Introduction to Real Estate Investment:
Q.1: Taking the definition of Market Rent in the Red Book (RICS 2014), discuss the challenges that face the valuer in arriving at a rent of a commercial property, including physical, economic and practical factors.
Tip:
• It is suggested you consult more than one text book
• You may start to consult Journal articles and i-surv
• Please use Harvard references- and I do expect to see some references in your texts.
(750 words)
Q.2: A retail property currently is currently on the market as an investment in a good position near a major rail terminus (No 7 Station Road). It is in an area of shops let to mainly local retailers and some national chains. It is currently vacant but is to let on an unrestricted A1 use on a 10 year FRI lease. The area of the shop is frontage 8 metres and depth 18 metres. There is no return frontage.
You have a client who is interested in purchasing the freehold as an investment.
Prepare a report to your client covering the following:
• Your analysis of the comparable evidence in Table A (overleaf) attached to provide your estimate of Market Rent.
• Your capital valuation of the property in the light of market evidence on yields on similar transactions supplied overleaf.
• You should show full workings of both analysis and valuation.
(max 1000 words excluding appendices)
Rental Evidence:
Property Comparable R1 Comparable R2 Comparable R3
Address 3 Station Road 10 Back Road 1 The Parade
Relative location 50 metres away; closer to station 150 metres away; less prominent position 100 metres away better footfall
Dimensions frontage 12 metres; depth 20 metres frontage 7 metres; depth 16 metres frontage 5 metres; depth 8 metres
Rent passing £ 29,000 pa £17,500 pa £10,500 pa
Lease basis FRI; only use as a ladies dress shop. 10 year term granted 6 years ago. National retailer FRI; any A class use
Lease renewal. New term 15 years; 5 year reviews.
Local Retailer FRI A1 user only
National retailer
Date Agreed 12 months ago 3 months ago 18 months ago
Status Rent review New letting Lease renewal
Yield evidence:
Comparables R2 and R3 have both sold in the last year. R3 was sold 6 months ago at a yield of 5.5% based on the rent passing. R2 was sold 18 months ago when the rent was historic at £14,000 and it was known that the tenant might be wishing to leave. It achieved a yield of 5.2%
Tips:
• Start by analyzing the comparables supplied – remember what we discussed in class about the ‘hierarchy of evidence
• When you have assessed the rental evidence, consider the yield
• Bear in mind the property is empty and it may take some time to let. Consider whether you will defer the income (we will cover this in class) or adjust the yield to reflect the risk.
• You can use Excel or simple calculations to show your valuation – the choice is yours.
• What is important is that you think about why the evidence may show slightly conflicting things!