Commercial Practice Real Estate - PDF

Commercial
Practice
Real Estate

Table of Contents

INTRODUCTION
Commercial practices implies to set of activities or functions linked to strategic
promotion, supply and sale of product. In real estate commercial practices involves specific
policies, acts, course of conduct concerned with regulating and monitoring of buy and sell of real
estate properties (Pirounakis, 2013). In this context valuation and assessment of leasehold
property is difficult task as it requires use of financial ratio and other mechanical approaches.
This report contains analysis of aspects of commercial practices related to real estate such as
valuations and appraisal of property, property's ERV or Estimated Rental Value etc. This report
also include risk valuation of investment through ARY (All Risk Yield) and market risk
valuation before purchasing property using MRY (Market Risk Yield).
MAIN BODY
Description of the property:
 Address: Units 16-17 Erdington Industrial Park, Chester Road, Birmingham B24 0RD
 Rental Price: £150,550 per annum exclusive
 Tenure: Leasehold (To Let)
 Property Type: Warehouse/Industrial
 Details: Approx. 1 mile from M6 (J5)
 Accommodation: Near about 1758 sq m.
 Location: The above displayed property is situated at area near Erdington Industrial
Park, Chester Road within Birmingham. Such property is available on lease for
commercial and industrial use such as office, warehouses etc. This property is directly

linked with central and major point of city with excellent road network. It is hardly
approx 5 mile away from City Birmingham as well as at distance of approx 2 miles from
J6 Spaghetti Junction, linking to The NMN or National Motorway Network.

 Description: https://www.harrislamb.com/properties/units-16-17-erdington-industrial-
park-chester-road-birmingham/
 Infrastructure: Premise of the respective company is separate bay unit of warehousing
in which steel is used for making portal frame. The roof includes special roof lightings,
steel profile: part block and wearing height along with a floor of concrete which is made
up with attractive colours. Ceiling of eaves of premise is of 9.1 meter along 7 meter of
height work.
 Floors: Property includes an integrated 2 floored elevation. Such two floors connected
with staircases. On other hand ground floor consists different options like kitchen,
canteen, space of reception as well as trade counter etc. Apart from it, the refreshment
facilities are also here for different kind of people such as disabled, female- male etc. . In
the context of first floor, a showroom is included as well as cellular office, another
kitchen and many other features are also involved. It consists an extra floor area for
mezzanine along- with office work area which can improve its capacity.
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*The above measurements have been determined according to the RICS Code related to
practices of assessment and valuation.
 Lighting and Entrance: Building premise includes a very well managed system of
lighting sodium. So, offering a deluxe lightened and suitable functioning environment to
tenants. At entrance of building there are two main doors.
 Additional Features: Apart from these features, the premises consist wide area of
parking. Now, 10 parking blocks are included in property. Additionally, well lighting
system, heating system and many more features are included in the are of the property.
Valuation of the Estimated Rental Value and All Risks Yield:
The property is being evaluated by “method of comparable evidence”. Information
related to same is derived through online data, and professional press. In the method, crucial
elements are recognised which affect to the property income as well as pose for becoming a
restriction on its usage (Baker and Ricciardi, 2014). These factors are such as size, infrastructure
quality, location etc. Following key factors can affect the aforementioned property:
 Easy reach the important road networks;
 Ability to reach to the site
 Building's layout along with height
 Area of floor
 Space of parking.
As building is related to the warehouse or industrial unit along with a specific tenure. So
the above listed factors or elements are very crucial and important for the purpose of analysing
the comparable evidence.
Estimated Rental Value (ERV):
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Estimated Rental Value simply implies to approximate amount of rent that property is
reliably assumed to provide on the basis of property's market condition, layout, location,
characteristics as well as working environment (Manganelli, B., 2014). At the time of purchase
of land or piece of property ERV is most considerable variable. In this context following is the
calculation of the Estimated Rental Value for given case:
On the basis of prevalent market rent as applicable for City Birmingham, following is the
ERV for respective property is:
Aggregate number of rental properties in Birmingham with rental level of under £250 per cm = 7
Time (Average )_ on Market = 163 days
Property Rent (Average ) in respect of Birmingham = £855 pcm
Gross Area (Internal) of Building = 1758.12 m. sq.
Price Rental = £128,550 p.a. (exclusive)
(Per month) Price Rental = £ 128,550 / 12 = £ 10,712. Monthly Rental Price per
sq. meter = £10,712.5/ 1736.26 = £6.169870872/m2
(Per centimetre): Monthly Rent = [√( 6.1698)]*100 = £248.3922 pcm
So, Property's Rental Value (Estimated) for property = £248.3922 pcm.
In order to arrive at this figure, current market rent rate area wise is taken as base for
calculation of rental value for property. Worth of property is high as 7 of them only remain in the
market with period average of 163 days , it simply means that these kind of properties with
higher price as compare to other properties of commercial nature.
All Risk Market Yield (ARY):
ARY or All Risk Market Yield can be defined as the base value of a commercial property
investors that gives an indication about how a particular property is related to risk (Viljoen and
Wiskerke, 2012). Herein, below some basic principles which are needed to be keep in mind
during reaching at the market yield risk:
 Falling Property: There contribution to be a increasing the scenario analysed in respect
of yields in relation to property's capital value falls. Additionally, the rent value is to be
constant except the rent review happens (Nwogugu, 2012).
 Buoyant Property: There contribution to be decreasing in the scenario analysed in the
yields in relation to property's capital value raise. Additionally, the rent value is to be
constant except the rent review happens (Tiwari and White, 2014).
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According to information obtained from online databases, In Birmingham City, most of
the Lease provider or Landlords are earning an yearly yield of approx 5.6 % to 10.9 % per
annum. In calculation part of ARY, average of these annual yield ins taken which is [(5.6%
+10.9%)/2] = 8.25%
Yield percentage = ( Rent per year / Aggregate Property Value) * 100
8.25 = ( £128,550 / Aggregate Property Value) * 100
0.0825 = £128,550 / Property Value
Property Value = £121,478 / 0.0825 = £1558181.8182 or £1558181.82
The above mentioned figure of property yield can be any no. varies between described
limit of prevailing Birmingham city's market yield in order to increase the accuracy in reflection
of risks. It is vital to note down that references and credit rating of different tenants also assist in
setting a compatible risk level. For this kind of tenants, risk will be less. Defaulter tenants leads
to increase in risk level.
Rates Payable of the building and Rateable Value including SBRR
Rateable Value defined as an approx or equivalent amount of rental value at which land
or property assumed to be let out on yearly basis for commercial and residential purpose. This
value is assumption based and it is assumed that tenant or holder of lease will bear all liability for
payment of its accrued and outstanding payments along with taxes of rent, expenses of
insurance, cost of repairs and miscellaneous expenses that are essential for maintaining such
rental property effectively (Bishop and Pagiola, 2012). In this context for Building, assessment
of rateable value is done by Valuation Office Agency. Governing body of valuation office
agency is HM Revenue and Customs.
According to this method of valuation, annual rent for property is assessed in case it was
eligible for let out or rent running in open market at particular date of valuation. Following is
major criterion with regard to determine rates:
 RV on the basis of valuation dated 2008, 1 April. Than value will be eligible until 2017,
March 31.
 RV on the basis of valuation dated 2015, 1 April. Than value will be eligible until 2017, 1
April.
Here exemptions are available in Rateable Values named as SBRR (Small Business Rate
Relief). This exemption of relief is computed for a specific valuation period. Such exemption
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rate may defer from one region to another region. Main motive of such rate is to provide
assistance to small and micro businesses (Elliott and Timmermann, 2013). Particularly to those
entities which are not availing any other relief. In given case study property is commercial by
nature and situated in Birmingham, Small Business Rate Relief is applicable on properties that
belongs to such region. Following os the criteria for qualification, as follows:
 Having a single self owned property and property's Rateable Value is below £15,000
after April 2017.
 Having self occupied property along with additional or extraneous properties, which have
Rateable Value of below £2,899 each individual property and aggregate Rateable Value
of properties are below £19,999.
In relation to the provided case scenario, following is rateable value in respect of
building:
Present monthly rental price = £ 10,712.5
Rateable Value is amount of rent which is approximately equals to expected rental value
payable in following year and amount of current year rent will be regarded as expected rental
amount in the year 2017 which is required to be paid in the 2018.
Therefore, Building's Rateable Value = £10,712.5
Although it is required to be consider that those individual who are have more than one
property, are eligible for claiming relief only in respect of main building or property. Year for
business rates is starts from 1 April to ends on 31 March of succeeding year. Rates of SBRR
follows a structure named as sliding scale. Following are the rates applicable in respect of
properties, as follows:
According to above mentioned SBRR Rates, following is calculation of rates payable in
respect of Birmingham Property for the period 2017/18, 2018/19 and 2019/20, as follows:
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Computed Rateable Value of property of Birmingham is £10,712.5, so it meets first
criteria as per above rates payable table. Thus it is eligible for claiming 100% full relief or
exemption under SBRR scheme. As per Regulations of England, Birmingham belongs to that
region so such rate world be applicable in property in Birmingham.
Transitional Relief: The transitional relief can be defined as a kind of method which is related
to the eliminating significant difference from the non domestic rate bill that result as revaluation
(Prasad, 2013). Eventually, these changes are included in the bills of owner.
One of them is related to claim transition relief in any of below mentioned situations:
 In case property is situated at the England.
 In case rates are fluctuating by large variations in relation to particular amount.
In case if any this kind of situations arise than Council is required to adjust Rates Payable
automatically as per their criteria of eligibility. Such change or modification applied in bill is
widely depend on:
1. Property's Rateable Value;
2. Increment or decrement in Bill due to Revaluation.
One would not be eligible for transition relief in case bill after revaluation has crossed
their full amount. Following are rates to be payable in scheme of transition relief if there is
Increment or decrement in Bill for the years 2017 - 18, 2018 - 19 and 2019 - 20:
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As calculated earlier in report the amount of Rateable Value is £10,123.17 for property which is
situated in Birmingham. In case if amount of bill enhanced in respect of year beginning from
2019-20, a increment of 10% would be admissible. So bill amount would be, as follows:
Bill Amount = Rateable Value + (Rateable Value * Relief Rate)
= £10,712.5 + (£10,712.5* 0.10)
= £10,712.5 + £1071.25
= £11783.75
Alternatively, if in case amount of bill would decreases in next upcoming year i.e. 2019-20. As a
result of revaluation of rates, bill amount would be:
Bill Amount = Rateable Value - (Rateable Value*Relief Rate)
= £ 10,712.5 - (£10,712.5* 0.35)
= £ 10,712.5 - £3749.375
= £ 6963.125
Hypothetical Scenario 1
A Valuation Report exhibits detailed assessment of value of properties which is based on
available data, personal experience and opinions. It is a formal document in from of report that
give a detailed computation of value of property along with assumptions used, methods of
valuation applied, scope as well as recommendation about property (Mooya, 2016). Following
presented valuation is based on RICS Global Standards, if amount of Rental estimated value and
value of let out property situated at Units 16-17 Erdington Industrial Park, Chester Road is
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equal, than freehold interest for the purpose of purchase of property can be calculated, as
follows:
VALUATION REPORT
Basis of Valuation:
The basic ground of valuation in respect of property located at Units 16-17 Erdington
Industrial Park, Chester Road, Birmingham B24 0RD is conducted as per Global Standards
Valuation (RICS) The Royal Institution of Chartered Surveyors and bounded by the privileges
and limitations or restrictions of respective professional standards in whole valuation report.
According to the concepts of standards, definitions and criteria of Market Rental Value and
Market Value are as follows:
Market Rental Value:
It is a particular amount or value at which is being leased as per valuation and an agreement to
pay rental value based on prevailing market rate, become enforceable between lessor and lessee
(Ross, 2017). Such agreement is done by parties after valuation and with declaration that parties
have acted judiciously as well as term and condition of agreement is in knowledge of both
parties.
Market Value:
It implies to an estimated figure or value at which parties (willing seller and a buyer) are agreed
to sale or buy a particular property on a valuation date after providing a declaration that both of
parties have acted judiciously as well as term and condition of agreement is in knowledge of
both parties (Goddard and Marcum, 2012).
Assumption:
Estimated Rental Value of provided hereditament = Let out value.
Rents are presumed to be as advance receipt.
No. of Year = 15 years
Here, Interest is regarded as freehold property interest.
Valuation Methodology:
In order to reach at amount of unencumbered Freehold's market value, direct capitalization
method applying ARY is used. In this regard multiplier of (1+k) can be used. So, following is
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the calculations for valuation:
MV of Let out Property let out = £248.3922 pcm
Yearly Market Value = £ 248.3922 * 100 * 12 months = £298070.64 pm
Per annum Rental Yield = 8.25%
Thus, [(£298070.64/0.0825)* (1+0.0825)] = [£3612977.4545* (1.0835)] = £3911048.09
Hypothetical Scenario 2
i. Market Value of the freehold interest for loan security purposes:
As per given case study, an assumption is taken that building had been let 12 years ago
with strength on Insurance and Repair Full (FRI) Lease of 15 year at rent that is currently 15%
more than of ERV. Another assumption is that expiry period of lease is 3 years and mentioned
property is now over- rented.
No. of the years = Twelve
Remaining of the years = Three
Aggregate Span period of lease = Fifteen years (12 plus 3)
Thus Market Value is equal to the Estimated Rental Value that is £298070.64 per month
ii. Discounted Cash Flow to show the NPV of the current income and outgoings and the
NPV of the proposed lease:
Here an assumption is taken that on part of owner of property, the occupant has appealed
new lease for a period of 10 years at rent based on market rate and along with a period which is
rent free. Proposed lease combines a rent free period that provides higher NPV as compared to
existing lease at discounting rate of 9%.
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CONCLUSION
From above report it has been articulated that RICS provides global standards for
valuations of properties which assist individuals, corporates, business entities etc. to do
commercial practices in real estate. This standards provide a systematic set of guidelines related
to assumptions and rules which are necessary for computation of estimated rental value, market
value etc. Different-different yields of market risks and other concerned methods are significant
in producing accurate and reliable information about valuation of Freehold Property interest and
leasehold properties
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REFERENCES
Books & Journals
Pirounakis, N.G., 2013. Real Estate Economics: A point-to-point handbook. Routledge.
Baker, H.K. and Ricciardi, V., 2014. Investor behavior: The psychology of financial planning
and investing. John Wiley & Sons.
Manganelli, B., 2014. Real Estate Investing: Market Analysis, Valuation Techniques, and Risk
Management. Springer.
Viljoen, A. and Wiskerke, J.S. eds., 2012. Sustainable food planning: evolving theory and
practice. Wageningen Academic Publishers.
Bishop, J. and Pagiola, S. eds., 2012. Selling forest environmental services: market-based
mechanisms for conservation and development. Taylor & Francis.
Elliott, G. and Timmermann, A. eds., 2013. Handbook of economic forecasting. Elsevier.
Prasad, R., 2013. Surface mount technology: principles and practice. Springer Science &
Business Media.
Mooya, M.M., 2016. Real Estate Valuation Theory. Springer-Verlag Berlin Heidelberg.
Ross, H.L., 2017. Settled out of court: The social process of insurance claims adjustments.
Routledge.
Goddard, G.J. and Marcum, B., 2012. Real estate investment: a value based approach. Springer
Science & Business Media.
Nwogugu, M.C., 2012. Risk in the global real estate market: international risk regulation,
mechanism design, foreclosures, title systems, and REITs (Vol. 664). John Wiley &
Sons.
Tiwari, P. and White, M., 2014. Real estate finance in the new economy. John Wiley & Sons.
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