Client Style Report for Henry Street Store

Tasks

Your specific brief is to write a client style report which will be considered at an upcoming board meeting. This client style report will include analysis and information in accordance with the four tasks outlined below.

Task 1

Prepare a Rental Value Grid showing all workings, adjustment factors and assumptions based on the comparables outlined below. Use this to determine the best comparable guide to establish Full Rental Value (FRV) for Henry Street Store.

• Outline appropriate adjustment factors with regard to each property in order to determine the best comparable.
• Provide full details of your analysis of the shops ITZA and an annotated valuation explaining your choice of input figures.
• Based on your findings and data ascertained below, calculate the freehold value of Henry Street Store using two alternative traditional methods of valuation.

Market research in the area has provided the following comparable evidence:

Supervalu Stores is located in a middle-class suburban location and is the subject of a lease agreement based on full repairing and insuring (FRI) lease.

This lease agreement was finalised last month at a rent of £525 per sq m per annum in Terms of Zone A (ITZA).

On street parking is required due to restricted rear parking.

Marshall’s Stores on South Ann Street

A modern energy efficient street level store building including high sustainability features, located in an upmarket location.

Marshall’s Stores measures 50m in width and 86m in depth, measured on a Gross Internal Area basis and benefits from easily accessible rear parking.

This store on South Ann Street is held on an FRI lease based on a lease renewal which was agreed 12 months ago with a new term of 30 years at a rent of £575 per sq m per annum in Terms of Zone A (ITZA).

Gordons’ Superstores, Grafton Street

Located on Grafton street – a superior location, this 15-year-old building measuring 60m width by 54m depth is measured on a Gross Internal Area basis.

Gordon’s Superstores has been recently refitted to include modern display units and shelving offering sophisticated specification with exceptional amenities.

Gordon’s also includes extensive car parking at rear.

Gordon’s Superstores has recently been let on a 30-year FRI lease at a rent equating to £610 per sq m per annum in Terms of Zone A (ITZA).

A particular challenge for you in compiling your client style report is that there has been a scarcity of sales of comparable retail freehold units in the recent past. However, a sale agreement was completed for a similar unit six months ago where the All Risks Yield (ARY) determined was 7.5%. Prior to that a freehold sale of a similar unit was completed two years ago showing an ARY of 8%.

Task 2

With regard to Henry Street Store, Glenworth Developments are aware of advancements in the area of sustainability and the impact of sustainability in Real Estate Values going forward. Glenworth Developments are also aware that a major influence on the thinking in the UK with regard to sustainability of real estate was the Stern Review (HM Treasury 2006) on the economics of climate change. This review helped focus attention on sustainability, energy efficiency and risk of flooding and the implications of these for the value of real estate.

The Climate Change Act 2008 outlines UK government environmental targets by 2050. As requested by Glenworth Developments, provide an outline of the impact of these considerations regarding energy efficiency and sustainability of buildings in three categories:

1. Economic
2. Socio-cultural
3. Environmental

Task 3

Making any necessary assumptions, provide advice on the figure Glenworth Developments should offer for Henry Street Store based on the information provided below:

Your valued client wishes to consider the opportunity provided by the demolition of Henry Street Store and construction and offer for sale or lease of a new residential development. The implications for obtaining vacant possession will be dealt with by Glenworth Developments legal department.

Based on research carried out by Glenworth’s development department and following communication with the local authority planning department, your client has been informed they would be allowed to construct 20 one-bed flats of 500 sq ft, 20 two-bed flats of 800 sq ft and 10 three-bed flats of 1,000 sq ft.

The local authority indicated they would require a contribution of £400,000 towards infrastructure under S.106 agreement. The development period is expected to be two years and finance is available at 8% per annum.

Glenworth Developments would require a developer’s profit of 15%.

Glenworth Developments also anticipates being able to sell one-bed flats for £250,000, two-bed

flats for £400,000 and three-bed flats for £500,000.

Consultancy fees are estimated to cost 12% of the total construction costs.

Agents/legal fees are estimated to cost 3% of the gross development value.

Legal fees relating to site purchase costs are estimated at 8%.

Based on Glenworth Developments’ previous development sites, they anticipate building costs at £2,000 per sq. m.

Task 4

Glenworth Developments have also requested detailed advice on the significance of the yield as a measure of return and risk.

Provide advice on the difference between market yield, investment yield or capitalisation rate and the impact of the investment yield on returns to be achieved from their investment on Henry Street Store.

Provide an outline and basis of derivation of the following:

1. Initial yield
2. Reversionary yield
3. All risks yield
4. Relationship between yield and multiplier
5. Relationship between yield and risk