Higher Certificate in Real estate (Level 6) Semester 2 Module: Valuation for Investment Individual CA2 Title: Client Style Report Lecturer: James Browne Submission Date: 10th April 2021 Student details: Word Count:1,997 Katie Colgan X00170496 Declaration: The above-named student declares that the content of this continuous assessment project is solely the work of the individual whose name appears on this cover sheet. The work of any other authors has been cited and referenced in full. TO BE COMPLETED BY STUDENT SubjectValuation for Investment Semester 2Semester2 3 ⃝ 4 ⃝ (Please Tick)Student NumberX00170496Submission Date9th April 2021 Declaration: I declare that this work is the result of my own study and application. NO other person had any active part in the final production of this document. I have acknowledged all assistance and sources. SignedKatie ColganDated9th April 2021 STUDENT NAME:_____________________________ STUDENT NUMBER:___________________ COMPLETED BY EXAMINER MARKING SCHEMEELEMENTMARKSMARKS AWARDEDClear and relevant introduction10 Understanding of key issues/components and clear development of thought20 Evidence of individual research and analysis25 Ability to arrive at comprehensive valuation workings based on research25 Presentation, layout, progression, accuracy, detail, use of English10 Conclusion, recommendations based on findings10 TOTAL mark awarded100 FEEDBACK TO BE COMPLETED BY THE EXAMINER PLEASE TICK ONE OF THE FOLLOWING FEEDBACKTICK ONEExceptional awareness of issues, supported by reference, wide ranging, objective Well organised, accurate, structured, not particularly broad Competent effort, heavily reliant on sources, lacked specific information General in nature, lacked depth, limited research, weak presentation Superficial, poor quality information, restricted treatment, poor presentation Signed Dated Please present this page as the 1st page of the coursework. Table of Contents Page Number Executive Summary 5 Terms of Reference 6 Introduction 7 Commentary on Real estate investment market activity 8-9 Chosen property details 10-11 Comparable Tables 12 Yield Determination 14 Valuation Freehold: Term and Reversion 15-16 Valuation Leasehold: Discounted Cash Flow 17 IRR Calculation 18-19 Recommendations and Conclusions 20 Bibliography 21 Executive Summary The objective of this report is to carry out and research the sales activity in the commercial property investment market in Ireland presently. Having extensively researched the current market through various newspapers, property reviews, as well as through reviewing online investment property Quarterly year reports, it is very clear that Covid-19 continues to have profound impact on property investment overall. The type of property that I have chosen for this report, is an office space investment which is 30 Merrion Square, Dublin 2. I have researched for comparable properties within the area of Dublin 2, and I have sourced two properties that are also primarily located in the city centre. I have highlighted the property details for my chosen subject property, and my comparable properties. I calculated the full rental value, an appropriate yield based on recent transactions, within a five-year frame. A Freehold valuation was then carried out using Term and Reversion approach. A Leasehold valuation was then carried out using a Discounted Cash flow table. Followed by calculating The IRR (Internal rate of Return) I would advise my client that this subject property is not worth investing in, because after carrying out the DCF, I achieved a negative value which would lead to a risk if investing in this property. It would only result in short term profit, not long-term capital gains. Terms of Reference This report was commissioned by James Browne lecturer in the Valuations for Investment module as part of the assessment for that module within the IPAV Higher Certificate in Real estate Property Valuation, at Tallaght University. It accounts for 40% of the final marks for this semester. Introduction In accordance with instruction received the following report is based on analysis of market valuation of a Dublin office property 30 Merrion Square, Dublin 2 for sale by private treaty culminating with recommendations and conclusion. Outline of the chosen property My Analysis of Market evidence will be based on the research provided by Estate Agents within the area. Due to Covid 19 and level 5 restrictions and exactly one year on since the pandemic, commercial properties have been slower to move. I gathered all the necessary information that I required for my subject property, 30 Merrion Square, Dublin 2, through Lisney Estate Agents. I corresponded directly via e-mail with Rebecca Long and Deborah Mahon the Divisional Director of Lisney Commercial Properties. They were both extremely helpful on this subject matter. Rental Value analysis is based on current comparable properties based on rents achieved and process obtained in the current market. I will value The Freehold Interest using the Term and Reversion approach. This valuation is carried out in accordance with evidence obtained from recent transactions. I have sourced 3 comaparable properties which I have provided in the comparable table. However, I will be focusing on one comparable, which is 59 Merrion Square, Dublin 2 to support the term and reversion calculations. This will be followed by valuing the Leasehold Interest of the property, A discounted cash flow is outlined to determine the net present value. Finally, I will calculate the IRR and a recommendation will be provided based on valuations calculated and concluded. Market Activity: Office Space Commentary on real investment market activity: The Covid19 pandemic continues to majorly impact the real estate investment market activity. According to CBRE (Commercial Rel Estate Advisors) they predict that the remainder of this year will be busy in relation to both transactional and investment volumes. They also envisage that this positive activity will occur in the second half of the year, when the rollout of Covid-19 vaccines will enable investors to travel normally to view and inspect properties. In relation to the office sector which Is the market sector that I have chosen to base my case study on CBRE predict that there will be increased demand for flexibility in terms of the “adaptability of office buildings themselves and increased flexibility in the leases agreed between landlords and tenants”. CBRE also stated that, “The Occupational needs of companies will change as a result of the Covid-19 pandemic, and that there reading on the issue is that despite companies not actually needing less office accommodation, the way in which they use the accommodation will certainly change. The Dublin office market has been very repressed. A lot of companies are being cautious and are deferring making those crucial decisions regarding properties. There are some occupiers that are deciding to extend existing leases or indeed move to more adjustable accommodation until they are in a more stable position to assess their future space needs. It is not surprising that there has been a significant increase in the demand for adaptability in the overall office market over the last 18 months. According to CBRE’s latest monthly report issued in March, this is liable to continue for the foreseeable, even when the high profiled companies will be going back to their workplace later in the year. The increase in vacancy over the past 12 months, has been as a result of a rise in ‘grey space’ however this has had a positive impact to the occupiers that are interested in immediate occupation. CBRE predict a busier and a more optimistic second half of the year once physical inspections can recommence. Office rents in Dublin are approximately €635 per square meter. According to CBRE, this is due to fair lease incentives, which include a longer rent- free period and more adaptable lease terms. Supply has been massively halted due to the closure of construction sites. However, with them due to reopen later this spring it will produce many new office buildings that will launch towards the end of this year. The Global real estate Investment company, Kennedy Wilson have applied for planning permission for a brand new 39,932m2 office building between St Stephens Green and Harcourt street in Dublin 2. Coopers Cross Development in Dublin 2, and the college square development scheme also in Dublin 2, are just some of the office buildings that may go on site in Dublin this year which is encouraging. Retail From an Investment perspective the number of investors invested in pursuing retail assets has declined and this is likely to continue in 2021. The hold period for retail investors will be much longer than they initially thought. As a result, holders of retail investments could look to dilute their exposure to this sector leading to interesting opportunities for buyers who are primarily invested in this sector. Brexit will continue to impact the retail sector, however the major concern for retailers is the worry of continued lockdowns. With vaccines now beginning to be administrated, workers returning to offices and tourism travel also returning to business, it will most definitely result in an increase in the overall demand for retail. Industrial and Logistics According to CBRE’s market outlook for 2021, there is very restricted supply available to purchase. Prime industrial yields have flattened to 4.75% during 2020 and could possibly flatten further by up to 50 basis points this year. Having taken all of the above detailed information on sales activity in the commercial property investment market in Ireland, into consideration,2022 will be mainly focused on office life resuming to normality and continuing to rebuild, restore and reopen the market after what has been another very difficult and unprecedent year. Overview of market evidence Subject Property detail: 30 Merrion Square, Dublin 2 (For sale by Private Treaty) 30 Merrion Square, Dublin 2 comprises of a substantial period building located on the East of Merrion Square. The building extends to approximately 480 sq m (5,160 sq ft) and it consists of 4 storeys over basement with a part two storey/part three storey return to the rear. This property has distinctive period features which includes stunning cornicing, sash windows and decorative plaster work. The property also comes with 6 car park spaces to the rear. Having researched the above subject property for this assignment and communicated with the agent Deborah Mahon at Lisney Commercial properties, I was informed that the sale price quoted for the property was €2,500,000. However, after communicating with the agent again on the property she told me that they were waiting for a reduction of €200,000 to be approved by the owner. Based on this information I am going to assume that the asking price is now €2,300,000. Assumptions have been made for the Calculations presented in this report. Subject Property Details: 30 Merrion Square, Dublin 2 Date: 12.03.2021 Event: Open market sale Capital Value/Asking Price: €2,300,000.00 Passing Rent: €138,667 Rent Per Sq. M: €288.89 Size m2: 480 Lease: Freehold Tenant: N/A Rent Review: 5 Yearly Term Certain: 10 Yearly Break Clause: N/A Sector: Office Rates: Annual Growth: 4 % Management Fees p/a: 4% Letting Fees: 10% Rent Review: 7.5% Initial Yield: 6% Exit Yield: plus 1% Overview of Market Evidence Yield Table Comparison transactions DatePropertyTerm CertainPriceYieldSize (sq ft)PurchaserSourceAsset CategoryComments18th March 202159 Merrion Square, Dublin 2Flexible terms (5 years*)€25,000 p. a5.7%9, 42.380 sq ftN/AKeane Thompson Property ConsultantsTertiaryFor sale as of the 20th of February1st July 201569 Merrion Square, Dublin 210 years€3.6m4.5%5,811 sq ftCBRE Arts CouncilCBRESecondaryThis property is rented to the Arts Council at €156,000February 20201 Upper Hatch Street, Dublin 215 years€35 Million4%Originally was 2,800sq m now 30,139sq ftKanAm Grund (German Asset Manager)Savills who acted on behalf of Kan Am Grund GroupSecondaryA grade A, eight-storey over- basement office building. This property is occupied by accountancy firm, Deloitte. Comparable Property: 69 Merrion Square, Dublin 2 The reason why I have chosen this property is because the best comparable is the one that is sold, as it has already established market value. Overview of Property: A four-storey over basement Georgian office building. Sale Price: €3.6 million Calculate the Rental Value of the Subject property Subject property size x Comparable Price per sq.m (comp 69 Merrion Square) = 480 x 288.89 ( Rent €156,000/ 540sq m = 288.89) = 138,667 The Next step is to calculate the yield. Formula = Current Income (multiply by 100 to get the percentage) Market value of property = 138,667 2,300,000 = 0.06029 (x100) = 6.029 = 6% Yield This % becomes my NPV discount rate. Value the Freehold interest using Term and Reversion approach To calculate the market rent for this property Investment case report there will be an increase in year 5 with an annual growth rate of 4% Formula= = 1.2166 rental value x annual growth rate = 138,667 x 1.2166 = 168,702 (Market Rent) Term and Reversion Term rent (€) €138,667 YP 5yrs @ 6% x 4.2124 584,120.87 Reversion to Market Rent (MR) €168,702 YP Perpetuity @ 6% 16.6667 PV £1 for 5 yrs @ 6% x.7472582 12.454328 2,101,070.00 Valuation 2,685,190 Capital Value 2,685,191 (rounded) Discounted Cash Flow Template End of YearRent InAnnual Rental Growth Rate at 4%Total RentRent Review/ Letting FeesLetting FeesManagement Fees 4% Per annumPurchase PriceNet Cash Flow (+/-)PV Factor at 6%PV Cashflow0 -2,685,191-2,685,191 -2,685,1911138,6671138,667 13,8675,5470119,2520.9433962112502.872138,6671138,667 5,5470133.120.8899964118476.59843138,6671138,667 5,5470133,120.8396193111770.38324138,6671138,667 5,5470133,120.7920937105443.76055138,6671.2166138,6671.2166 5,5470149,301.7472582111566.39656168,7021168,702 6748.080161,954.7049605114171.11647168,7021168,702 6748.080161,954.6650571107708.60448168,7021168,702 6748.080161,954.6274124101611.89769168,7021168,702 6748.080161,954.591898595860.2823210168,7021168,702 6748.080161,954.558394890434.2267710+ 2,410,0302,410,030.55839481,345,748 NPV-269,897 The annual growth is 4% and this is added to the current market rent to reflect the growth continued into perpetuity. Exit Yield= 7% is converted to 0.07 (multiplier) = 1 0.07 = 14.285714 Sale Price= €2,410,030 IRR Calculation Purchase PriceNet Cash Flow (+/-)PV Factor at 6%PV CashflowPV Factor at 4&PV Cash Flow-2,685,191-2,685,191 -2,685,191-2,685,191-2685,1910119,2520.9433962112502.8711114666.35070133.120.8899964118476.59841123076.92130133,120.8396193111770.38320.92245562118343.20080133,120.7920937105443.76050.8889964113791.53510149,301.7472582111566.39650.8548042122714.5380161,954.7049605114171.11640.8219271127994.59450161,954.6650571107708.60440.7903145123071.72740161,954.6274124101611.89760.7599178118383.20070161,954.591898595860.282320.7306902113786.72640161,954.558394890434.226770.7025867109410.32442,410,0302,410,030.55839481,345,7480.67556421628129.989 NPV-269,897NPV128,133 Please see the Excel spreadsheet for all calculations. IRR Formula ???????????? = ????1 +[ ( ????h – ????1 )???? ???????????? ????1 ] (????????????1) − ????????????ℎ = 0.04 + [6-4] x 128,133 (128,133 + 269,897) = 4 + (2 x (128, 133) 398,030 = 4+ 0.64 IRR = 4.64% Recommendations and Conclusions From the above DCF (Negative calculation) I feel that 30 Merrion Square, Dublin 2 would not be a viable investment for my client, and therefore I would not advise the investor to purchase the sale as he will not achieve a return of 6%. After carrying out the IRR calculation, which measures the rate of return that the investment earns on the capital invested, the same cash flow has been discounted at 4% and 6% to produce + NPV of €128,123 and ‑NPV of €269,897 respectively. The IRR is 4.64%. In Conclusion, I feel that the investor should wait for a better investment opportunity, as the subject property would only lead to short term profits and not a long-term gain. Bibliography Books: Millington, A F (2020) An Introduction to Property Valuation Websites: CBRE.ie [Online], Available from: https://www.cbre.ie/en/research-and-reports/Ireland-Real-Estate-Market-Outlook-2021 [accessed 29/03/2021] Irishtimes.com [Online], Available from: https://www.irishtimes.com/business/commercial-property/georgian-makes-3-6m-1.2268245 [accessed 29/03/2021] Irishtimes.com [Online], Available from: https://www.irishtimes.com/business/commercial-property/german-investor-acquires-hatch-street-office-building-for-35m-1.4184358 [accessed 31/03/2021] Irishtimes.com [Online], Available from: https://www.irishtimes.com/business/commercial-property/pandemic-will-force-property-investors-to-future-proof-portfolios-report-1.4456236 [accessed 05/03/2021] Myhome.ie [Online], Available from: https://www.myhome.ie/commercial/brochure/30-merrion-square-south-city-centre-dublin-2-d02-ve40/4335008 [accessed 14/03/2021] Scsi.ie [Online], Available from: https://scsi.ie/business/value/market-insights/ [accessed 05/03/2021] Other: Browne, J. (2021) Lecture Notes
