Project Details - Part One - Valuations and Appraisal

You have been appointed by NAPT Property Investment Ltd.  This is a Glasgow based private property investment company looking for advice and guidance on the management of their portfolio.  They have asked you to undertake a DCF appraisal of the investment value and traditional market valuation on the following investment opportunity.

G1 Building, 5 George Square, Glasgow, G2 1DY

This  5-star  (CoStar  rating)  award  winning building is  arranged  over  eleven  floors  offering  office accommodation over the first to eighth floors and a bar covering the ground floor and basement. The building has a NIA of 131,448 ft2 and contains 10,660 m2  (113,663 ft2) of high-quality office space and 1,713 m2  (18,435 ft2) of space currently let as a bar/restaurant, with a total of 61 covered car parking spaces.  The particulars of the building can be found on Moodle, and there is also more information available on CoStar.

For the purpose of this valuation, the current tenancy schedule is as follows:

B & G                     1,713sq m (18,435 sq ft) which is currently let to Browns Bar & Brasserie. The 15-

year lease was agreed on Monday 12th November 2018 at £515,000 and is quoted on a net basis. The annual rent is paid in arrears and index-linked to the Consumer Price Index (CPI).

Level 1 & 2            2,852  sq  m  (30,702  sq  ft)  currently  let  and  occupied  by  The  Scottish  Herald

newspaper. These floors were letonanIRIbasis that was signed at the end of August 2012 for a period of 20 years with rent reviews every five years. The current passing rent is £550,000 per annum and paid in advance.   Seventeen parking  spaces  are attached to this lease.

Levels 3, 4 & 5      These three floors (4,744 sqm/51,074 sq ft) are currently let and occupied by Gardner

Investment Management. These floors were let on an FRI basis that was signed in early March 2014 for a period of 14 years with rent reviews every seven years. The current passing rent is £1,639,000 per annum and paid in arrears. Twenty-one parking spaces are attached to this lease.

Levels 6, 7, 8,        3,723 sq m (40,074 sq ft) across these three floors was let on  18th March 2019 by

Amazon. The 15-year lease is currently set at £1,030,000 (IRO) per annum in arrears and has five yearly rent reviews.  This space is let with 15 car parking spaces.

You estimate a current gross initial yield of 5.5%, an implied growth rate of 2% per annum on non- index-linked rents, along run CPI of 2.25% and a suitable target rate of return of 9%. You also estimate it will take 12 months after an existing lease ends to find a new good quality tenant under current Glasgow office market conditions, and you are required to explicitly allow for rental income voids.  All leases across levels 1 - 8 are quoted in current terms. The seller is asking for offers over £65,000,000.

Your client has asked you to critically appraise the market rent for the office space in the Glasgow Core submarket. In addition, you are required to recommend how much your client should offer to purchase this asset, and to evaluate and compare the rents achievable, market conditions and rental growth prospects for prime offices in Glasgow.

This recommendation of the offer should come once you have completed both of the valuations for George Square, and be clearly included in your spreadsheet.

Your excel spreadsheet should include (and clearly link in through formula), all evidence and figures used to inform the assumptions made in relation to the valuation inputs.

All the assumptions and market evidence could be housed on one page, then connected to the worksheets, or you might want to have the related information on the same sheet as your calculations – it is entirely up to you.

When determining your rents, yields and other inputs – you need to clearly state how you have arrived at these from market evidence, and note any other assumptions being used – such as those listed below.

Additional information:

a.       A  traditional  valuation  (10%)  and  DCF  investment  appraisal  (15%)  for  the  George  Square

property which assumes that the investor plans to buy the property and sell after a holding period of 15 years. Your appraisal must also account for 5.8% purchase costs and a further 2.5% for disposal costs at the end of the holding period.  Forecasts predict that suitable exit yields, post refurbishment, will be around 4.5% for the George Square  office.  You should also allow 5% of the market rent for rent review costs on leases at every rent review (over and above annual management costs).

Also, do not forget to include the car parking in your valuations and appraisals.  These spaces have value too.  You estimate each space has a market price of £18,000 at the valuation/appraisal date.

b.       Valuations of the market values, as  of 4th   December 2024 (submission date), for the property

interests your client has asked you to value. These should be accompanied by a critical discussion of your comparable evidence, assumptions and methods employed.

c.       When valuing the leasehold interest at 70 Cambuslang Road, your client has asked you to use a suitable Year’s Purchase formula that makes adjustment for a 2.5% sinking fund and 21% rate of corporation taxation which the current occupieris liable for. Remember, current practice tends to use a single Year’s Purchase formula to value leaseholds, but your client has expressly requested a dual rate Year’s Purchase and allowance for taxation. When valuing the landlord’s and tenant’s interests in Radisson Blu Hotel, Glasgow assumes the rent represents 65% of the Fair Maintainable Operating Profit (FMOP).

For part one of the coursework the grading will be broken down as follows:

-     Traditional office valuation for George Square (10%)

-     Discounted cashflow for George Square (15%)

-     Residential valuation for Montgomery Street (7.5%)

-     Industrial valuation – leasehold (5%) and freehold (5%)

-     Hotel valuation (7.5%)

-     Total for calculations – 50% of course grade.

Project details - Part Two - Critical Reflections

This part of the submission requires you to prepare two short critical reflections on the statements below. These should be considered independently of each other – as separate responses, rather than merging any details together.

Please prepare responses of 750 words maximum for each.

The word count does not include any references or visuals / figures you may choose to include to enhance your work or demonstrate key points. However, if you include text within tables, for example, this will contribute to your word count.

Harvard referencing should be used throughout, and a full reference list provided. There is no hard and fast rule on the number of references – you need to find a balance between content and references which works best for you. However, it will not work in your favour if you fail to include any, or only very limited, references. Evidence of additional reading and around the topic areas is key to communicating your perspectives in an informed way, and references help to support points.

These reflections should clearly state a variety of perspectives and bring together challenges, barriers, positives and negatives which reflect the complexity of the real estate market and the practicalities of valuation and appraisal processes. Part of the challenge is successfully doing this within a limited number of words – you need to be considered and thoughtful in what you choose to include. Clarity is key.

Provide responses to each of the following:

1. Critically evaluate the  strengths  and weaknesses of   both  contemporary and traditional approaches to valuation, considering how well they effectively capture the ‘value’ of real estate across different asset classes.

2.   Reflect on the various challenges and barriers to collecting and collating appropriate real estate data for valuations and appraisals – how can we understand what data is appropriate in global markets?