Real Estate Valuation and Appraisal (URBAN5040)
Project Brief 2024-25
Project Aims
The aim of the project is to introduce you to the complex operation of the investment, use and development markets by applying the techniques and methods associated with valuations and appraisals to solve real life problems. It also gives you the opportunity to analyse and reflect on the various challenges inherent in completing contemporary valuations and appraisals.
There will be two elements to the submission -
1) Calculations - Applying valuation and appraisal techniques, through data collection, market analysis and assumptions, to complete the valuation and appraisal of an office building, industrial unit, residential property and hotel, submitted as one complete excel spreadsheet (50%).
2) Critical reflections - Preparing responses to two statements in relation to valuation and appraisal in practice. These will be short academic essays with clearly defined and well- informed positions, a maximum of 750 words each, excluding references (50%).
Any additional information that informs parts one and two can be included in an appendix, as and when relevant and appropriate.
More detail on the breakdown of these elements can be found below in terms of marking guidance and criteria.
Output Objectives
When you successfully complete the project, you should be able to:
• Systematically examine and compare real estate market conditions in Glasgow and the Central belt, across varied sub-sectors.
• Understand how the performance of real estate markets is connected to broader economic trends at the urban, regional, and national levels, and the challenges in analysing data and trends.
• Be proficient in the collection, interpretation, synthesis and preparation of material from a variety of diverse sources.
• Undertake the analysis and critical evaluation of market data.
• Put into practice the income, direct comparison and profit methods of valuation, and
• Critically appraise investments using a DCF model.
• Evaluate a range of academic sources and establish distinct critical positions and arguments in relation to two statements regarding valuation processes in the real estate market today.
Project Details - Part One - Valuations and Appraisal
You have been appointed by NAPT Property Investment Ltd. This is a Glasgow based private property investment company looking for advice and guidance on the management of their portfolio. They have asked you to undertake a DCF appraisal of the investment value and traditional market valuation on the following investment opportunity.
G1 Building, 5 George Square, Glasgow, G2 1DY
This 5-star (CoStar rating) award winning building is arranged over eleven floors offering office accommodation over the first to eighth floors and a bar covering the ground floor and basement. The building has a NIA of 131,448 ft2 and contains 10,660 m2 (113,663 ft2) of high-quality office space and 1,713 m2 (18,435 ft2) of space currently let as a bar/restaurant, with a total of 61 covered car parking spaces. The particulars of the building can be found on Moodle, and there is also more information available on CoStar.
For the purpose of this valuation, the current tenancy schedule is as follows:
B & G 1,713sq m (18,435 sq ft) which is currently let to Browns Bar & Brasserie. The 15-
year lease was agreed on Monday 12th November 2018 at £515,000 and is quoted on a net basis. The annual rent is paid in arrears and index-linked to the Consumer Price Index (CPI).
Level 1 & 2 2,852 sq m (30,702 sq ft) currently let and occupied by The Scottish Herald
newspaper. These floors were letonanIRIbasis that was signed at the end of August 2012 for a period of 20 years with rent reviews every five years. The current passing rent is £550,000 per annum and paid in advance. Seventeen parking spaces are attached to this lease.
Levels 3, 4 & 5 These three floors (4,744 sqm/51,074 sq ft) are currently let and occupied by Gardner
Investment Management. These floors were let on an FRI basis that was signed in early March 2014 for a period of 14 years with rent reviews every seven years. The current passing rent is £1,639,000 per annum and paid in arrears. Twenty-one parking spaces are attached to this lease.
Levels 6, 7, 8, 3,723 sq m (40,074 sq ft) across these three floors was let on 18th March 2019 by
Amazon. The 15-year lease is currently set at £1,030,000 (IRO) per annum in arrears and has five yearly rent reviews. This space is let with 15 car parking spaces.
You estimate a current gross initial yield of 5.5%, an implied growth rate of 2% per annum on non- index-linked rents, along run CPI of 2.25% and a suitable target rate of return of 9%. You also estimate it will take 12 months after an existing lease ends to find a new good quality tenant under current Glasgow office market conditions, and you are required to explicitly allow for rental income voids. All leases across levels 1 - 8 are quoted in current terms. The seller is asking for offers over £65,000,000.
Your client has asked you to critically appraise the market rent for the office space in the Glasgow Core submarket. In addition, you are required to recommend how much your client should offer to purchase this asset, and to evaluate and compare the rents achievable, market conditions and rental growth prospects for prime offices in Glasgow.
This recommendation of the offer should come once you have completed both of the valuations for George Square, and be clearly included in your spreadsheet.
Your excel spreadsheet should include (and clearly link in through formula), all evidence and figures used to inform. the assumptions made in relation to the valuation inputs.
In addition to the investment appraisal and valuation of this prime office, your client has asked you to undertake the valuation of a series of investments in Glasgow and Edinburgh.
They would like to know the market value of the following interests:
97/7 Montgomery Street, Hillside, Edinburgh, EH7
This third-floor flat forms part of a traditional tenement in Edinburgh, within walking distance of Edinburgh city centre, and many local amenities. It is bright, contemporary and well proportioned. Hillside is a central Edinburgh address, close to Leith and Calton Hill, and is popular with young professionals looking to take advantage of city life. There is a selection of bars, restaurants, coffee shops and shops on the property’s doorstep, with very good transport connections (tram and bus), and Edinburgh Waverley train station only a short walk away. The spacious property consists of 63.92 sq m (688 sq ft) gross internal floor area which contains two double bedrooms (3.38m x 2.64m / 2.95m x 1.93m), a separate WC and bathroom. The property boasts an open plan kitchen / dining room (5.13m x 3.20m) and a large living room (4.52m x 3.45m). The property is finished to a very high standard and has many period features. There is a security entry system leading to a secure residents’ communal staircase. The flat is in excellent condition, currently vacant and available for sale, has a C Council Tax Band and has a communal garden and on street parking.
70 Cambuslang Road, Glasgow, G32 8NB
The subject property, built 2006, comprises a single warehouse unit within an established industrial location, incorporating accommodation with a secure yard and car parking. The warehouse area is currently leased to DHL, who occupy 5,109 sq m/ 55,000 sq ft (GIA). The site was let on 3rd March 2015, FRI on a 15-year lease with five yearly rent reviews (last review 2020). The current rent was set at £6 per sq ft, equivalent to £330,000 per annum. Your client is interested in buying both the heritable and leasehold interests.
Radisson Blu Hotel, 275-309 Argyle Street, Glasgow, G2 8DP
This property, fronting on to St Enoch Square and within walking distance from Glasgow Central Station, comprises a new hotel accommodating 249 bedrooms, ground floor reception, restaurant and bar. The property is owned by your client but rented to Whitbread (who own the Premier Inn chain) until March 2040. After allowing for staff and other running costs, you estimate that annual earnings before, interest, taxation, depreciation and amortisation of £3,150,000 represents a fair and maintainable profit for a reasonably competent operator in this property. You also estimate that 5.5% is a suitable capitalisation rate for the owner’s interest whereas 9% is more suitable for the leasehold interest. You are required to value both the heritable and leasehold interests.
You are not required to produce a full professional valuation report.
For part one, you are required to present annotated valuations that explain your assumptions and contain a critical analysis of comparables and provide clear sources for the inputs being used.
It is entirely up to you how you choose to present the inputs for each of the valuations – although it is best practice to have each valuation on a separate sheet in your Excel file.
All the assumptions and market evidence could be housed on one page, then connected to the worksheets, or you might want to have the related information on the same sheet as your calculations – it is entirely up to you.
When determining your rents, yields and other inputs – you need to clearly state how you have arrived at these from market evidence, and note any other assumptions being used – such as those listed below.
Additional information:
a. A traditional valuation (10%) and DCF investment appraisal (15%) for the George Square
property which assumes that the investor plans to buy the property and sell after a holding period of 15 years. Your appraisal must also account for 5.8% purchase costs and a further 2.5% for disposal costs at the end of the holding period. Forecasts predict that suitable exit yields, post refurbishment, will be around 4.5% for the George Square office. You should also allow 5% of the market rent for rent review costs on leases at every rent review (over and above annual management costs).
Also, do not forget to include the car parking in your valuations and appraisals. These spaces have value too. You estimate each space has a market price of £18,000 at the valuation/appraisal date.
b. Valuations of the market values, as of 4th December 2024 (submission date), for the property
interests your client has asked you to value. These should be accompanied by a critical discussion of your comparable evidence, assumptions and methods employed.
c. When valuing the leasehold interest at 70 Cambuslang Road, your client has asked you to use a suitable Year’s Purchase formula that makes adjustment for a 2.5% sinking fund and 21% rate of corporation taxation which the current occupieris liable for. Remember, current practice tends to use a single Year’s Purchase formula to value leaseholds, but your client has expressly requested a dual rate Year’s Purchase and allowance for taxation. When valuing the landlord’s and tenant’s interests in Radisson Blu Hotel, Glasgow assumes the rent represents 65% of the Fair Maintainable Operating Profit (FMOP).
For part one of the coursework the grading will be broken down as follows:
- Traditional office valuation for George Square (10%)
- Discounted cashflow for George Square (15%)
- Residential valuation for Montgomery Street (7.5%)
- Industrial valuation – leasehold (5%) and freehold (5%)
- Hotel valuation (7.5%)
- Total for calculations – 50% of course grade.
Project details - Part Two - Critical Reflections
This part of the submission requires you to prepare two short critical reflections on the statements below. These should be considered independently of each other – as separate responses, rather than merging any details together.
Please prepare responses of 750 words maximum for each.
The word count does not include any references or visuals / figures you may choose to include to enhance your work or demonstrate key points. However, if you include text within tables, for example, this will contribute to your word count.
Harvard referencing should be used throughout, and a full reference list provided. There is no hard and fast rule on the number of references – you need to find a balance between content and references which works best for you. However, it will not work in your favour if you fail to include any, or only very limited, references. Evidence of additional reading and around the topic areas is key to communicating your perspectives in an informed way, and references help to support points.
These reflections should clearly state a variety of perspectives and bring together challenges, barriers, positives and negatives which reflect the complexity of the real estate market and the practicalities of valuation and appraisal processes. Part of the challenge is successfully doing this within a limited number of words – you need to be considered and thoughtful in what you choose to include. Clarity is key.
Provide responses to each of the following:
1. Critically evaluate the strengths and weaknesses of both contemporary and traditional approaches to valuation, considering how well they effectively capture the ‘value’ of real estate across different asset classes.
2. Reflect on the various challenges and barriers to collecting and collating appropriate real estate data for valuations and appraisals – how can we understand what data is appropriate in global markets?
