Valuation (submission)

Question 1

Roker - • What valuation bases did you use and why?

Answer 1

Market Value subject to Special Assumption of Completed Scheme – might be more, check

Question 2

Roker - • Why did you adopt a special assumption?

Answer 2

Because scheme had not been completed yet.

Question 3

Roker - What was the age / condition / specification of the property? How did you measure the property/what was size – what did GIA/NIA include/exclude? What did you consider in surrounding area?

Answer 3

• Two large adjacent former terraced houses, both vacant, 3 storeys. - Planning permission in place for 9 apartments, (4 2 beds), between 400 – 750 sq ft, with access from front and side. (ignored parking for now). - Measured GIA 5,125 sq ft - Noted factors affecting value including: - Located in sea front location in Roker, a popular suburb of Sunderland – popular with retirement community on seafront, flat values fall off significantly if property does not have sea views. - Parking provision to front already in place – 9 spaces. - As planning permission already obtained, I did not see it necessary to consider planning viability, but would have otherwise considered surrounding building heights etc. - Range of local cafes nearby, bus stop 200m away for access to Monkwearmouth – extensive retail and amenities available. - Measured site on Promap – identified boundary on site was correct. Could have also used Trundle Wheel.

Question 4

Roker - • How did you collate and analyse evidence (6 points, same for all vals)? / How did you apply the Hierarchy of evidence in line with RICS guidance? / What was the rental psf range/capital psf range/yield range? What did it show?

Answer 4

1. Search & select comps - researched rental comparable evidence and investment comparable yields - I focussed on recently completed transactions for which full data was not available but which sufficient evidence could be obtained (comparable evidence RICS paper) - Open market lettings only. - Did not use any asking prices or historic prices 2. Confirm/verify details and analyse headline rent to give net effective - using agents, boards noted upon inspection and in house records/databases and websites, such as EGI and EIG, LR. 3. Assemble comps in schedule - matrix 4. Adjust comparables using hierarchy of evidence (OML, LR, RR, 3rd p. determinations, sale&lease, inter-company transactions) 5. Analyse comparables to form opinion of value 6. Report value and prepare file note - To calculate GDV - Sales evidence (for residual): - Analysed comparable evidence to form an opinion of sales rates for new build apartments in the area. - I then multiplied the sales rate by the area for each unit to calculate the total GDV of the scheme. - I therefore gathered comparable evidence for one and two bedroom apartments, having regard to the size range of the ½ beds in proposed scheme: - Focused solely on apartments with sea front views – - One beds – between 180 – 300 psf based on size, if allocated parking space, internal order - Two beds – between 150 – 260 psf based on same. - Applied rates between 220– 280 psf in subject, based on size/views/no. of beds primarily – all had 1 allocated parking space. - GDV = 1,175,000

Question 5

Roker - talk me through your calculation - costs etc, why you put in. (screenshot is better)

if have time could think about handling of void period at end

Answer 5

• GDV – 9 apartments at blended rate of 246 psf * 4,771 = 1,175,000 - Development costs: - Total build cost 5,125 sq ft * 68.29 psf = 350,000 (from BCIS, confirmed clients projected costs were inline with estimates – COULD ADD MORE – resi conversion) - Contingencies 10% = 35,000 - Professional Fees 10% = 35,000 - = 420,000 - Marketing costs: - Agents fees @ 0.5% (of GDV) = 5,875 - Legal fees @ 0.5% (of GDV) = 5,875 - Marketing = 5,000 (flat figure) - Total = 16,750 - Finance costs: - 18 months @ 12% on 50% of cost = 44,431 – at some point think about this right. - Bank Fees = 10,000 - Valuation Fees = 2,500 - Total = 56,931 - Profit – doesn’t seem right -and a developer’s profit of 20% on the GDV - 20% of total costs = 195,833 - Calculations - GDV = 1,175,000 - Less - Development Costs = 420,000 - Marketing Costs = 16,750 - Finance = 56,931 - Profit = 195,833 - Residual Value = 485,485 - Say 485,000 (we said 450,000 really) - WHEN HAVE TIME – NEED TO PUT IN CIL PAYMENTS – WAS ALREADY AGREED IN PLANNING APPLICATION (GET FIGURE PERHAPS), OTHERWISE TARIFF PUBLISHED ON WEBSITE - ALSO COMPARE THESE FIGURES ABOVE WITH OTHER GUIDANCE IN DEV. Q’S WHEN FIND TIME – LEAVE TILL LATER. - MORE TO ADD GENERALLY TO THIS ONE, BUT SHOULD BE EASIER ONCE I’VE LEARNT THE THEORY PROPERLY, COULD ALTER FIGURES ACCORDINGLY.

Question 6

Roker - talk me through your check measure calc.

Answer 6

• VP sales for check measure: - Residual value of 485,000 (13 beds over 9 flats, good views, allocated parking etc.) - 5,125 sq ft / 95 psf for subject - Best comp nearby on sea front, of similar size, 3 storey block with planning permission for 10 flats, (10 South Cliff) – but slightly larger building so lower rate achieved overall – 86 psf

Question 7

Roker - What was your construction timetable informed by?

Answer 7

• BCIS or QS - More substantial the development the longer the construction timetable e.g. industrial quicker than hotel.

Question 8

Blyth - • What valuation bases did you use and why?

Answer 8

MV – to ascertain current value for bank.

Question 9

Blyth - - What was planning use/how did you check?

Answer 9

Sui Generis, from local planning authority portal – obtained consent for change of use previously.

Question 10

Blyth - - What were lease terms?

Answer 10

Owner occupied – FOR REFINANCING PURPOSES SAY.

Question 11

Blyth - What were tenure terms?

Answer 11

Freehold.

Question 12

Blyth - What was the location of the property?

Answer 12

• Blyth a secondary port town in South East Northumberland, 11 miles north east of Newcastle. - Relatively high unemployment, secondary industrial location. - However, advised client that generally good demand for small workshop units, and vehicle repair workshops in particular due to: - Low supply: Sui Generis consent usually required to carry out MOT operations + landlords of industrial estates do not permit such a use. - Subject situated in Blyth town centre, in area of early 1900s terraced housing and other similar commercial industrial local businesses (car repairs, MOTs etc), also in early 1900s accommodation of a similar spec to subject.

Question 13

Blyth - - What was the age / condition / specification of the property? How did you measure the property/what was size – what did GIA/NIA include/exclude (copy from stock answer if necessary)?

Answer 13

• Early 1900s converted fire station, 1,800 sq ft, 90% workshop - Reinforced concrete frame, brick/sandstone elevations, reinforced concrete flat roof with felt covering - SGTF windows, solid concrete floor - Minimum eaves 3.84m, good for age of construction, previously used for servicing fire engines. - Square workshop with 6 original timber VADs 3 x 3m, to front and back, well suited for MOT. - Fronts directly on to street, to rear includes cobbled palisade fenced yard – 150 sq m, rare for location, beneficial for use. - Internally very basic FFs.

Question 14

Blyth - • How did you collate and analyse evidence? / How did you apply the Hierarchy of evidence in line with RICS guidance? / What was the rental psf range/capital psf range/yield range? What did it show? AND WHAT WAS FINAL VALUATION?

Answer 14

I took into consideration size, condition, site area, coverage, specification, location and the transaction circumstances to attribute a relative weight to each sale. - Sales evidence: - Evidence between 30 – 50 psf – - Focused on either dated industrial premises or vehicle repair workshops between 1500 – 6000 sq ft. - Lowest rates achieved for largest premises (quantum discount applied), highest rates achieved for MOT workshops nearby of similar size to subject. Advised that some of the lower rates achieved for comparable units to subject should be given less weight as could not verify were arms length transactions. - Subject one of smallest units, well located with MOT use, and good sized yard for use, rare useful feature. - Therefore decided final value – 85,000 (47 psf)

Question 15

What is the 16 step process to undertake a valuation?

Answer 15

1. Receive instructions from client, 2. Check competence (SUK) – do you have correct level of Skills, Understanding and Knowledge? & 3. Check independence so that there are no conflicts of interest or personal interests – think WHO and WHY? 4. Issue terms of engagement to client (CIT) – set out in writing confirmation of instruction to client prior to commencing, confirm competence, extent/limitations of valuer’s inspection stated & 5. Receive TOE signed by client 6. Gather information – leases/lease packet, title documents, planning information, OS plans etc. 7. Undertake due diligence - to check there are no matters that could adversely impact upon value (as. Reg., BR, cont., EA, env., EPC, flooding, fire safety, H&S comp., highways (adopted?), legal title and tenure, public RoW, planning history/compliance 8. Inspect and measure 9. Research market and assemble, verify and analyse comparables 10. Undertake valuation 11. Draft report 12. Have valuation and report considered by another surveyor for checking purposes 13. Finalise and sign report 14. Report to client 15. Issue invoice 16. Ensure valuation file in good order for archiving

Question 16

Washington - • Talk me through how you agreed terms of engagement with the client of 1980s industrial unit Washington / What are the key elements included within terms of engagement? Did you make any additional disclosures? i.e. conflicts… just check each report basically

Answer 16

• Discussed requirements with client as part of initial scoping exercise, and then applied what I believed they required into TOE, taking into account my knowledge of the property and instruction from my initial investigations. Then drafted up RB minimum TOE reqs.

Question 17

Washington - What valuation bases did you use and why?

Answer 17

• Market Rent – as client required for comparison with proposed SIPP lease terms. - Market Value subject to Special Assumption of completion of proposed lease (10 year, year 5 review, 6 months rent free, £30,000 p.a.)

Question 18

Washington - • Why did you adopt a special assumption?

Answer 18

• The client required a valuation on the basis of assumptions that differed from those at the valuation date (new lease granted).

Question 19

Washington - - What were lease terms?

Answer 19

• Currently owner occupied, being transferred to SIPP. I was informed 10 years FRI at £30,000 p.a., 5 year RR, 6 m. RF, qualified alteration, alienation and user clauses

Question 20

Washington - - What was the location of the property?

Answer 20

• Washington - 6 miles to the south of Newcastle upon Tyne and 6 miles to the west of Sunderland city centre, expanded significantly when designated as a 1960s new town, significant manufacturing and employment base, which is linked to the Nissan car manufacturing plant. - Glover Industrial Estate, approximately 2 miles to north of Washington town centre, connects to A1231 motorway immediately to south, which connects to A1/A194 interchange approx. 500m to west – good road links to arterial roads.

Question 21

Washington - - What was the age / condition / specification of the property? How did you measure the property/what was size?

Answer 21

• 1989 built single storey industrial unit of 8,696 sq ft GIA, which includes 1,924 sq ft offices/ancillary (c. 65% used for production), and 3,380 sq ft first floor storage/outbuildings. - Extended 2009/10 – confirmed on Sunderland City Council planning portal, also therefore noted current use (B2) is assumed permitted. - 3.65m minimum eaves height. - Steel portal frame, externally clad in a mixture of steel profile cladding and low height brickwork - Rectangular secured yard with palisade fencing, concrete covered, 0.47 acres. - 2 loading doors 3.5m height. - Good condition throughout, albeit a little dated, well maintained and progressively updated. Offers good quality, functional accommodation with good external vehicle circulation and parking areas. However, the prospect of any future expansion is limited.

Question 22

Washington - - How did you assess covenant?

Answer 22

• Argos Inspection Company Ltd - according to Experian the company has a credit risk score of very low risk, which should appeal to the investment market. However, there is very little financial data available, which may deter some investors.

Question 23

Washington - What was the rental psf range/capital psf range/yield range? What did it show?

Answer 23

• Rental evidence: - Evidence ranged between £3.25 psf for older 1970s unit on nearby Crowther Industrial Estate (10,901 sq ft) to £6.20 psf for late 1990s industrial unit 12,211 sq ft on Boldon Business Park, Boldon (similar location a few miles to north west, direct links to A19, motorway links to A1). - All open market lettings, no need to adjust for hierarchy. - Investment evidence: - Ranged between 6.51% for 1980s 70,000 sq ft on Stephenson IE, Washington (superior location) with 13 years unexpired to VLR covenant and 5 yearly RRs - to - 8.42% for 1980s 70,000 sq ft unit on Stephenson with 4 years unexpired to VLR covenant.

Question 24

Washington - • Talk me through your valuation calculation. Did you deduct purchaser’s costs? How did you deal with purchaser’s costs? What assumptions/yield did you use and why/what factors affected your adjustments/value? What was the final valuation? How did your investment calculation reflect the income profile?

Answer 24

First considered Market Rent – decided rack rented on proposed terms – comps generally had 10 years term certain to similar covenants, subject superior to Crowther Units (70s v late 80s) and smaller (quantum), therefore £4.50 psf with £2 psf for first floor storage/outbuildings (DO I NEED RENTAL EVIDENCE TO SHOW THIS?). This resulted in £30,000 p.a., therefore rack rented with 6 months rent free reflected in net effective rent. I capitalised the Market Rent into perpetuity as 10 year unbroken term, standard market practice + investment evidence available. On basis of investment evidence and very low risk covenant and building age/location/road links/size etc. capitalised at 7.25% Net Initial Yield, equating to £400,000. Investment evidence showed 6.51% for 13 years unexpired on similar terms to similar covenant and similar spec unit, but slightly better location (Stephenson) to 8.42% for 4 years, same investment characteristics – therefore decided 7.25% reflected 10 year term, low risk covenant, but slightly inferior location to Stephenson. I assumed purchaser’s costs of 4.16% in my valuation. Purchaser’s costs are made up mainly of stamp duty (2.36%) and agents and legal fees (1% and 0.8%, CHECK).

Question 25

Wahsington - What advice did you provide and why?

Answer 25

• Although not LSV, I included information on current market conditions: - Industrial market generally strong in NE – very little speculative development since 2008, never been an over-supply. - Resulted in competitive bidding on both prime and secondary stock like subject, as long as offers good investment characteristics overall, income security, established estate with good road links. - Yields for secondary assets have been hardening slowly, and rents have marginally improved, but mainly yields falling. COULD ADD MORE, SEE MY OTHER MARKET APPRAISAL QS

Question 26

Silverlink - • What valuation bases did you use and why?

Answer 26

• Market Rent – lender required as part of loan cashflow modelling. Also necessary to provide opinion of MV, and MV VP. - Market Value – for current prospects of investment. - Market Value on the special assumption of vacant possession – for modelling ‘worst case’ scenario for lenders purposes.

Question 27

Silverlink - • Why did you adopt a special assumption?

Answer 27

• This was necessitated by lender in SL agreement. I recognise that lender’s require VP special assumption for the own internal loan underwriting risk and cashflow analysis.

Question 28

Silverlink - - What were lease terms?

Answer 28

• The lender had been approached by the borrower, possibly for refinancing purposes or switching from another lending agreement – I was not made aware. However, borrower had recently agreed a renewal of existing lease – I was provided with lease and made precis as follows: o Tenant: John N Dunn Group Limited o 10 years from 8 April 2020 (valuation date 17 April 2020), FRI at £120,025 p.a., no RF, RR/BO year 5 (6 month notice, VP only required). o RR 10 year hypothetical term o Qualified alteration, alienation and user clauses o Service charge for estate common parts – fair proportion.

Question 29

Silverlink – What were tenure terms?

Answer 29

• Provided with title docs – 125 years at peppercorn from 14 Sept 1990, 95 years unexpired, therefore assumed ‘virtual freehold’.

Question 30

Silverlink - What was the location of the property?

Answer 30

• Silverlink – strategically developed business/retail park 6 miles north east of Newcastle, 4 miles south west of Whitley Bay/Tynemouth, at junction of A1058 Coast Road and A19 (major trunk road providing good regional road links). - Retail park comprises a mixture of retail warehouse units with occupiers including M&S, Boots, Currys PC World and Next + Odeon + Pizza Hut etc. North of retail park - office units together with motor dealerships, largest collection of motor dealerships in north east. - Subject situated on Kingfisher Way on west side of Silverlink, cul de sac office development (10 buildings of differing sizes, some single occupancy, others multi-occupancy). Generally occupied by national and regional office businesses. Some sold off for owner occupation.

Question 31

Silverlink - - What was the age / condition / specification of the property? How did you measure the property/what was size?

Answer 31

• Early 1990s detached two storey T shaped office building of 9,318 sq ft NIA (advised client of benefits of IPMS, but only wanted NIA). - Framed construction, brick elevations, concrete floors, hipped and pitched tile roof, DGMF. - Two main open plan office areas to each floor + disabled, male and female toilets, staff kitchen on ground floor, 8 person lift. - Tiled suspended ceilings, LED lighting panels, raised access floors to office space, split heating system – heating from boiler, cooling from ceiling tile mounted modern air con (worth working out which type, see APC Success list). - Well landscaped grounds of 0.94 acres, 15% site coverage (better than average), 54 designated parking spaces on paved surface. - Well maintained, no repair issues noted.

Question 32

Silverlink - - How did you assess covenant?

Answer 32

• John N Dunn Group Ltd - according to Experian the company has a credit risk score of above average risk (very limited pre-tax profit, falling net assets over previous 3 years), which I advised the investment market would view with some caution.

Question 33

Silverlink - What was the rental psf range/capital psf range/yield range? What did it show?

Answer 33

• Rental evidence: - Evidence ranged between (net effective) £6.40 psf for mid-1990s similar spec office 13,000 sq ft in North Shields (poorer location, less established estate, less accessibility, similar parking provision) to £10 psf for office suite (7,000 sq ft) in Cobalt Business Park, built as grade-A space in mid-2000s, nearby to north of subject, one of 2 recent major out of town office developments in Newcastle, similar location, better spec, more established estate, similar parking provision. - Several recent lettings at Kingfisher Way ranged between £8 - £10 psf, but for smaller 2-3,000 sq ft suites (quantum discount), lower figures for longer term certain than subject (5+ years). - Lease lengths ranged between 5-10 years, FRI. - All new lettings, no adjustment for hierarchy of evidence. - £75,000 MR decided (£8 psf). - Investment evidence: - Searched regionally for recent prime and secondary office investments of similar lot sizes. - NIY (correct for over-rented?) ranged between 7.5% for newly constructed office Belmont, Durham (similar location quality) (10,000 sq ft), rack rented to VLR covenant with 14 years unbroken lease term, 5% fixed rental increases years 5/10 - To 11% for poorer location (Spectrum BP, Seaham) early 2000s good quality space (30,000 sq ft), VLR covenant, 5.5 years term certain.

Question 34

Silverlink - • Talk me through your over-rented valuation calculation. Did you deduct purchaser’s costs? How did you deal with purchaser’s costs? What assumptions/yield did you use and why/what factors affected your adjustments/value? What was the final valuation? How did your investment calculation reflect the income profile?

Answer 34

First considered MR – decided highly overrented on current terms – MR £75,000 (£8 psf) – most similar suites at Kingfisher between £8 - £10 psf, but generally had shorter term certain than subject, after adjusting for quantum suggested £8 psf for subject larger floor area. More comparable sized, similar spec offices on competing nearby estates ranged between £6.40 for similar space but in significantly poorer location, to £10 psf for nearby higher spec space at Cobalt. Therefore decided £8 psf reflected the asset qualities. I capitalised the Core Income (Market Rent) at 11% (ARY? KT says NIY) (£680,000) - prime OOT office investment at 7.5% with 14 years term certain – best comparable was 11% for 5.5 years term certain to VLR covenant at Spectrum, Seaham – decided that although subject had more risky covenant (above average risk), specification/size similar, and due to better location would achieve similar ARY? I capitalised the over-rented income (£45,000) at 14% for just under 5 years YPSR to the break option (as highly likely tenant will exercise to lower rent) (£155,000) – yield increase reflected the above average risk tenant, risks that could not sustain rental payments, degree of overrenting (and time until break? Or is that already factored in 5 years cap?). Resulted in gross valuation of £840,000. Deducted purchasers costs at 5.51%, 1.8% fees, 3.71% SDLT Resulted in rounded MV of £790,000. KT says ‘market yield uplifted to reflect risk’, others says equated yield (gilts yield, plus a property risk premium, plus in excess of 2-3% to reflect overage risk).

Question 35

Silverlink - Why is there no PV £1 in over-rented hardcore/top-slice approach?

Answer 35

Both parts of income flow being received now (no need to defer to next reversion).

Question 36

Silverlink - Could you have done this differently (over-rented scenario)?

Answer 36

Yes, if sufficient evidence was available for over-rented investment sales it may have been possible to capitalise the Passing Rent at an ARY that took into account these risks. However, this was not available, therefore decided to use a layer (core and top-slice) approach.

Question 37

Silverlink - Are there any issues with this approach (over-rented), and how could you possibly rectify them?

Answer 37

• The Core ARY applied assumes 5 years to next review/break option, but property is reversionary (over-rented)… DO MORE – main thing is approach assumes overage will last until lease end, but in reality MR is likely to increase during remainder of lease term (however that could be equally difficult to analyse, leading to similar inaccuracies, not sufficient data/certainty necessarily available to do this in Newcastle OOT office market). - Therefore could use shortcut DCF approach to estimate when ‘breakthrough’ occurs. (think about in relation to lease pattern for mine, see p.456 Real Estate Concepts, not sure, probably too in-depth, not worth mentioning in interview)

Question 38

Silverlink - • Talk me through your vacant possession assumption valuation calculation. Did you deduct purchaser’s costs? What assumptions/yield did you use and why/what factors affected your adjustments/value? What was the final valuation?

Answer 38

• Limited vacant possession sales evidence – 1 VP sale of Mercantile House, Kingfisher Way –similar 7,500 sq ft detached office sold at £64 psf, which had been refurbished in some areas internally. On basis of this sale, indicated approx. £55 psf for subject (9,400x£55=£510,000), due to quantum + spec. - Therefore sense checked this estimate with investment method. - In order to select an appropriate yield I considered the investment evidence and consulted local agents to establish the typical marketing duration for an asset of this nature. - I determined that a 11.50% equivalent yield (CONSIDER- WHY IS IT EQUIVALENT?) reflected the additional risks associated with purchasing a vacant property, and adopted the following calculation/assumptions: - Hypothetical 5 year unbroken term. - 12 month marketing void reflecting a 6 month void period and 6 months rent free. - Holding costs comprising empty (business) rate (9 months) and a 15% letting fee alongside purchaser’s costs at 4.73%. - This produced a rounded VP Market Value of £510,000 - This reflected a reversionary yield of c.14% (maybe put accurate no. in later once VP val. Issue rectified). - accounting for a suitable level of void and tenant incentive which I had established through market research (deferred using PV£ 27 months for remaining length of term + refurb (3 months + letting period 6 months + rent free 6 months) – consider calculation – what happened?

Question 39

Silverlink - • What advice did you provide and why?

Answer 39

• As LSV, advice on whether suitable security for a loan: - Provided market risks analysis, advised that: - Local OOT market dominated by Cobalt and Quorum, c. 500,000 sq ft vacant accommodation – both within 10 minutes drive time, big impact on competing offices. Other competing locations include South Tyneside, Sunderland, Seaham and Peterlee, some with significant vacant space. - However, the subject market prospects are better than the norm for secondary space in region as: o Cobalt/Quorum supply has been gradually falling, demand improving and both have become more established, attractive to higher profile occupiers, and nearby estates (like subject) could benefit from market improvements in next few years as long as supply continues to fall at current rate. o Additionally, best performing space is sub-10,000 sq ft, as above it can be difficult for secondary stock like subject to compete with Cobalt/Quorum. - I then addressed the market conditions in relation to the property specific risks – the property is highly over-rented. Although we have incorporated that into our opinion of Market Value, we recommend you consider the impact a tenant default could have on the loan cashflow over the 10 year term you are contemplating. - We would anticipate a void of 12 months, and 6 months rent free necessary for a 5 year term if the tenant breaks in year 5, better than norm, but market still significantly oversupplied. - Although overall we consider the property to be acceptable security for a loan, you should carefully consider these market and property-specific uncertainties in your internal loan underwriting risk analysis. - We would therefore recommend regear of lease at Market Rent in return for break removal, risk profile would be reduced significantly if this could be negotiated. - Valuation uncertainty no more than above average – o there is reasonable market activity, very limited speculative development, no particular challenges in predicting future performance, only potential positive (rather than negative) changes to market at present. o Property risk uncertainties no more than average – not a ‘one-off’ property/lease scenario, relatively confident in valuation analysis, but advised client that determining an overage yield is subjective, and difficult to be completely accurate therein.

Question 40

What are yields etc. Qs to add specific to my examples.

Answer 40

. - some examples in sample Qs. - also check my residual values against APC Success book.

Question 41

How would you carry out a valuation differently if you were instructed today as a result of Covid-19?

Answer 41

mpact of Covid-19 on valuation: • Would be unable to inspect the property so would have to make this restriction on information clear in the ToE and the report • Include a material uncertainty clause in accordance with VPGA 10. Use wording recommended by the RICS • Increase length of void periods as reletting is likely to take longer, particularly for retail and leisure uses • Market rent and yield selection would be impacted, although unlikely to be the transactional evidence to support this. Would judge market sentiment from agents • Ensure I had the correct PII in place that would cover valuation practice in the current environment and that I had capped liability

Question 42

What are the average yields for key sectors? (not my Q, for reference currently)

Answer 42

Prime offices 3.5-4% Secondary offices - 5% Prime warehouse/industrial - 4% Secondary warehouse/industrial - 5% Prime retail - 4.5% Secondary retail (high street) - 10%

Question 43

How do you see the future of the market once the pandemic ends?

Answer 43

…

Question 44

Outline the current office market conditions in Newcastle (demand, supply, development pipeline, short and medium/long term occupier focus).

Answer 44

o Expectation 2021 will be a “year of optimism” in Newcastle’s prime office market:  City centre market has seen consistent tenant demand and ever reducing Grade A supply (which remains very limited, 150,000 sq ft/1.5% of total office supply), with landlords refurbishing existing properties to capture demand and benefitting from rental growth as a result.  The demand for office still remains strong, with new grade A starting to satisfy anticipated demand as occupiers increasingly focus on better quality accommodation – 91% of Q3 activity was for Grade A.  12 month completion of The Spark, alongside Bank House and 1 St James’s construction will deliver 300,000+ sq ft Grade-A over next 24 months.  Short term: • additional ‘grey space’ to come to market and a need for ‘plug and play’ flexible space as occupiers seek short term space to review their property strategy and look to release surplus accommodation in the current recession conditions.  Mid-long term: • Focus on three key areas; o flexible floorplates, o high specification interior o ability to offer a CAT B fit out, either speculatively, or as part of a deal. • Agile working forced by pandemic: technology advancements will help occupiers looking to ‘futureproof’ through o more room for collaboration, less dense working arrangements, more workstations (rather than fixed furniture), with more homeworking o focus on employee health and wellbeing o increased use of office as a hub rather than set location

Question 45

Nationally, what will the limited office demand lead to, and what office sector will grow?

Answer 45

o Thin layer of demand across market will likely lead to:  downward pressure on rents,  supply issues, likely from release of existing space rather than the development pipeline – which is tight across most markets. o Flexible office sector will grow – expect first flex ‘work near home’ concepts to come in 2021, expect experimentation around workspace and work/life balance.

Question 46

What the prime city centre/OOT/secondary retail yields in Newcastle, and what vacancy figure illustrates the current conditions?

Answer 46

o Naylors Q1 2019:  Prime single let retail in central Newcastle: 5.5%  Prime out of town: 6.5%  Secondary yields 10% + SEE PRIME YIELD GUIDE PERHAPS – update at some point, maybe ask Pete.  Cushman Wakefield Dec 2020 – retail will never be the same again - Metro Centre 20% vacancy rate “illustrates the scale of this succinctly”.

Question 47

How did retail fare in 2020 nationally (closures, openings, most/least resilient locations)?

Answer 47

o COVID significantly exacerbated long term structural retail issues:  2020: 17,500+ chain retail stores closures, biggest decline in decade+, net decline 9,877, but still 7,655 new openings, arguably the most staggering number.  Expected to continue in 2021 as many ‘non-essential’ stores closed temporarily during lockdown are unlikely to reopen.  Sharpest decline in London (-5.8%) and shopping centres (-7.1%), East England most ‘resilient’ – 3.7%.  Retail parks, with higher representation of ‘essential’ retailers, proved more resilient, with 3.3% closure.

Question 48

Are essential retailers ‘winners’ in the current market, and why?

Answer 48

 Lower footfall for high street ‘essential’ retailers has led to lower trade, and grocers have robust sales growth but decimated profits (Morrisons sales +8.6%, profits down 62.1%, v. small net profit)

Question 49

How could EPCs impact the retail market?

Answer 49

o E rated minimum from 2023 could result in further retail obsolescence – 20-30% of retail currently below E minimum.

Question 50

Why is retail spending higher than normal, and how is this distributed?

Answer 50

o Households ‘enforced savings’ and lack of overseas travel – spending continues to be significantly higher than normal, although benefits will continue to be unequally distributed.

Question 51

How have consumer habits changed in 2020 (online, location spending, major city risks)?

Answer 51

o Permanent shift in consumer habits:  Online sales: 20% pre-COVID, May 34% demand spike: limited by supply chain/distribution issues, suggesting a medium term ceiling.  People spending more locally (out of town/local high streets relative beneficiaries), albeit footfall levels are lower everywhere.  Risk of major cities becoming ghost towns due to: • Reluctance to use public transport • Desire to avoid congested places • Lack of tourism • Workers staying at home • If office occupiers move out, would destroy midweek trade.

Question 52

What will happen when Govt retail support ends?

Answer 52

o Government support has been key, but proposed 2021 eviction moratorium end will lead to increase in retailer failures and vacant space.

Question 53

What 3 things must retailers do in the current market?

Answer 53

o Retailers must:  adapt physical stores,  evolve showroom concepts,  split between the experiential element of retail and order fulfilment aspect via click and collect.

Question 54

Explain how John Lewis has performed (stores, finances, sales) and what repurposing they are pursuing.

Answer 54

 John Lewis: • expected to close further 8 stores following lockdown lift, on top of the 8 confirmed last year. • reported loss of £517m last year v £146m profit of previous year. • 75% of department store sales online, a leap from 40% pre-pandemic. • repurposing Oxford Street flagship – conditional planning permission granted to turn roughly half of space into flexible retail or office space.

Question 55

What are M&S and Debenhams seeking to do re. repurposing existing stores?

Answer 55

 M&S • Announced plans for Marble Arch flagship – downsize retail space, create offices on upper floors, complete demolition and redevelopment.  Debenhams • Landlords looking for alternative uses: o building flats, o university lecture halls, o training spaces for nurses and healthcare workers o Few represent ‘quick wins’, most will be creative, long-term, capital intensive initiatives and hopefully part of wider, mixed-use regeneration projects.

Question 56

How has the Newcastle industrial market fared in 2020 (activity, development pipeline, space availability, demand, yields, prime rents (50/20), prime yields?

Answer 56

o KF industrial North East Q1 2020:  Post-election ‘bounce’ failed to materialise  Activity levels modest and slowed further by COVID-19.  Small number of new requirements but pretty low vacancy rate of 7.3%, 0 sq ft under construction, some speculative schemes, but most not delivered until 2022.  Very low grade-A availability (130,000 sq ft), pretty low overall availability (2,200,000 sq ft), current quarter takeup of 500,000 sq ft, 3,800,000 sq ft annual take up.  With demand from central and last mile logistics continuing to soar rents and yields will continue to grow and tighten, driven by an acute shortage of prime stock.  Prime rents of £6.50 psf for 50,000 sq ft+ and around £8-£9 psf sub 20,000 sq ft  Prime single-let industrial: 5.25% prime yield  Prime multi-let industrial 5 year WAULT: 6.5%, maybe a little lower now.  Recent announcement of the Gigafactory planned for Blyth is evidence that the region can continue to adapt and thrive exploiting the opportunities in the zero-carbon economy.

Question 57

How has logistics fared in 2020 (take up %, demand drivers, prime rents %, speculative development, capital values) and how will retailers try to compete?

Answer 57

o Strength to strength – 2020 likely a record year for Big Box take-up (40% of overall take-up), driving demand for local logistics and last mile delivery as Hermes and DPD continue to expand. o Due to growing shortage of suitable stock prime rents grew at fastest annual rate (+4.3%) since 2018. o Speculative development in 2021 is likely to surpass 2020. o Capital values grew at fastest monthly rate since 2017 (MSCI, +1.9%). o Some activity will fade away post pandemic, unclear how much changes in consumer behaviour will endure. o Retailers looking to compete with Amazon remain focussed on driving down costs and reducing fulfilment times. Last-mile and urban logistics will be a key battleground.

Question 58

How has home buying behaviour changed in 2020, and what changes to construction are likely?

Answer 58

o More acceptance of remote working, leading to more demand for homes in attractive local environments with outdoor space and room to work. o Living further from city centres, local amenities more importance than commuting times. o Difficulties in construction (COVID H&S issues) leading to more use of modern methods of construction – off-site factory, potential 70% labour reduction and 2x site delivery speed.

Question 59

Explain why the current financial conditions would typically be helpful for investors, and why this has not been the case.

Answer 59

o Money wall looking for a yield, increased liquidity in financial system, certainty of low interest rate environment typically creates a positive real estate investment environment. o Although the Brexit backdrop, economic uncertainty, structural shifts in occupier markets and mobility restrictions have led to difficulties accessing debt due to lenders struggling with mitigating risks, and issues between the expectations of buyers/sellers, the performance of most commercial occupational and investment markets this year has been typical of past recessions.

Question 60

How has PBSA fared in 2020, and what do the university intake figures show?

Answer 60

o PBSA is exception from residential growth (as investors move money to resi from commercial) – investors waiting to assess pandemic impact on nature of student demand and operation of PBSA assets. o In 2020-2021, total acceptances rose by 5.4%, around 13% uptick for higher tariff universities, whilst medium and lower tariff universities increase of 3.7% and 1.1% respectively. o Need to put in that % of PBSA accommodation info, and development pipeline info if available. o Indications that demand will rise again for 2021/22 academic year, with UCAS data indicating +8.4% applications: highest increase since 2010, albeit coincides with increase in 18 year old population, first time in last 6 years.

Question 61

Roker - How did you assess planning and development potential?

Answer 61

In this instance I had been approached to value the development opportunity once the borrower had already obtained planning permission. In other circumstances I would have:

• I gave consideration of published planning policies recognising that they heavily influence future additions to the supply of particular types of building (VIP 12).
• I consulted national and local planning policy including the local plan and density matrix to be the main guide.
• I used land and sale comps with planning to ensure that what the local plan is stating is in reality happening on the ground.
• Consulted the planning team to ensure my assumptions were accurate.

Question 62

Roker - What costs did you deduct?

Answer 62

Transaction costs (SDLT, agent, and legal fees) - don't think I did though - consider
Construction costs (contingencies, professional fees, build costs, planning costs)
Post construction costs (marketing costs, sales and legal fees, finance costs and developer's profit).

Consider the above answer.

Question 63

Roker - what was the timescale? consider

Answer 63

Consider - i.e. (6+12=18) = 36 months

Question 64

Roker - what were planning costs?

Answer 64

£6,500 for S106 for ecological works - for sea defences. Nothing else. Why no CIL? I assume because Sunderland council haven’t adopted? And affordable housing? I assume because below housing no. threshold?

Question 65

Did you inspect the site in Roker?

Answer 65

Yes. I noted factors affecting value including, heights of neighbouring properties, proximity to transport, proximity to amenities (e.g. high street 200m away)

Question 66

Roker - How else could you measure the site?

Answer 66

Trundle Wheel

Question 67

Roker - How did you establish profit?

Answer 67

Market assumption which I arrived at in consultation internal development team. Undertook valuation during COVID-19 (could say, consider later if better answer) therefore higher than usual 20% on GDV (contingency built into profit)

Question 68

Roker - What relevant information did you analyse

Answer 68

Local and national planning policy, comparable sales evidence, BCIS

Question 69

Roker - How would your valuation differ without planning?

Answer 69

I would increase the profit %

Question 70

Roker - Where did you obtain costs for planning consent? What are the costs and what do they include?

Answer 70

In this instance all planning enquiries had been undertaken - I therefore only had to include the S106 in calculation.

In other circumstances:

Application fee checker online, + professional planner fees and cost of surveys.
Planning fees fixed across the country but vary in terms of type and scale of development.
Establish whether need to pay for pre app or free informal advice

Question 71

Roker - What is the purpose of a development contingency? What did you apply and why? How do they
differ and why?

Answer 71

Development contingency to offset letting/sales risk. Construction contingency for contractor to
offset construction risks.
Larger contingency for commercial.

Question 72

Roker - What was your construction timetable informed by?

Answer 72

BCIS or Quantity Surveyor. In this instance a QS had provided a construction timeline, and therefore I considered whether that was in keeping with market norms through discussions with senior colleague.
More substantial the development the longer the construction timetable. Eg industrial quicker then hotel.

Question 73

Roker - How could profit have been improved?

Answer 73

Phase development, look at alternative uses, see if additional land could be acquired, investigate
alternative finance.

Question 74

Roker - How do you work out the CIL payments? consider

Answer 74

Published tariff on council websites.