Module Code and Title
Module Convenor
Type of Assessment
Weighting of Assessment
Submission Deadline
RE2PREP-Projects in Real Estate and Planning (2)
Report
45%
Submission Point
(Blackboard/Turnitin/Other)
Items to be Submitted
Individual or Group
Assessment
Module Convenor Office
Hours/Opportunities for
advice and feedback
Turnitin
Investment committee memorandum with cash flows
Individual
Module convenor email: k.pain@reading.ac.uk
The part of the module will be delivered by Lukas Makovsky
who will be the point of contact and will provide advice and
feedback; l.makovsky@henley.reading.ac.uk
1. What is the purpose of this assessment?
Module Learning Outcomes Being Assessed
Use subject knowledge in
the solution of a complex
real estate market
problem
Demonstrate analytical
skills within the real estate
sector
Present results, support an
argument and formulate
1. Application of your knowledge to a real-world case study
to make a valuation of an income producing property
2. Conducting a real estate market analysis and preparing
inputs for NIY (net initial yield) and DCF (discounted
cash flows) methods
3. Calculating market value with NIY method
4. Calculating investment value with DCF method showing
proficiency working with spreadsheets
5. Providing sound justifications for your model parameters'
choice
6. Clear presentation of results of the two valuation methods
7. Compiling all work in a neat, well structured and easy to
follow memorandum
defensible conclusions
Produce a professional
business report
Critically reflect upon real
8.
Reflect how field trip experience affected your analysis
estate in the world of
practice 2. What is required of this assessment?
Simulated Scenario
Please note - You may not need to use much of this contextual material in your assignment. Some of
it is to provide context and hopefully will add to your knowledge and understanding of real estate
investors and investment markets.
-
Your (hypothetical) employer is the real estate fund manager for a private property company based
in the UK South Western Real Estate Investment Fund (SWREIF) owns 20 office assets in
Bristol, Exeter and Birmingham. The total portfolio value of SWREIF is approximately £250
million. SWREIF has recently 'accepted' the introduction of 101 Victoria Street by an agent
employed by a large advisory firm (e.g. CBRE, JLL, Savills, Cushman and Wakefield etc.).
SWREIF's Investment Committee has decided that they would like to see a financial appraisal of
the asset with a view to making a bid. They have had a long discussion about the asset in terms of
its location, quality of the building, the quality of the tenants and the leases. They have decided that,
subject to getting it at the right price, it would be a good addition to the portfolio.
The asset expected to be sold in a 'best bids' tendering. You should assume that bids are required to
be submitted on 1 April 2024 (Note - This is not the assignment deadline).
It is estimated that legal completion (this is the date that the ownership is legally transferred and the
price is paid) of the acquisition will take place on 30 June 2024 following exchange of contracts at
the beginning of June, 2024.
A copy of the sales particulars (including a tenancy schedule) is also provided with this brief. You
should note a number of further points.
Firstly, the tenancy schedule consists of actual tenancy information. This is usually reliable but can
cause some minor problems. The main advantage of using actual rather than hypothetical
information is that it gives you an idea of the real-world detail in the kind of things that you tend to
see in real estate assets. Textbooks can often lack this type of detail. The main downside is that
sometimes the information can contain errors or inconsistencies or be out-of-date (there's always
inconsistent measurements). If anything crops up, I'll try to 'iron out' problems as we go along.
They usually have no material impact on the appraisal.
In addition, tenancy schedules often get overtaken by events. Tenants may go into liquidation
during the project, a new letting may occur, a rent review may remain unsettled...This is part of the
trade-off between using sometimes messy, sometimes complex reality compared to neat but
possibly overly simplistic hypothetical scenarios and examples. Normally such problems will be
minor and will not create 'bottlenecks' that prevent you progressing with the assignment.
A number of other inputs for this specific project have been estimated in advance. Some are fairly
standard and others are supplied because they are fairly minor and/or difficult to find good sources
of data to support them. Holding period and management strategy: SWREIF typically assume a five year holding period in
their financial modelling. SWREIF does not intend to redevelop the building. It intends to hold the
building, fill vacant units and sell at the end of the holding period.
Target rate of return: SWREIF currently have an average unlevered target (internal) rate of return of
6% per annum.
Acquisition (purchaser) costs: 6.8% of price paid. These acquisition costs include SDLT (5% of
price paid), agents' fees, legal costs and other due diligence surveys.
Sales costs (or Disposal fees): 2.0% of sale price
Management fees: £25,000 per annum paid quarterly in arrears.
Rental depreciation: 0.5% per annum.
Void costs: During any void periods, the landlord will be responsible for the service charge and
business rate estimated combined at £20 psf per annum.
Tenant rollover: It is estimated that approximately 30% of tenants renew their leases for this type of
space and that approximately 70% of tenants will leave their space after their lease terminates.
Renewal fee is 5% of new (annual) rent.
New Leases: It is assumed new leases are for 10 years with rent review after 5 years. Letting agent
fee is 10% of new (annual) rent.
Rent review fees: 5% of new (annual) rent both for existing and new leases.
Capex: There are no expected capital expenses over the holding period.
Vacant space on the fourth floor, suite A: Assume the current owner guarantees to cover void costs
and forgone rent at £28.5 psf for up to 1 year.
Vacant space on the fourth floor, suite B: Assume the current owner has already found a tenant for
this space with the rent £31.75 psf moving into the premises in the first quarter of your property
holding period. You will not pay tenants' improvements nor letting agents' fees for this lease. To
simplify, the current owner will cover rent free period up to 2 quarters.
Service charge caps: Assume there are no service charge caps.
3. What is required of me in this assessment? Guidelines/details of how
to prepare your
submission
The fund manager would like you to prepare an investment
memorandum for the SWREIF's Investment Committee that
provides
1.
estimations and justifications for your assessments of Net
Initial Yield, exit yield, Market Rent, market rental growth, void
period duration and rent free period duration used in the modelling
of the asset's financial cash flows and estimating Market Value.
2.
an estimate of the Market Value of the asset using a
simple Net Initial Yield approach drawing upon appropriate
comparables*. The assumed date of valuation should be 1 April
2024. The calculations involved in the valuation should be
displayed in the memorandum and it should be close to your
estimate and justification of Net Initial Yield.
*The simple NIY method of valuation is fairly straightforward. It
simply involves applying an appropriate yield to the rent passing
and then adjusting for transaction costs. This yield should be
based on the analysis of comparables (similar properties that
have been sold). So, rent passing/estimated net initial yield =
Valuation (gross of costs) and Market Value = Valuation (gross of
costs)/1.068. Finding comps to support your choice of NIY will be
the main challenge here. CoStar will be the main sources.
3.
A discounted cash flow model to estimate the IRR per
annum, cash profit and equity multiple assuming that £33,645,000
is paid. The cash flow should be on a quarterly basis. Assume an
acquisition date of 30 June 2024. Sensitivity analysis should
show impact of selected key parameters on IRR and NPV.
4.
A discounted cash flow model to estimate the Investment
Value of the asset assuming an acquisition date of 30 June
2024*. If the Investment Value is paid (maximum bidding price),
it should produce an IRR of 6.00% per annum precisely. The cash
profit and equity multiple generated if the Investment Value is
paid should be reported. The cash flow should be on a quarterly
basis.
The (discounted) cash flow appraisals should be appended to the
memorandum (see below for further guidance on submission).
*The good news is that there's very little extra work involved in
doing the second cash flow model to estimate Investment Value. It
basically involves omitting the costs of acquiring the asset
(£33,645,000+ acquisition fees) from the first cash flow and
working out the Gross Present Value of the remaining cash flow.
It should only take a few minutes to do in the Cash Flow sheet. The assessment criteria to
be used for marking this
piece of work
Refer to the marking criteria rubric at the end of this document.
Self-regulation: make sure Comply with this brief.
that you...
Three key pieces of advice
based on the feedback
given to the previous
cohort who completed this
assignment
Formatting Guidelines
It is surprisingly common how often students do not comply with the
assignment brief. It's unusual - but it happens for them to fail to do
things that they were asked to do. It's more usual for them to include
materials in the assignment that they were asked NOT to include.
A common problem is inadequate discussion and weighing up of
evidence, particularly relating to market values. It is generally not
sufficient to simply list the comparable evidence you have used to arrive
at your adopted values. You need to demonstrate how you have used the
comparable evidence to arrive at your estimated values. It is not always
possible to get all the information that you would like but you should try
to evaluate the comparable evidence in terms of its similarity to the
proposed development in terms of timing, location, quality etc. It needs
to be clear to the reader what evidence you have used, as well as how
you have used it. Pat McAllister wrote this blogpost after marking
assignments few years ago. There's a useful link in it to the RICS
Guidance in it
https://getrealpat.wordpress.com/2020/04/07/incomparable-valuation/
You should provide a professional document that is 'pitched' at the
appropriate level given the reader's existing knowledge. In this case, you
should assume that the reader knows more than you do! The reader may
be specified in the brief. Often, there is a tendency to focus on the
process-comparables were gather from...
It is normally not appropriate to include materials from textbooks and/or
academic papers in this type of memorandum.
Here is some guidance on how you could allocate the 1600 word
limit. The first page should begin with titles (left justified and in
bold)
Investment Committee Memorandum
Property: 101 Victoria Street, Bristol
Purpose: Estimation of Market Value and Investment Value
Date: 1 April, 2024
This should be followed by (section headings are suggested in
bold):
1.
2.
Introduction: Approximately 75 words
Results of the DCF model - Investment value and
maximum bidding price for the property. Approximately 150
words
3. Analysis of comparables to justify market yield and
results of Net Initial Yield valuation. Approximately 150 words
4.
Analysis of comparables to justify Market Rent estimate:
Approximately 150 words
