
- Operational costs
- Lenders appetite
Legal and regulatory
- Planning
- Nominations agreements
- Legal title
ESG
if the credit report came back with a weak covenant, what would do?
It would not impact the value
But it would impact the advise we gave on the suitable for secured lending
What essentially are you doing for loan security?
Value the asset and take into account all the risks presented and relay them to the lender so they can make a holistic decision on that
How did you ascertain that it was suitable for security lending?
- along with SWOT analysis we were provided with the loan terms and deduced that the LTV was 60% and this was in line with their appetite for risk
What might a potential purchaser likely consider?
Do you look at the London market with extra caution when considering loan security?
- Strong fundamentals of London market
- very under supplied market
- lots of international student demand
- occupancy voids are unexpected
What sort of things would you look out for in Certificate on title that might impact the marketability
- Freehold - clean and marketable title
- Leasehold
- Covenants
Can you give some title examples of what would impact the marketability?
Leasehold with onerous ground rent
* negatively impact the marketability
Leasehold property
* Less marketable, so if you needed to sell quickly you would likely take a bigger hit on the price
What is it about a leasehold property that would impact the marketability?
- International investors less likely to invest as they don’t understand leaseholds
- Diminishes the buyer pool
- Less buyers = longer to buy it and thus pricing won’t achieve the best pricing
Other onerous clauses?
- Restrictive user clause
- Right of access
- Chancel repair liability
What did you advise from the Experian check?
- Ensured that University’s turnover was at least 3x times the rent to cover the rent
- Looked delphi score
- Checked P&L
- not just about the delphi score
- turnover needs to cover the rent
Valuation based on a shortened marketing period
- NOT MARKET VALUE
- Investment value of a truncated marketing period -
What would you do if asked to provide a value for shortened marketing period?
- Look for any evidence
- Failing that, speak to capital markets colleagues on who the likely buyers would be and what they would likely expect
- and what discount on the yield
- typically expect a softer yield
- less time to do DD which is an added risk
How are the profits method and investment method different?
PBSA - capitalizing the market rent
Profits method - capitalizing the trading profits
Are you not looking at profit in student?
You are not looking at profit
You are looking at market rent - operating costs
The profits method
- Valuing a business
- Student is not valuing the profit
What are you valuing differently with Hotels and PBSA
- PBSA - valuing a property based with an income on the income it produces
- Hotels - valuing the business performance not the property
What do you mean by market standard?
How an investors in the space have always
The investment market has always approached PBSA by looking at net income at day one and capitalising it with a NIY
Not a profits based valaution
Shortened marketing period?
- Shouldn’t make too much of a difference
- Level of DD takes 9-12 months
- 6 month marketing period - calculate market value and get evidence from cap markets of an appropriate discount to cap value ie 10%
- % would depend the strength of the asset
Do you provide VP figures for PBSA?
Common not to provide VP figure because the market resets every year
If it has historically let well and is established, you would continue to expect it to let well year on year
How does the market interpret VP figures?
If there is a long term nomination agreement in place the VP figure would be assuming all DL
Does a noms agreement fall away with sale?
No it would stay
Can you value student on a DCF basis?
Yes you can, but it is not market pratice
Because it isn’t market practice, discount rate comps aren’t readily available
Why do you use an NIY?
That is how the investment market approaches it and to form our opinion of yield, we look at investment evidence which is always reported and analysed based on the NIY
Difference between GIY and NIY?
Net of purchasers costs as all transactions incur purchasers costs
Why is marketability high in London?
- Tight planning controls
- Affordable restrictions
Making new developments limited
Valuation margin for error
According to RICS standards and case law, a typical margin of error for a property valuation is considered to be around 10-15%
