Valuation Level 3 Flashcards
Tell me about the Pub Portfolio
Pub Portfolio
11 sites located across the north east of england
Mixed tenure
Large managed house style pubs - some with large external areas and car parks
2 Freehold, 9 leasehold
Tell me about your valuation of the pub portfolio.
Pub Portfolio
I was instructed by my client to value a portfolio of pubs located in the North East of England for Financial reporting purposes.
The valuation was completed in accordance with the Red Book Global standards where I used the profits method and reported the basis of value was Fair Value in line with IFRS 13.
Walk me through your SWOT analysis of the pub portfolio.
Pub Portfolio
S = Propertys were in good condition
W = Most of the portfolio is held on short leasehold basis
O = Renegotiate the onerous lease terms
T = Impact of cost of living pub businesses are ongoing threat
How did you factor the short leasehold tenure into the Valuation?
Pub Portfolio
How were the properties trading?
Pub Portfolio
- On a portfolio level the EBITDA % was 23% which is good and in line with margins seen across the sector
- However some had recovered quicker out of covid than others
- But all of the properties were profitable
Which legal documents did you review?
Pub Portfolio
I reviewed any key documents available which could adversely impact upon value.
8 of the properties were held leasehold and therefore reviewing the leases was a key aspect of the due diligence.
Other legal docs included:
Planning
Any environmental surveys available
Title documents
Why did you use the Profits Method?
Pub Portfolio
- I used the profits method in line with VPGA 4 Valuation of trade related properties.
- I used this method as pubs are normally transacted on the basis of their trading potential.
- The essential characteristic of this type of property is that is has been designed for this specific use.
- Therefore, the lack of flexibility means the value of the property is intrinsically linked to the returns that an owner can generate form that use.
Where would you find guidance on accounts valuations?
Any
- VPGA 1 Red Book Valuation Global Standards 2025 - Valuations for financial reporting
What is IFRS 13?
Any
It is a standard from the International Financial Reporting Standards which defines and explains the application of Fair Value.
It is deifned as “the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement
date.”
The RICS clarifes in VPGA 1 that for most practical purposes MV and FV should produce
the same result as they are both based on the same concept of a price in a free and open
exchange between typical buyers and sellers on a given date.
What advise did you give your client?
Pub Portfolio
What is rent cover?
Pub Portfolio
For your over-rented asset, where did rent cover sit?
Pub Portfolio
How do you calculate FMOP?
Pub Portfolio
By coming to a view on the level of profit a reo can derive from their fmt
Done by analysising historical and forecast accounts and having specialist knowledge of industry benchmarks of kpis and thinking about it from the point of view of this specific property.
Explain your advice relating to WAULT
Pub Portfolio
I advised my client how the WAULT is calculated across the leasehold portfolio, weighted by contracted rent. I advised that as this declines, there will come a point when it will have an effect on value.
I advised that as this declines, there will come a point when it will have an effect on value.
The rationale behind this advice is that due to the increased risk of the income in the future years, investors will take this into account in the price they are willing to pay.
What is WAULT? How is it calculated?
Any
What was the WAULT at date of Valuation?
Pub Portfolio
10.1 years
What is a Turnover rent clause?
Pub Portfolio
What was your advice on the Turnover rent clause?
Pub Portfolio
I advised my client that one of the properties is subject to a turnover clause which is an onerous lease term.
The rationale behind the advice is that the turnover clause can lead to significant uplifts in rental value if the property trades well as opposed to index linked reviews which move gradually with inflation.
What is FMOP?
Pub Portfolio
As stated in VPGA 4 of the Red Book: Fair Maintainable Operating Profit
This is the level of profit, stated prior to depreciation and finance costs relating to the
asset itself (and rent if leasehold), that the reasonably efficient operator (REO) would expect
to derive from the fair maintainable turnover (FMT).
What was Fair Value of portfolio?
Pub Portfolio
£8.8m
What multiplier was applied?
Pub Portfolio
8.25x on the FH’s
and ranging from 0.75x - 1.50x on the LH assets
Tell me about your valuation of Pub, London
Pub, London
I was instructed by my client to provide a red book valuation of a Freehold pub in Central London for accounts purposes.
I carried out the valuation in accordance with the red book, using the investment method to calculate Fair Value
Talk me through the hierarchy of comparable evidence
Pub, London
A= Direct comparables e.g comps of similiar assets / under offer
B= General market data e.g published sources, commerical databases
C= Other sources e.g interest rates, stock market movements
Describe the property
Pub, London
- Pub is of 3 storey brick construction with Georgian sash windows throughout
- Situated just off of Oxford Street in Central London
- Underwent full refurb in 2022
- C.3,500 sq ft
Why did you use the Investment Method?
Pub, London
- In line with VPS 5 of the Red Book, I had regard to the nature of the asset as well as the purpose of the valuation when selecting the appropriate method.
- I deemed the investment method appropriate as there was an income stream to value in the form of the rent and there is a market of comparable evidence where I could analyse investment comps.
How did you verify your comparable evidence?
Pub, London
- I mainly got my comparable evidence from internal / external databases so to verify this information
- I called the agents involved in the deals and confirmed that I had accurate information.
What made it a prime asset?
Pub, London
- The asset was located in Central London just off of Oxford St, one of the busiest leisure destinations in Europe.
- From my inspection, I noted the property was in good condition for its age with no major issues identified.
What yield did you choose and why?
Pub, London
- I collected comparable investment evidence in Central London which indicated that prime yields had shifted outwards.
We had previously valued the property at 4.50% whereas current investment was showing that the market had changed.
- There was also limited evidence of this kind of stock trading and therefore there is a supressed buyer market.
- Roebuck in Chiswick sold at 5.2% that year
Why was there reduced demand for the covenant?
Pub, London
- The tenant was completing a significant refinancing and part of this will see many of their pubs split into a SPV and sold off down the years.
- This created uncertainty around the financial strength of the company
How can you assess covenant strength?
Pub, London
- You can do the profits test and use third party financial reporting services including S&P and Dun & Bradstreet reports
How did you assess market rent?
Pub, London
- Rental values for pubs are also based on trading potential so there is not a direct comparison for those assets where we do not have visibility on trading performance.
- The pub had a rent review in 2020 which was recently awarded at arbitration (2023) with an Open Market Rent of £165,250. I adopted this as MR.
What was FV and NIY, ERV?
Pub, London
- FV = £3.5m
- NIY% = 4.75%
- ERV = £165,000 (£42.50 psf)
How did the WAULT on the london pub valuation of 21 years impact your valuation?
Pub, London
What yield did you apply? why?
Pub, London
I applied a Net Inital Yield….
When would you use an equivalent yield?
Pub, London
What was your advice to the client?
Pub, London
I advised that 21 years left on the lease was a strong and attractive lease term for potential investors…………..
