Task 1

Sketch Of A High Street Market

PRINCESS STREET MARKET
Shop No.	Trade Name	Trades in Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Lease Status
01	Jenny Garments	Ready to Wear	Due in Jul 2020
02	Denny’s	Footwear	Due in Jul 2020
03	Samantha Fashion	Ladies Outfits	Due in Jan 2022
04	Smith & Jack	Shoe Store	Due in Jun 2020
05 & 06	Taylor & Sons	Menswear	Due in Jan 2021
07	NextGen	Toy Store	Due in May 2020
08	NextGen	Toy Store	Due in Sep 2021
09	Tasty Breads	Confectioner	Due in Jan 2022
10	All Night Store	Cold Food takeaway	Due in Jul 2021
11	Amber Lights	Menswear	Due in Jul 2020
12	Delicious Food	Confectioner	Due in Jan 2022

GRAND PARADE MARKET
Shop No.	Trade Name	Trades in	Lease Status
01	Jane & Janet	Womenswear	Due in Dec 2022
02	Johnson & Co.	Watches	Due in Jan 2021
03	Optico	Eye Wear	Due in Jan 2020
04A, B, C	SmithSons	Super Store	Due in Jul 2020
05	Toy Store	Toys & Games	Due in Feb 2020
06	Harry Store	Shoes	Due in Jan 2021
07	Justin Book Store	Bookseller	Due in Mar 2022
08	Justin Book Store	Bookseller	Due in Mar 2022
09	VACANT
10	VACANT
11	Coffee Bites	Fast Food	Due in May 2022
12&13	Decent Joint	Restaurant	Due in Jul 2021
14	Fantasy	Cosmetics	Due in Jul 2020
15	World of Joy	Children Books	Due in Jul 2020
16	Super Moms	Ladies Shoes	Due in Jul 2020
17+18+19	MacDonalds	Fast Food Joint	Due in Dec 2022
20	House of Wax	Gift Items	Due in May 2022
21	Burger Joint	Fast Food	Due in Jul 2021
22	Childsplay	New Born Clothes	Due in Jul 2020
23&24	Decent Joint	Restaurant	Due in Jul 2021
25&26	Hair Craft	Salon	Due in Aug 2021
27	VACANT
28	Music Stars	Musical Instruments	Due in May 2022
29+ 30+30A	Starbucks	Coffee shop	Due in Jul 2020
31	Sander’s Joint	Fast Food	Due in Aug 2021
32	VACANT
33	VACANT
34&38	Daily Needs	Super Store	Due in Dec 2022
35&36	Super Drycleaner	Drycleaner	Due in Aug 2021
37	Fountain	Soda	Due in Dec 2022
39	Delicacy	Fast Food	Due in Aug 2022
40	VACANT
41	VACANT
42	KFC	Fast Food	Due in Aug 2021
43	VACANT
44	VACANT
51	VACANT
52	VACANT
53	VACANT
54	VACANT
55	VACANT
56	VACANT

Rack Rented Premises

Yields have become important in many of the real estate contexts and property valuations are now being based on information obtained from markets about the yields demanded by investors. In cases where cash-flow methods is being used exit yields find extensive use for calculating the property’s value at the end of the period for which this explicit prediction is being made, as per Baum & Baum, (2015). However, the focus of this study is on the yield term, which is important for reflecting an investor’s risk analysis of investment. The straightforward application of this factor is usually made with an objective to arrive at the conversion of the annual net operating income from the investment, state Erp & Akkermans (ed), (2012).

In the current real estate markets, situation is not that simple as it is made out to be. Investors do not become sure about the value of the property they wish to invest in when they are going to either sell or rent it, as per Kao, Sung & Chen (ed), (2014). Hence, property valuation methods are necessary to estimate the most suitable value of the proposed property in the market, asserts King, (2015). The accuracy of valuation can only be tested when the investor receives an equivalent sale value or an approximate purchase price, which, in all cases, represents the investor’s investment cost (See illustration in Example-1). Financial theory on yields in financial market is becoming crucial for it serves as a comparison tool between the general financial and property-related financial theories, according to Sexton & Bogusz, (2013).

It is a universal phenomenon that values of properties keep changing over time. As discussed in Persson (2003), the value of a property is usually attached with the investor’s expectations from the valuation, as stated by Burn, Cartwright & Maudsley, (2009). In actuality, the valuation of a property is based on the following four basic conditions:

• need
• limited supply
• right of disposal and
• transferable assets in the market.

Once any of these four conditions change, the expected yield is bound to follow the movements of the change, but always in an opposite direction. Hence, to make a correct assessment of the yield ratio, it becomes necessary that the above noted conditions remain standard and are acceptable to all participants dealing in that property, say Megarry et al, (2012). It must also be noted that although Going-concern has not been considered as a basic condition for valuation, it is a strong pre-requisite for a good yield since every business is directly connected with the property from which it is run. The values of the properties are attributed to the value created by the business operations run from that property and hence, the business and the property are inter-related, asserts Bevans, (2008). Both the values generated are capitalised on the profits generated by the business’ turnover and its calculation is directly related to the property’s valuation, says Hinkel, (2010). Finally, the return on the investments must be compensated to the investor for “foregoing the present benefits and accepting the future benefits and risks”. This return in value is what is commonly termed as “interest” by lenders and “yield” by investors.

Task 2

The Current Income and Current Capital Value of a property is measured through use of Income Yields. Although each financial instrument is required to use a different income yield method for differentiating it from others, in case of property-specific yield methods, a brief description of income yields, is being given. In the property market, the income yield is also known as the initial yield and sometimes as All Risks Yield (ARY), assert McFarlane, Hopkins & Nield, (2012). It represents the ratio of net rental income to the purchase price or the current market value of the property under consideration. The Years’ Purchase (YP) is the inverse ratio of the income yield and is equivalent to the Present Value (PV) of $1 which is received annually and has been discounted at the initial yield rate. According to Baum, (2009), income yield from a property is useful for investors when they want to make assumptions about the market expectations of a risk, its growth and the depreciation, according to Karadimitrio, Magalhaes & Verhage, (2013). This relationship between the various factors is expressed by the following comparatives:

• The higher the risk, the higher is income yield;
• The higher the income growth, the lower is income yield; and
• The higher the depreciation, the higher income yield.

As per the JLW Glossary of Property Terms, 1989, the words rate, return and yield are often used as synonyms for describing the ratios between income and capital value or cost in the property market. The difference among these terms is in the time path of the data and their sources of value and capital. The Estates Gazette, 1993 defines them as follows, and I quote:

“Yields are generally defined as annual percentage amounts expected to be produced by an investment. They are also used as the measure for capitalization of income in the specific context of investment valuation. The yield is therefore identified very much as a measure of market expectation. Returns on capital, on the other hand, are defined as the annual percentage amount produced by an investment by reference to its cost or value. Returns can be distinguished from yields in that the value, on which they are based, is not necessarily a market value. Rates of interest, finally, are simply the annual percentage amounts payable on borrowed money and are further used in the context of discounting to reflect the time value of money.” Unquote.

As illustrated in the example below, the universal formula used for evaluating the property’s yield or cap rate is to divide the annual net operating income by the selling price. The net operating income is obtained by reducing the actual or anticipated net income by all the operating expenses, but before deducting the mortgage debt service charges, as stated by Goodhart & Hofmann, (2007).

Task 3

Illustrative Example – 1

Potential gross rents plus other income

= potential gross income less vacancy and credit losses

= effective gross income less operating expenses

= net operating income

Once the relevant capitalization rate or yield has been determined, an estimative of property value can be obtained, by applying the universal valuation formula:

Value = Income / Cap Rate   

Or: V = I / R

Now, considering the data provided, following shall be the Values –

VALUE if Yield is 5%

= £65,000 / 5% = £65,000 / 0.05 = £1,300,000 

LESS Purchaser’s Costs of £88,400 = £1,211,600

VALUE if Yield is 5.25%

= £65,000 / 5.25% = £65,000 / 0.0525 = £1,238,095 

LESS Purchaser’s Costs of £84,190 = £1,153,905

Purchaser’s Costs are considered to be 6.8%

The Fully Let Freehold

Of all the categories of property investment in use at present, the fully let freehold has been considered as the least prone to variations and hence to an inaccurate valuation. The normal approach adopted when dealing with a fully let freehold interest of the investor for market value purposes is to consider the rent passing (which is also known as the ERV) and divide it by the capitalisation rate (also known as ARY-all-risks yield), as per Ashworth & Perera, (2015). In this method, there are no major differences in its application by different investors, hence the chances of any differentiated valuations by the users, based on the same data base are almost negligible. However, since the valuation method relies on the strength of the comparable data, the comparable data may create a small difference in cases where the market is dominated by reversionary freeholds. Hence, the quantity and quality of the comparable transactions is the key to the comparable valuations, assert Fair & Raymond (ed), (2013).

However, as per Myers, (2012), in cases where the comparable data cannot be directly applied, the adaptations used should be intuitive. Take for example, a case where the reversionary freehold comparable is showing a yield of 6%, then the question is how to apply this information to a fully let property? What are the consequences, asks Taylor, (2008), when the comparable has been let on 5-year review but the subject property has been let on a 3-year review? But since the model has been based on rent and capitalisation rate, only the capitalisation rate should be adjusted to deal with the ambiguity between the subjective and the comparable, hence the use of ‘all-risks yield’, which is used so that all risks are hidden in the yield. The Reversionary Freehold

Task 4

There are three conventional techniques used for valuing the reversionary freeholds and these are the 

• Term and Reversion
• The Equivalent Yield and
• The Layer (or hard core) Approach.

The basis used in most of the market valuations tend to suggest that the term and reversion approach has found the most common application among users, whereas the other two are the lesser used methods, explain Smith & Jaggar, (2007).

Analysis

For our analysis of the Reversionary Freehold Value, we are considering a freehold office investment, where the property has been let at a net fixed rent of £150,000 p.a. and where the final 6 years of the historic lease are still to run. The net ERV of the building has been fixed at £300,000 p.a. An identical space in the building next door has also been recently let on 5-yearly reviews at its ERV and has been subsequently sold for £5,000,000. The Capitalisation Rate (k) is calculated as £300,000 / £5,000,000 and is found to be 6%

In the UK, according to Kao, Sung & Chen (ed), (2014), the purchaser’s costs are deducted from the valuations after the application of the capitalisation rate. Because of this factor, when an analysis of the property’s transactions are carried out for calculating the capitalisation rate, all these costs are added back to the contract price for determining the full outlay of the property. For the purpose of this study, as explained by Burn, Cartwright & Maudsley, (2009), the purchaser’s costs in the UK are taken at 5.75%, and these consist of 4% stamp duty tax and 1.75% for professional fees. However, in order to keep calculations simple, it is better to ignore all purchaser’s costs for the purpose of calculations in this study, assert Erp & Akkermans (ed), (2012).

If the valuation is about a fully let property, the capitalisation rate can be applied directly. In cases where perfect comparable data is available, there can be no arguments over the method being used and direct capital comparisons are all which an investor requires. However, the subject property of our example is a reversionary property and hence an adjustment technique is required in order to reconcile any imperfect comparable data, as illustrated below, as stated by King, (2015).

Term and Reversion

Term rent £150,000

YP 6 years @ 5% 5.0757

Term and Reversion Valuation is £761,350

Reversion to ERV £300,000

YP perp. @ 6% 16.6667

PV 6 years @ 6% 0.7050

Valuation is £3,524,800

Final Valuation is taken as £4,286,150

Initial yield = £150,000 / £4,286,160 = 3.50%

Task 5

Reversionary yield = £300,000 / £4,286,160 = 7.00%

The equivalent yield is the single yield applied to both parts of the valuation to get the same answer. In this case it is 5.97%.

1. The term yield has derived from the fully let comparable and then is adjusted to represent the security of the term income. This security is derived from the fact that the default risk from the tenant is less as he is less likely to vacate the premises while paying less than the ERV.
2. The capitalisation rate of the reversion has been based on the fact that the property shall become fully let in 6 years’ time and the comparison is also with a fully let property, hence the yield can be applied directly, statesBevans, (2008).
3. An alternative application of this technique may adopt the same 1% differentials between the term and reversion yield.
4. This methodology does not attempt to identify the nature of any changes in the rent and whether this can be caused by a rent review or a lease expiry, saysMyers, (2012).

Residual valuation is the process of valuing land with development potential. The sum of money available for the purchase of land can be calculated from the value of the completed development minus the costs of development (including profit), as per Megarry et al, (2012).  The complexity lies in the calculation of inflation, finance terms, interest and cash flow against a programme timeframe. The equation for the residual method of valuation, in its simplest form, is as follows, states Baum, (2009):

Value of Land / Property = GDV – (Construction + Fees + Profit)

here

Value of Land / Property refers to Purchase price of land / property / site

GDV refers to Gross Development Value

Construction refers to Building and construction costs

Fees refers to Fees and transaction costs

Profit refers to Developers profit required

Gross Development Value (GDV)

GDV, asserts Myers, (2012), comprises of the following components:

Building Costs

Professional Fees

Marketing and Sales Costs

Financing Costs

Contingencies

Any other Ancillary Costs

Land Acquisition Costs

1. Building Costs

Building costs offer the greatest risk when calculating the residual valuation of a property. Building Cost Information Service (BCIS) is the foremost agency in the UK which publishes information related to building costs every quarter and the information is shared only with subscribers who pay for the service, according to McFarlane, Hopkins & Nield, (2012). BCIS provides latest building cost information for a wide spectrum of buildings, both in the residential as well as the commercial sector. The information provided is based on the national average of the tender prices and does not include costs related to fees, external works and VAT. BCIS also notifies its members that they must take consideration the regional adjustments depending on the location of the property, assert Sexton & Bogusz, (2013). Another important criteria to be considered by the subscribers using the information is to ascertain whether costing details have been based on the Gross External Area (GEA) and is inclusive of the common areas or has been based on the Net Lettable Areas (NLA). This consideration is highly important as the difference between costs based on GEA and NLA can be as high as 20%, says Taylor, (2008).

1. Professional Fees

Professional Fee includes fee charged by the Design Team and also includes the Construction Management Fee usually charged by Consultants, Architects and Engineers.  The range of Professional fees varies between 10% and 12%, as per Myers, (2012). Fees charged for Refurbishments and Fit-outs fees are charged at a higher rate as compared to new build fees. Other than standard design fees, an ‘additional’ fee’ can be charged for providing services related to the following trades:

• Acoustic Consultancy
• Building Information Modelling (BIM)
• Environmental Impact Assessment
• Feature Lighting
• Health and Safety Consultancy
• Interior Designing
• Landscaping
• Planning Consultancy
• Site Inspection
• Traffic Modelling

1. Marketing and Sales

Costs related to promotional activities and selling efforts are included in this category and are usually about 1% of the GDV. Agents providing their services may charge 10% of rental for the first year or 2% of the sale amount, as stated by Smith & Jaggar, (2007).

1. Financing Costs

An agreed interest rate and charge for draw down facilities is included in the loan contract irrespective of whether the interest rates are variable, fixed and/or capped. Use of S-curves is extensively made by developers for predicting expenditures when determining the cash flow of a project. During the planning stage, most developers use their own capital for funding the appraisal stage and this includes charges for the design work and due diligence charges so as to obtain the funding consent from lenders, assert Fair & Raymond (ed), (2013). However, once the appraisal and planning risks have been taken care of, developers go for advantageous terms of funding the project and look for the lowest loan rates from banks or financial institutions for funding the construction process.

Drawdown facilities, mostly on a quarterly basis, are considered as sufficient and are timed by the developers so as to meet the contractor’s monthly payments, explain Karadimitrio, Magalhaes & Verhage, (2013). In this respect, developers often make use of the residual value calculations for drawing down all the construction costs and professional fees payments to the two-thirds stage of the project’s period in order to avoid any perpetual risk of default on payments, state Baum & Baum, (2015). To facilitate defects liability period to their advantage, developers usually keep 5% of the payment made to the contractor as retention money. Half of the retention amount is released on completion of the project and the balance half is released at the end of a defects liability period, after satisfactory completion. For looking after these arrangements, most lenders may take the services of a professional appraisal team for carrying out a complete due diligence in order to ascertain risks associated with the project risk and keep a control over the loan agreement, as per Ashworth & Perera, (2015).

1. Contingencies

Unforeseen events, such as natural calamities, are provided for under this head. It is usually in the range of 5% to 7.5% and is based on the estimated building costs. Developers can mitigate the unforeseen risks occurring due to fault in design before signing of the Contractor Agreement, but this flexibility cannot be availed once the construction contracts have been finalized, assert Kao, Sung & Chen (ed), (2014).

1. Any Other Ancillary Costs

Costs covered under this heading include:

• Demolition and other works including service diversions and/or site clearance costs.
• Site decontamination.
• Planning fees.
• Planning obligations and conditions due to community infrastructure levies.
• Public consultations and exhibitions.
• Public utility charges.
• Third party fees, such as party wall surveyor or lawyers.
• Archaeology costs.
• Topographical surveys.
• Geotechnical investigation such as boreholes and trial pits.
• Void costs, such as interest, insurance, rates, cleaning, maintenance, fuel, and security, which may be incurred in-between the completion of the project and achieving sales / rental revenues.
• Legal costs on sales or leases.

1. Land Acquisition Costs

Land acquisition costs shall include property taxes and / or any compensation to be paid to possess vacant possession, as per Erp & Akkermans (ed), (2012).

GDV (Gross Development Value) is calculated by multiplying the annual rent by the ‘year purchase amount’ at a yield which is considered to be appropriate for the type of the property proposed at the given location. Considering a rental income of £500,000 per annum and expecting a yield at 7.5%, shall provide a year purchase of 13.33 and the property’s capital value shall come to £6,665,000 (£500,000 x 13.33).

The NDV (Net Development Value) can be determined after the deduction of the purchaser’s costs, which would include costs related to stamp duty and legal fees from the GDV.

To understand how Zoning affects the rental income from a commercial property, especially the shops, one must know the fact that a shop on third floor would fetch a lower rent compared to a shop on the ground floor. Hence Zoning tries to impose a rule that accessibility of the shop to the customer is the main criteria of fixing a higher rent, explain Sexton & Bogusz, (2013). Also, commercial space is sometimes valued on the basis of location, at a fraction of the highest paid Zone A. Take for example the basement, which could be valued at A/10 or A/15 for storage, A/12 for kitchen and A/20 for a remote ancillary. Similarly, all external space, contained in the outbuildings and garages, is usually valued at a fraction of Zone A as compared to upper floors, asserts King, (2015).

Another important factor is size of the shop. Usually, the Net Internal Area (NIA) is considered for assessing the size of a shop. However, in large stores, located in Super Markets, it is the Gross Internal Area (GIA) which is used for assessing the space of the shops, retail warehouses and factory outlets, as per Kao, Sung & Chen (ed), (2014). Gross External Area (GEA) is used when assessment of the premises is done for valuation for building insurance purposes. In GIA, the measurement includes the structural walls and usually ignores the de-mountable or non-structural partitions. But for NIA, the space used for columns, piers, nibs, chimney breasts and other structural impediments is excluded, say Erp & Akkermans (ed), (2012). It must also be noted that the variations in different floors may allow for different valuation for a zone compared to other parts. Similarly, values can be different because of masking, which means obstruction of view of the particular shop from the frontage is interrupted because of structural impediments, such as an L-shape design, according to Sexton & Bogusz, (2013).

Zoning, a standard method being applied in the UK since the 1950s, is used for assessing retail premises and for calculating and comparing their values for rating purposes. This method has been used both by public as well as private sector surveyors. For assessment purposes, the shop or retail premises are divided into different zones, each having a depth of 6.1 metres or 20 feet, as explained by Burn, Cartwright & Maudsley, (2009). Zone-A is the area which is closest to the window and is considered as most valuable. The values keep decreasing as one moves away from the frontage. Zone-B is the next most valuable with a further 6.1 metres away; then comes Zone-C and so on, till the entire depth of the retail area has been classified as per the zones. Usually, any space left after classifying as Zone-C is classified as the remainder. Below are illustrated three classes of commercial spaces for making the point more clear, state Megarry et al, (2012).

Shops 

Also termed as Class-1 Units, are those properties which have physical characteristics of a shop and are to be used for retail trade and the trade could be goods or services. Access is preferred to the premises directly from the pavement, or by steps going up or down, asserts Bevans, (2008). These must have at least one or more display windows. Inside, the premises will have a counter or pay-desk and the goods which are displayed for sale. Such properties usually have planning permission for Class-1 use (Shops), as per Hinkel, (2010). These premises could include travel agencies, ticket sales, post offices, hairdressers, launderettes, dry cleaners, pet shops and funeral directors. These could include shops selling cold food for take-away customers, speak Baum & Baum, (2015).

Offices

These are termed as Class-2 Units and may be situated in the retail type properties inside the busy shopping locations. These are properties physically resembling the shops but are used as offices and other commercial purposes such as architects, solicitors, architects, banks, accountants and building societies, as detailed by McFarlane, Hopkins & Nield, (2012). These premises must have a Class-2 (office) planning permission. Generally, they command the same values as those of other shops, but in certain cases they may command a higher basic rate in comparison to what is being applied to an adjacent unit which is under Class-1 use, and this depends on the units’ rental evidence, shown by Baum, (2009). However, a higher zoning classification is necessary for those units which command a better rental value, as is the case with the Class-1 shops.

Termed as Class-3 Units, these could be dine-in or Hot Food Take-away and occupying retail type properties in recognised shopping locations. Such premises require Class-3 planning permission and are required to be valued as per the LVJB Instruction Valuation of Restaurants. However, their valuation terms shall be governed similar to those of the shops and in accordance with the zoning classifications, exerts Myers, (2012).

The established valuation convention, as explained by Smith & Jaggar, (2007), is to halve-back from Zone A, with Zones B onwards assessed ‘in terms of Zone A’ (ITZA):

Zone B =A/2; Zone C=A/4; and Zone D, which is usually the remainder of the retail area after Zone C, is to be assessed as A/8. Any remaining space after this will probably be valued as A/10.

Merry Hill Shopping Centre

Comparison Method

The Principle of ZONING

• rental/capital value of shop is dictated by potential level of trade
• significant trade is created by spontaneous “window shopping”
• thus, the greater the ability to display goods the greater the potential for sales
• this “display” potential must be reflected in value
• look at the two shops shown in Figure-2.

References

Ashworth, A. and Perera, S. 2015 Cost Studies of Buildings, 6^th ed. Routledge, Oxon.

Baum, A. 2009 Commercial Real Estate Investment. Taylor & Francis, London.

Baum, A. and Baum, Prof A. 2015 Real Estate Investment: A Strategic Approach, 3^rd ed. Routledge, Oxon.

Bevans, Neal R. 2008 Real Estate and Property Law for Paralegals. Aspen Publishers Online, London.

Burn, Edward Hector, Cartwright, John and Maudsley, Ronald Harling. 2009 Maudsley and Burn’s Land Law. Oxford University Press, Oxford.

Erp, Sjef van and Akkermans, Bram (ed). 2012 Cases, Materials and Text on Property Law. Bloomsbury Publishing, London.

Fair, D.E. and Raymond, R.J. (ed). 2013 The Competitiveness of Financial Institutions and Centres in Europe. Springer Science & Business Media, Dordrecht.

Goodhart, C. and Hofmann, B. 2007 House Prices and the Macroeconomy: Implications for Banking and Price Stability. OUP Oxford, Oxford.

Hinkel, Daniel F. 2010 Practical Real Estate Law, 6^th ed. Cengage Learning, Boca Raton, FL.

Kao, J.C.M., Sung, W. and Chen, R. (ed). 2014 Green Building, Materials and Civil Engineering. CRC Press, London.

Karadimitrio, N., Magalhaes, C. and Verhage, R. 2013 Planning, Risk, and Property Development: Urban Regeneration in the England, France, and the Netherlands. Routledge, Oxon.

King, Sarah. 2015 Beginning Land Law. Routledge, Oxon.

McFarlane, Ben, Hopkins, Nicholas and Nield, Sarah. 2012 Land Law: Text, Cases, and Materials. Oxford University Press, Oxford.

Megarry, Robert, Wade, William, Harpum, Charles, Bridge, Stuart and Dixon, Martin J. 2012 The Law of Real Property, 8th ed. Sweet & Maxwell, New York.

Myers, D. 2012 Economics and Property. Taylor & Francis, London.

Sexton, Roger and Bogusz, Barbara. 2013 Complete Land Law: Text, Cases, and Materials Oxford University Press, Oxford.

Smith, J. and Jaggar, D. 2007, Building Cost Planning for the Design Team, 2^nd ed. Routledge, Oxon.

Taylor, J. 2008, Project Scheduling and Cost Control: Planning, Monitoring and Controlling the Baseline. J. Ross Publishing, Florida.