Submission - Case Study

Question 1

What did you do before instruction?

Answer 1

Competence
Independence
TOE

Question 2

• Did you inspect the site?

Answer 2

Yes – the inspection was external for the purpose of agency. This meant that it was to understand the general condition, repair, presentation, marketing etc. rather than factors effecting value. I ensured that I notified the persons responsible on site. Pen, and camera for the financial memorandum purpose. The building was in good repair with no structural issues, just aesthetics.

Question 3

• What RICS guidance in relation to Inspection? What did you do prior to the visit?

Answer 3

Surveying safely GN 2019 - Carried out a desktop research, planned my travel and timing, updated my team and diary.

Question 4

• Conflict of Interest Check, how did you do this?

Answer 4

Through CBRE internal systems. Client and Building

Question 5

• How did you assess market sentiment?

Answer 5

Through transaction tracker and news.

Question 6

• Minimum things to be included in TOE?

Answer 6

Basis of instruction, it provides a scope of work, fee and calculation CHP and terms of business.

Question 7

• Asset overview, what did this involve?

Answer 7

Number of units and pricing
Overview of the location of the asset
Amenities
Demographics - 200k households within 60 mins – best place to live 2019.

Question 8

• Did you just adopt client’s assumptions?

Answer 8

Yes – whilst we included our healthcare team to cross check assumptions, the client was already in exclusivity and wanted the debt metrics to be based on their assumptions

Question 9

• How would you value this site? How would you value the development portion? What was the GDV?

Answer 9

Development Appraisal. Assess the GDV of the phases

£35m Phase 1&2
£40m Phase 3

Question 10

• What is currently on the site?

Answer 10

The existing house and mews - and infrastructure

Question 11

• Did you run any covenant checks on Elysian – what were the results?

Answer 11

Elysian were run through our know you client processes that usually highlight any issues.

Question 12

• What was the impact on the property market of coronavirus? Examples?

Answer 12

From a lending perspective – retraction of senior lenders, lower LTV and pricing

Question 13

• What is senior debt?

Answer 13

Most secure part of the capital stack – is the first to be repaid – has security on the property - cheapest IR

Question 14

• Where did you get your comps from? What did they tell you? Any guidance to a lack of comparables?

Answer 14

Local Agents, Internal Systems and Client

Question 15

• How did you assess quality for comparables?

Answer 15

Quality of comparison metric used to evaluate competitive schemes based on location, amenities , healthcare provision and overall quality of the development.
The comparable evidence for real estate valuations 2019 guidance note

Question 16

• What is internal modelling best practice?

Answer 16

Disclaimer, elegant and clear formula, colour coding, error checks and sensitivities, one formula per row on cashflow

Question 17

• What was your PII for this instruction? and uninsured excess?

Answer 17

Turnover >200k so the pii had to be at least over £1m

Un-insured excess liability >500k is 2.5% of sum insured

Question 18

• How many have been sold?

Answer 18

3

Question 19

• How many properties think will do on a pre-sale? how many thereafter?

Answer 19

30% presale - 2 per month after (conservative)

Question 20

Who is carrying out the de-snagging?

Answer 20

Existing contractor - was completed within a couple of months - Client put 70k per apartment aside for specification updates

Question 21

• What sort of deposit required for apartments?

Answer 21

5%

Question 22

• Any ground rent payable on these units?

Answer 22

No ground rent - Service charge and DMF

Question 23

What is a DMF?

Answer 23

Exit Fee: This fee will be paid when your apartment is sold on. The payment is used to cover building repairs and maintenance, replacement of furniture, fixtures, and equipment (such as lifts) for the communal areas.

Fee charged on exit for the management of the property and services - it rises 5% every year up to a maximum of 20% of the value of the property.

Question 24

• What type of contract they going to put in place for phase 3?

Answer 24

To be confirmed - the planning is in place and there is potential for upside should Elysian decide to go back to planning

Question 25

Is it listed?

Answer 25

Grade II listed building that was carefully refurbished.

The Architect, Contractor and previous owners worked with the local Conservation Officer, Planners and Building Control to repair features within the building where possible, without disguising the modern interventions, which (while sensitive to their context) are clearly legible as new additions and which meet regulatory and planning requirements.

Question 26

How did you know it’s Georgian? What is the construction of your building?

Answer 26

The classic Georgian building is the Classical country house, standing alone in its own landscaped park. 1700. Gracious classical proportions and symmetry as a general rule

Architectural imitations of Classical Roman and Greek originals

Symmetrical chimneys, Columns, Symmetrical window placement mirrored on both stories

The original structure of Wildernesse House is predominantly load bearing masonry under a mix of timber trussed pitched slate roofs and flat lead roofs.

The Mews Houses are of concrete frame construction with pitched timber roofs, with a mix of slate and three layer felt to the dormers.

Question 27

What amenities does the house have?

Answer 27

The parking ratio is 1:1 (31 spaces), there is space for additional parking at the front of
Wilderness House if required. Phase 1 & 2 benefits from amenity space including
a the site wide restaurant, a gym, swimming pool, tennis court and wellness centre.
The interior of the property is mostly to good specification, with original feature
restored to a high quality and new modern appliances fit.

Question 28

What were some of the strengths of the asset?

Answer 28

 Affluent location close to Sevenoaks town centre, within the desirable gated community
of the Wildernesse Estate.
 Excellent demographic profile with 20.4% of the population over 65 years (GB average
18.6%) and the 9.9% above the age of 75 years (GB average 8.7%).
 All amenity accommodation has been built to a good specification ready for operation.
 Accommodation at Phase 1 & 2 is of a high standard.
 Planning permission already in place for Phase 3.

Question 29

What were some of the asset weaknesses?

Answer 29

 Slow sales rates to date due to lack of marketing and building defect issues post completion.
 Existing operational management has been overlooked in place of rectifying building defects.
 Given the building has remained relatively unoccupied for some time, local residents may view the scheme negatively.

Question 30

Was the property suitable for loan security? What else has to be included?

Answer 30

Overall the Property provides adequate security for prudent lending purposes based upon the values reported here in.

Method, suitability of mortgage, conflicts past 2 years, special assumptions etc.

Question 31

What is GDV?

Answer 31

“The aggregate market value of the proposed development, assessed on the assumption that the development is complete at the
date of valuation in the market conditions prevailing at that date”.

RICS Guidance Note on the Valuation of Development Property 2019

Question 32

Any covenants?

Answer 32

LTGDV < 51%

Question 33

What were the DMF calculations?

Answer 33

Event premium formula is:
DC x NY x P
Where:
 DC is the disposal consideration at date of disposal (quantum paid for the assignmentof a lease) note when this is less than market value the Landlord may chose for the disposal consideration to be treated as market value
 NY is whole number of years rounded up, e.g. 1.1 years would be NY 2
 P is 5% (0.05)

Question 34

What was the service charge?

Answer 34

Service Charge: A service charge, which varies according to the size of your apartment, covers the cost of running the building, including communal utilities, staffing, etc.

Incl:
Property Upkeep
Security
Hospitality and common parts
Care

Question 35

What were some of the key demographic statistics in the local area?

Answer 35

There are 240,000 people aged 65 years plus (20% growth)

40k+ houses over £1m in the local area

Question 36

What was the impact of COVID on the sector?

Answer 36

Whilst the senior housing market is very much linked to the fundamentals behind the standard residential market, the demand for
suitable housing provision is not necessarily affected by the changes in the residential market. Indeed, the current COVID-19
pandemic has further highlighted the need for adequate housing for the more vulnerable and isolated within our communities.
Although it is too soon to know for sure, we do expect the impact of lockdown to have a positive effect on the supply of senior
housing with care in the long term across the UK.

Question 37

Why is the UK in it’s infancy of the sector compared to Aus and US?

Answer 37

The number of people across the UK aged over 65 years is projected to grow 20% in the next 5 years. Old age is no longer seen as a single, defined way of life as it was in the past, resulting in an increasing diversity among older people in terms of age, culture, wealth, ability and lifestyles.

0.5% of the UK’s population over 65 years currently live in a retirement community (including extra care housing, housing with care, assisted living, close care apartments and retirement villages). This is compared to 5.6% in the USA, 5.25% in Australia and 5.0% in New Zealand.

It is also interesting to note that this growing senior population also represents the wealthiest demographic in terms of housing equity, with the over 65’s
currently holding circa £1.2trn of the total of the UK housing equity.

The retirement living sector is still in its infancy when compared against the US, Australia and New Zealand where retirement living is viewed more as a lifestyle choice rather than a ‘last resort’.

Question 38

Isn’t 55 young for a retirement village?

Answer 38

The future of elderly accommodation in this country is likely to mirror that seen in other parts of the world.
It is recognised that the elderly population is increasingly discerning and requires on site social facilities such as restaurant, bar, gymnasium, facilities for meetings and clubs, shop, hairdressing salon, therapy rooms, laundry, cash machine, post box and sometimes a swimming pool.
The unifying factor is something of a ‘village’ atmosphere with grounds and communal facilities that are significantly beyond those in traditional flatted sheltered schemes.

Question 39

How did you deal with little comparable evidence?

Answer 39

Quality of comparison metric used to evaluate competitive schemes based on location, amenities , healthcare provision and overall quality of the development.
The comparable evidence for real estate valuations 2019 guidance note

Also three sales within the site gave an indication

Question 40

What is the value of the DMF income?

Answer 40

£9m worked out using a DCF
Expected churn rate - recycling of units
20% fee

Question 41

What is the opportunity in the senior living sector?

Answer 41

There is a growing demand and supply imbalance in the UK, driven by an ageing population and structural undersupply. The number of people aged 65+ living in the UK currently equates to c.12m, and is expected to grow by 20% by 2027
Homeowner equity in Britain among people aged over 65 has been estimated to total £1.6 trillion (Airey, 2018)

There is a chronic undersupply of housing with care across the UK
Mature retirement housing markets such as the US, Australia and New Zealand, where over 5 per cent of over 65s live in housing with care

Question 42

Who are Elysian?

Answer 42

Elysian is a best in class vertically integrated retirement living investor, developer and operator of specialist independent
/ assisted living, catering to the unmet demand within the growing UK affluent elderly population

15+ team with in house investment management, planning, development, operations and sales expertise

Question 43

Where is seven oaks?

Answer 43

South East of London, off junction 5 of the M25

30 min train into london

Question 44

Key attractions of sevenoaks?

Answer 44

Sevenoaks was in the top list for theSunday Times ‘Best Place to Live in The UK 2019’.

The site is situated c.1.5 mile from the High Street and Sevenoaks train station

240k +65 within a 60 min drive - 41k w/ house>£1m

Question 44

Key attractions of sevenoaks?

Answer 44

Sevenoaks was in the top list for theSunday Times ‘Best Place to Live in The UK 2019’.

The site is situated c.1.5 mile from the High Street and Sevenoaks train station

240k +65 within a 60 min drive - 41k w/ house>£1m

Question 45

Expected sales plan?

Answer 45

Existing contractor to amend all snagging - Elysian have set aside £70k per apartment for upgrades etc.
Elysian believe the sales period will stretch between 18 and 24 months, which is conservative at Elysian believe the sales period will stretch between 18 and 24 months, which is conservative at 1.2 to 1.5 per month
(vs. 3 4 per month on other projects)

Elysian have been conservative at 30% sold at PC (with a built occupied scheme in the
run up before PC of the Phase 3), and 2 sales per month thereafter, for a total of 21 months

Question 46

How many units are there? What’s the average price?

Answer 46

84, 3 of which have been sold.

£712 psf

£600k - £2m
£500 - £1m

Question 47

Who were the stakeholders?

Answer 47

CBRE and the Client

Due to the pandemic, most communication was virtual - this meant that regular call were scheduled to maintain clear and concise working arrangements

Question 48

What is the difference between Retirement Living vs Care Homes?

Answer 48

Retirement living is an senior living option that allows residents ownership, independence, amenities with the option or access to care when required.

Care homes usually follow a rental/payment model and the residence usually require a high level of care. This was obviously very difficult to protect during the pandemic due to the more moderate accommodation and health requirements.

The pandemic arguably increased the attractiveness of retirement living as although independence is maintained in accessible needs based housing, that allow tenants to isolate if required, it also provides a community atmosphere to reduce the impact of isolation.

Question 49

What do you mean by cautious market dynamics?

Answer 49

Specific to debt - but applicable to the entire sector. a drop in transaction due to the uncertainty and therefore increase in perceived risk.

In the debt market, this increase in perceived risk led to many lenders de-risking their loan offers by reducing the loan amount based on the assets value - across the board a 10% hit was felt.

The do this because if the loan was to fail, there is a higher chance that they would recover their loan amount on repossession.

Also pricing increase as the lenders wanted to be rewarded for undertaking more risk in the market - this was roughly 150bps

Obviously lenders in this market were rewarded for supporting successful projects as pricing was higher for de-risked schemes.

Question 50

You mentioned a smaller lender pool dominated by debt funds. What does this mean?

Answer 50

Due to the macro factors at play, some of the senior lenders such as the commercial banks and insurers put in place a market wide pause on new loan generation, so that they could understand the risk posed by the pandemic.

These lenders target long-term stable income and usually price this cheaply due to the apparent low risk associated.

Consequently, the smaller market was populated by debt funds. These are funds who generate returns by investing in debt products. They usually have higher required returns and therefore take on more risk and set higher prices.

They can also be more flexible with regards to process and covenants compared to more senior lenders to offer capital quickly.

Question 51

Why did you believe that the splitting the facilities would have achieved more preferable pricing?

Answer 51

Debt funds who were prominent in the market usually have a more specific investment criteria. For example, sectors or investment/development financing.

Consequently, usually they are more educated and more aligned to the market for their investment strategy.

Usually this means they understand the risk, have evidence to back this up and can price funding efficiently.

However, due to the nature of this development with the combination it became clear that the lenders were not keen on splitting the title.

A club deal was proposed but meant the investment facility would be charged at the same, higher price as the development portion.

Consequently the lender proposing a weighted financing of the two was providing more attractive pricing.

Question 52

What is snagging?

Answer 52

“Snagging” is a necessary process of identifying issues with your new build property. Snagging issues range from leaks, heating faults, un-level ceilings, floors and walls, damaged units, missing insulation, poor joinery and structural issues.

Question 53

Who’s responsibility is snagging?

Answer 53

There is usually a warranty in place on the contractor to fix any snagging issues in the development - The contractor for the previous owner went into administration. They appointed a contractor to finalize the snagging issues. This was in the process of being completed.

Question 54

Give an example of the snagging?

Answer 54

water ingress is when water infiltrates a property. This term can also be used to describe the penetrating damp that can permeate some properties. Common signs that you have water ingress is the development of mould and damp patches on walls and floors.

water damage to the ceiling of 2 ground floor corridors (repairs have been undertaken to the relevant roof area, redecoration required).

Question 55

What was wrong with the finishes specification and design?

Answer 55

Didn’t align to the usual Elysium standards and the expectations of a discerning upmarket consumer for the price points.

Potentially reflected in the lack of sales.

Set aside £70k per apartment to update:

appliances, fittings, furniture, bathroom, fitting lifts costed, design

Question 56

Why was the outsourcing of the marketing an issue?

Answer 56

The product differs from a usual residential product and so local estate agents may have been underselling the opportunity.

Lifestyle purchase at its heart, driven by the added services and benefits not the property on its own
Multi-faceted offer including healthcare, community, food & beverage
Complex lease, regulated sales & marketing environment
Thorough discovery process required, understanding of the multiple needs of the customer
Wider catchment means very local knowledge is less relevant
Few, if any, full service retirement offerings use estate agents for anything other than referrals

Question 57

How did you deal with the lack of comparable data?

Answer 57

The comparable evidence was given a quality of comparison metric. Working with the Healthcare team, I created a tool used to evaluate competitive schemes based on location, amenities, healthcare provision and overall quality of the development.

Used the hierarchy of evidence from Comparable evidence in real estate valuation 2019. meant that the units already sold could be used.

Ultimately, this is a market that is in its infancy and there is a dearth of comparables. Consequently, the sector and market fundamentals were important.

Elysian’s track record pointed to homes over £1m in the vicinity as being an important statistic. The potential growth in the sector also helped educate the lender. Fortunately, this was a target space for the lender which made the negotiations run smoothly.

Question 58

Why is a clear scope of work important?

Answer 58

Dispute resolution purposes
Can always clear up any misunderstanding through clear TOE and scope
Understand original client request and allows them to ensure you complete the work to satisfactory standard.

Question 59

Why was frequent communication required?

Answer 59

Covid - unusual, wanted to make the client comfortable, keep them updated and provided a great service despite the issues.

Question 60

Tell me about the financial model?

Answer 60

Due to the exclusivity period, it was based on the clients assumptions that were cautious to reiterate the quality of the scheme.

I cash flowed the predicted sales plan based on the GDV of the units.

I cash flowed the construction costs, professional fees, contingencies, land costs etc. according to the drawdown schedule supplied.

I then added the debt mechanism. The debt assumptions could be altered by the lenders in terms of loan amount, LTC, margin, entry and exit fees, non utilization etc. The calculations were based on the cost drawdowns.

The repayment method could be altered using a drop down. Repayment through sales, or rolled up into a final bullet payment at the term of the loan.

I included covenant checks that could be altered by the lenders such as LTGDV on running basis.

Question 61

What did you do on your inspection?

Answer 61

Agency purposes

External inspection of the local area, the site area, the exterior of the property from the top down and the infrastructure.

Images helped with the IM production and lender conversations

Question 62

How did you experience in the debt market help?

Answer 62

Meant I could be open and honest with the client upfront about pricing expectations and probability of success.

I knew where pricing was and which lenders remained active despite the pandemic.

I also knew what the lenders would want to see in the IM to make the process as efficient as possible.

Question 63

What was your advice on indicative terms?

Answer 63

Side by side
Loan amount, term, margin, fees, covenants, warranties, etc.
Total fees, total facility amount
Commentary regarding any restrictive covenants etc.

Side by side allows the borrower to instantly compare the options and make a swift educated decision on the best option.

Question 64

You’ve mentioned limitations to advice and knowledge gaps, what do you mean?

Answer 64

Despite working on multiple retirement living projects, I wanted to ensure that our client received the best service.

Our service focusses on the debt component and lender relationships. However, it was important to be able to educate the lenders on the sector and have an understanding of the sector, its strengths, weaknesses and the opportunity.

Due to the fact that I work on multiple sectors, it was interesting to get an idea of the specific market knowledge that may be required should I specialise in the future

Question 65

How would you be more proactive around the lack of comparable evidence?

Answer 65

Whilst the sector remains in its infancy, the comparable evidence will remain low.

Focusing on residential comparable, although helpful for context, doesn’t take into account the multitude of extra offerings.

Consequently, the focus should be on the sector, the asset and the market forecasts to get the lender comfortable.

Question 66

What would be your advice on sites with multiple phases?

Answer 66

Preference for one lender due to the more streamlined legal process.

Consequently, I would understand the lenders price inelasticity to smooth, clear transaction compared with achieving the best pricing.

Question 67

How did the mandate go. There is an on-going relationship?

Answer 67

Very well.

The biggest evidence of this was in the re-engagement for the client on their future pipeline.

This also meant that we were able to approach lenders with a significant understanding of the class, the borrower.

Question 68

What did the healthcare team add to the process?

Answer 68

They were able to provide market context in the form of research, prices and comparable evidence

They were able to cross check the clients assumptions

We were able to include them in lender discussions so that the lenders could get comfortable with the sector

Question 69

What did the financing request include?

Answer 69

Gave the lenders an indication of the terms expected to be submitted

Facility size

Term

Purpose - Acquisition, capex

Repayment - bullet, sales etc.

Margin

Arrangement

Exit

Non Utilization

Question 70

Why is the sponsor and management overview required?

Answer 70

This is ultimately who the lender is entrusting with the funding. Although the asset provides security, the operator ultimately ensures that repayment is made.

Given the lender comfort around the sponsors track record, management and experience gives the lender comfort that they know what they are doing, they’ve done it before and will likely continue this success.

It’s the reason senior lenders only lent to existing clients during the pandemic.

Question 71

What was the impact of covid on the property market?

Answer 71

Depends on sector 
Detrimental for retail
Positive for last mile logistics
Unknown for offices
Fall in transactional data

Question 72

What was the agreed structure?

Answer 72

Elysian wanted a flexible structure, dependent on whether they were achieving the business plan - Final bullet payment on maturity.

The lender wanted 100% repayment from unit sales.

In negotiations this was agreed at 50% - this would revert to 100% should their be deviation from the business plan or tripping of covenants.

Question 73

What is the 10% of build contract as guarantee for overruns?

Answer 73

The sponsor is required to provide additional equity pursuant to a cost overrun guarantee, which is a standard security in real estate development financing. Typically this cost guarantee is limited to between five and 10 percent of the total project costs

Question 74

What are warranties from contractors?

Answer 74

Warranties may be used to provide assurance from one party to another that goods and/or services will meet certain expectations, e.g. fit for purpose, being free from defects, complying with statutory and other regulations and specifications.

A warranty can be either express (i.e. written) or implied.

Question 75

What techniques did you use in Excel that they weren’t aware off?

Answer 75

Followed the CBRE best practice
Colour coding
Error Checks & Sensitivities run through a macro to ensure file size remained convenient
Amended the model to allow the lenders flexibility to analyze their returns

Question 76

What is price inelasticity?

Answer 76

When a consumer is not impacted by price changes

Question 77

Were the historic trees protected?

Answer 77

Yes, there was a TPO (Tree Protection Order) enforcced by sevenoaks.

All trees in Conservation Areas (if they are over 7.5cm diameter, measured at 1.5m high on the stem/trunk) are also protected.

the majority of the east portion of the site is a conservation area

Question 78

What is material uncertainty?

Answer 78

Where a material uncertainty clause is used, its purpose is to ensure that any client relying upon that specific valuation report understands that it has been prepared under extraordinary circumstances.

The RICS have clarified as follows: “The term is not meant to suggest that the valuation cannot be relied upon; rather, it is used in order to be clear and transparent with all parties, in a professional manner that – in the current extraordinary circumstances – less certainty can be attached to the valuation than would otherwise be the case.