Economics Report: Commercial Property Valuation and Lease Analysis

This report provides a detailed analysis of commercial property valuation and lease agreements in the UK, focusing on two subject properties: 72 and 65 High Street. It examines major lease clauses, including rent review mechanisms, tenant and landlord responsibilities, and property conditions. The report utilizes various valuation methods, such as conventional, DCF, and arbitrage, to determine the fair market rent for each property, considering factors like initial yield, risk-free rates, and purchase costs. Calculations and interpretations are presented for each method, highlighting the differences in valuation results and identifying the most accurate approaches. The report also includes details of comparable properties to support the valuation process. This report provides a comprehensive overview of commercial property valuation techniques, making it a valuable resource for students studying economics and real estate.

ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
(i) Details of property and of major clauses of leases.................................................................1
(ii) Details of transactions on other properties..........................................................................14
(iii) Details of rating scheme.....................................................................................................24
CONCLUSION..............................................................................................................................27
REFERNCES.................................................................................................................................28

INTRODUCTION
In way of allowing the periodical adjustment of all the commercial properties available in
market level at the current date of review as agreed by landlord and tenant notified in rent review
clause in commercial lease will be known to as rent review (Dolan and et.al., 2016). Although
before this it will be very much essential to value that rental property that too at fair market price
at time of renting. So the practitioners of United Kingdom for market valuation will not be
practicing contemporary approach and rather utilising conventional one. In 3rd quarter of 2017
the value of commercial properties of UK at its prime location increased on an average of 0.7%.
These movements which are the upward and downward slope will be mostly depended upon the
performance of industrial sector. While the all shop sector recorded a fall down of rents of prime
locations by -0.3% in the 1st quarter of 2018.
So in this particular assignment discussion will be done on major clause of lease that are
all available in UK with details given from the property and other situated near by with that of
rating scheme as well. Under this project brief discussion will be made on how properties are
valued and how their rents are calculated given their rent review period and present conditions as
well.
MAIN BODY
(i) Details of property and of major clauses of leases
Under this assessments there are majorly 2 of the prime and main properties and both of
them need to be valued in order to take out the actual and current rent of them (Kavetsos,
Dimitriadou and Dolan, 2014). Both the two properties are in the main shopping street
surrounded by 4 other comparable properties on this street. So the details and valuation of both
subject properties are as follows:
Subject property 1: 72 High Street
This particular is a three storey building including basement, ground and first floor which
was built in 1900. The subject property is mainly occupied by ladies wear shop as it is in main
shopping street of provincial market town which also has store rooms, other accommodation but
in this valuation area of toilet will not be included. The overall internal and external premises of
this particular building are very much shabby and untidy which will be calling for further clean
up. All the work by tenant on this building was renewed on timely bases which were entirely
done only after taking prior written consent of the landlord (Reeves and et.al., 2017). Like about
1

25 years ago rear of ground floor of the building premises was extended with about 6.15 meter
till the present depth of over 29.03 meter. This property’s current lease is 42 years ago which is
too old and not as per the current or modern transactions so its valuation is very much necessary.
The other terms of lease will be including like that of the current rent of this building is £60000
p.a. with the terms for 99 years. This rent will be reviewed every 14 years value of rent will be
£2000 p.a. higher than that of market value (Ringø and et.al., 2016). It was also included in the
lease terms that all internal repairs and insurance will be responsibility of tenant only while
landlord will be answerable for exterior and structural repairs and maintenance.
VALUATIONS: CONVENTIONAL, DCF, REAL
DATA
ERV £62,000
Rent £60,000
Years to review 14
Equivalent/initial yield 6.80%
Risk free rate 1.32%
Bond premium 1.00%
Property premium 2.00%
Fixed rent return 2.32%
Required return 3.32%
Overage risk premium 1.00%
Rent review period 99
Purchase costs 6.50%
Void Period 0
2

Figure 1: Subject property 1: 72 High Street
Interpretation:
From the above table it could be concluded that rent of this property is £60000 while it is
estimated to be £2000 higher than market value which will be summed up to £62000 with years
to review will be 14 years. So including all the other factors like that of initial yield (6.80%), risk
free rate (1.32%), bond premium (1%), property premium (2%), fixed rent return (2.32%),
required (3.32%), overage risk (1%), rent review period (99 years) and purchase cost (6.50%).
CALCULATIONS
DCF/real
Implied growth over review -2554.05%
Implied growth per annum -203.29%
Inflation risk free yield -200.03%
Arbitrage
Implied growth over review -1677.07%
Implied growth per annum -202.83%
Inflation risk free yield -199.51%
Interpretation:
3

The table will be interpreting the results showing calculations of arbitrage and DCF or
real valuation. Under this implied growth over review period will be -2554.5% while per annum
growth will be -203.29% and inflation risk free yield will be -200.03%. All these things will be
calculated based on discounted cash flow techniques (DCF). While on other hand arbitrage also
calculation was done of implied growth over review (-1677.07%) and per annum (-202.83%)
with the inflation risk free yield (-199.51%). Which shows that there is very small difference
between both of them methods of DCF and arbitrage.
CONVENTIONAL EY VALUATION vertically sliced
Term:
Rent passing £60,000
YP 14 @ 6.80% 8.8513
Capital value £531,080
Reversion:
ERV £62,000
YP perp @ 6.80% 14.7059
Projected value £911,765
PV 14 @ 6.80% 0.3981
Capital value £362,982
VALUATION (ignoring PCs)
839494.875
1 £894,062
Initial yield 6.71%
Reversionary yield 6.93%
Interpretation:
The capital value of this property as per conventional EY valuation will be £531,080 if
the rent review will be for 14 years if it is valued at £60000. On other hand if it is done based on
£62000 then the capital value will be £362,982 which is less than the above one. Then if
Purchase cost is been ignored than valuation will be very higher to as £894,062 whereas initial
yield will be 6.71% and that of reversionary yield it would be 6.93%.
DCF VALUATION
4

Term:
Rent passing £60,000
YP 14 @ 3.32% 11.0536
Capital value £663,214
Reversion:
Projected ERV
(ERV * (1+implied
g)^ 14 £97,486
YP perp @ 6.80% 14.7059
Projected value
£1,433,61
3
PV 14 @ 3.32% 0.6330
Capital value £907,508
VALUATION
£1,570,72
2
REAL VALUATION
Term:
Rent passing £60,000
YP
1
4 @ 3.32% 11.0536
Capital value £663,214
Reversion:
Projected 'real' ERV £62,000
YP perp @ 6.80% 14.7059
Projected value £911,765
PV
1
4 @ -200.03% 0.9953
Capital value £907,508
VALUATION £1,570,722
ARBITRAGE VALUATION
Term:
Rent passing £60,000
5

YP 14 @ 2.32% 11.8380
Capital value £710,280
Reversion:
ERV £62,000
YP perp @ 6.80% 14.7059
Projected value £911,765
PV 14 @ -199.51% 1.0714
Capital value £976,851
VALUATION £1,687,132
EY Horizontally sliced
Bottom Slice Rent £60,000
YP perp @ 6.80% 14.7059
Capital value £882,353
Top Slice ERV - Rent £2,000
YP Perp @ 6.80% 14.7059
PV 14 @ 6.80% 0.3981
Capital value £11,709
VALUATION £894,062
REVERSE LAYER/HARDCORE
(Core and Top Slice)
Bottom Slice ERV £62,000
YP perp @ 6.80% 14.7059
Capital value £911,765
Top Slice Rent - ERV (£2,000)
YP 14 @ 4.32% 10.3434
Capital value (£20,687)
£891,078
6

TR VALUATION
Term:
Rent passing £60,000
YP
1
4 @ 5.80% 9.4112
Capital value £564,671
Reversion:
ERV £62,000
YP perp @ 6.80% 14.7059
Projected value £911,765
PV
1
4 @ 6.80% 0.3981
Capital value £362,982
VALUATION £927,653
871035.7712
LAYER/HARDCORE
Bottom Slice Rent £60,000
YP perp @ 6.80% 14.7059
Capital value £882,353
Top Slice
ERV -
Rent £2,000
YP Perp @ 8.800% 11.3636
PV 14 @ 8.800% 0.3070
Capital value £6,978
VALUATIO
N £889,331
EY Quarterly in Advance
Bottom Slice Rent £60,000
YP perp @ 6.80% 15.3257
Capital value £919,545
7

Top Slice
ERV -
Rent £2,000
YP Perp @ 6.80% 15.3257
PV 14 @ 6.80% 0.3981
Capital value £12,203
VALUATION £931,747
SUMMARY
Valuation after PC Initial Yld Reversionary Yld
Conventional £839,495 6.71% 6.93%
DCF £1,474,856 3.82% 3.95%
Real £1,474,856 3.82% 3.95%
Arbitrage £1,584,161 3.56% 3.67%
Layer/hard core £839,495 6.71% 6.93%
Reverse layer £836,693 6.73% 6.96%
EY q in a £874,880 6.44% 6.65%
Interpretation:
The valuation of rent of this particular property as per the given various methods is
coming different from each valuation methods like that of EY horizontally sliced, reverse layer
and hard-core, TR valuation and layer or hard-core methods. While the most accurate or correct
valuation of rent will be coming from DCF valuation which is about £1570722 as this technique
is mostly used throughout UK. While on other hand conventional valuation methods will also be
very authentic at initial yield of 6.71%.
Subject property 2: 65 High Street
This building was built up in 1980 having ground and first floors which is since 9 years
ago rented to Tiny Tots for over 20 years currently valued at £110000 p.a. the property is in good
condition on both internal and external premises (León‐Ledesma, McAdam and Willman, 2015).
Some of the major clauses of the lease agreements will be like for the exterior insurance or repair
and maintenance landlord will be responsible, while for internal repair tenant is accountable. So
all these it is required to adhere with so that valuation could be accurate and correct in all respect
with the required different methods. There are many methods which will be used to calculate the
actual value of rent of 65 high street subject property like that of conventional, DCF and real
valuations.
8

VALUATIONS: CONVENTIONAL, DCF, REAL
DATA
ERV £120,000
Rent £110,000
Years to review 1.6
Equivalent/initial yield 6.80%
Risk free rate 1.32%
Bond premium 1.00%
Property premium 2.00%
Fixed rent return 2.32%
Required return 3.32%
Overage risk premium 1.00%
Rent review period 5
Purchase costs 6.50%
Void Period 0
Figure 2: Subject property 2: 65 High Street
CALCULATIONS
DCF/real
Implied growth over review -18.59%
9

Implied growth per annum -4.03%
Inflation risk free yield 7.66%
Arbitrage
Implied growth over review -23.46%
Implied growth per annum -5.21%
Inflation risk free yield 7.94%
CONVENTIONAL EY VALUATION vertically sliced
Term:
Rent passing
£110,00
0
YP 1.6 @ 6.80% 1.4693
Capital value £161,619
Reversion:
ERV
£120,00
0
YP perp @ 6.80% 14.7059
Projected value £1,764,706
PV 1.6 @ 6.80% 0.9001
Capital value
£1,588,39
4
VALUATION (ignoring PCs)
1643204.93
3
£1,750,01
3
Initial yield 6.29%
Reversionary yield 6.86%
DCF VALUATION
Term:
Rent passing £110,000
YP 1.6 @ 3.32% 1.5336
Capital value £168,695
Reversion:
Projected ERV (ERV * (1+implied 1.6 £112,355
10