Valuation

Question 1

Talk me through your valuation for the current interest?

Answer 1

For the current interest I established it was under rented so used the term and reversion technique.

I assumed Havenbooks would vacate at the end of the term, so capitalised the term rent until lease expiry.

Due to poor reletting prospects, I assumed a 2 year void period and therefore capitalised the reversionary rent of £65,000 in perpetuity, but deferred 6 years. I increased the yield to reflect the additional risk associated with empty property.

Question 2

Talk me through your valuation for the proposed interest?

Answer 2

1. Accounted for rent free periods and stepped rent structures at the start of the lease term. Specifically with Hayley’s where rent was stepped over first 4 years, so capitalised each years rent but deferred for amount of years until client starts receiving that rent to take into account time value of money.
2. Capitalised headline rents to to the end of the lease term. Adjusted yield slightly to take into account additional risk at lease expiry, and capitalised in perpetuity.

Question 3

Tell me about your comparable analysis?

Answer 3

The best comparable I found was on the same estate with similar construction and internal specification. It let for £2.50 per sq.ft, however this had 2x the site area than the subject property, therefore I deducted 7.5% to reflect this.

Question 4

Justify the yields used?

Answer 4

Existing interest

1. Second hand large industrial properties with a low eaves.
2. Judged 11% was appropriate for the term considering Havenbooks struggling financially and forthcoming break option.
3. Used 12% for reversion to account for increased risk with empty property and the poor re-letting prospects.

Proposed interest

1. Looked at all risk yields for newer and refurbished properties with similar specification.
2. Judged 8.5% was appropriate considering Hayley’s are of a strong covenant strength and secure lease terms agreed.
3. 10% for Havenbooks due to a poorer covenant strength and risk of defaulting was greater. Adopted 11% at reversion due to obsolescence and the fact E-Commerce is likely to reduce Havenbooks need for warehouse space.

Question 5

Why do they vary?

Answer 5

I increased the yield for Havenbooks because they were a weaker covenant and the property was more obsolete than Hayley’s..

Question 6

What is the usual treatment of the difference in a present = proposed valuation?

Answer 6

The difference would usually be split according to the strength of each others negotiating position.

Question 7

Where was the increased freehold value relevant to your client?

Answer 7

Asset valuations

Question 8

How did you calculate the net effective rent on the rent free period agreed with Hayley’s?

Answer 8

I used a straight line approach up by calculating the total rent receivable over the term and then deducting the incentive of £80,000 before dividing the remaining amount by the number of term years.

Question 9

What was the Net Effective Rent?

Answer 9

£20,833 (£3.47 per sq.ft)

Question 10

What is the valuation principle driving surrender and renewal calculations?

Answer 10

The principle is that either party shall be no worse off as a result of the surrender and renewal.

There are four calculations to this. Tenants present interest, tenants proposed interest, landlords present interest and landlords proposed interest.

Question 11

Was there any premium associated with this deal?

Answer 11

No, the benefit for my client was that they were able to secure the income from the property on where the

Question 12

Describe the valuations at Appendix F?

Answer 12

The valuations are investment valuations using the term and reversion technique.

They based on the existing interest with Havenbooks before the surrender and renewal happened and then the second valuations shows what impact the proposed surrender and renewal and subsequent lease terms would have on my clients freehold value.