The Fair Market Price of the Property - Statistics Project Example

November 5, XYZ Real E Appraisers London Re: Property at 30 Barking Road, London E6 Dear Client X, As per your request in a letter dated October 4, 2012, we have prepared an opinion on the fair market price of the property at 30 Barking Road, London E6. The standard of valuation used is the fair market value. We have assumed that the property has been on the open market for a reasonable time period. Additionally, we assume that during that time both seller and buyer were able to obtain pertinent information in relation to the property. We assessed different approaches and were satisfied that the income capitalisation approach was the most suitable for the main reason that it is a commercial property which is sought for investment purposes. The supporting calculations are shown in Table 1 which forms an integral part of this report. The opinions stated in the valuation are contingent on the assumptions and limitations stated in Section 5 which also forms an integral part of this report. Respectfully submitted ________________________ Name MRICS XYZ Real Estate Appraisers Valuation Report 1. General Information about Property i. Address: 30 Barking Road, London E6 ii. Title: Freehold iii. Type: Mixed Commercial/Residential iv. Area of property: 1561 sq ft v. Property includes two (2) 2 bedroom flats, one each located on the 2nd and 3rd floors vi. Asking price: £350,000 vii. Agent for Vendor(s): Dobbin & Sullivan (Telephone – 020 8221 9610; email: mail@dsdcnet.co.uk 2. Description i. An attached brick building includes a single shop unit consisting of an open plan sales area which includes a retail area which extends to the rear. There is also a large basement. The front of the shop is fully glazed and has a number of display areas for terms of inventory. ii. Security shutters are also a feature of the shop and serves as an additional safety mechanism. iii. A WC exists at the rear of the shop. Therefore, customers will want to visit at anytime. iv. It is a freehold property with ground rent income and valuable reversion of the flats above the shop. v. The tenant is ‘Rowes Sports’ store – a business which has been in existence for the past 42 years (Rightmove PLC 2012) vi. The two x 2 bedroom flats has long leasehold with valuable reversion vii. The size of the shop is 1,412 sq ft viii. The size of the basement storage area is 617 sq ft ix. It is classified for use as A1 Shops and A2 Financial and Professional Services (Rightmove PLC 2012) 3. Location and Statistics i. Barking Road is located in a very popular and busy shopping and entertainment area. It has a number of restaurants and numerous other shops along the same road and other roads and avenues which are in close proximity. It is also close to the tourist areas. The building is in good condition. Additionally, Barking Road and the streets adjacent to it are clean and well kept. ii. The surrounding areas are East Ham, Newham, London and East London (Rightmove 2012) . iii. Several hotels and entertainment venues are located in close proximity to Barking Road and so it is accessible to tourists and locals who use their services. More than a few tourists are therefore expected to patronise the business at the location (Rightmove 2012). iv. The Booby Moore Stand of the West Ham United Football Club is located in close proximity – just around the corner from Barking Road. This makes the location ideal for the current tenant and explains the reason for the longevity of the business. There is also some amount of goodwill attached to the business and the location. Goodwill is the excess of the market price over the combined value of the separate assets. It results from the reputation that the business has gained over the years and its quality customer service that keeps customers coming back. It is this reputation that also attracts new customers. v. The accounting information on the business is available for analysis. vi. The torch run for the Paralympics which was held between August and September 2012 included Barking Road. vii. There is a lot of traffic in this area. This is especially the case on match days. viii. The property is in close proximity to the Upton park tube station which approximately 0.4 miles. Two other stations – East Ham and Plaistow are also within a mile of the property (0.8 and 1.0 miles respectively) (Rightmove PLC 2012). ix. Several major bus routes are also in walking distance and so it is in easy reach (Rightmove PLC 2012 ). This makes it a convenient place to shop for shoppers who need sporting goods x. The population is racially diverse with 39% white, 32.5% Asian and 22% Black. The number of males and females are almost equal. Although the population tended towards being fairly constant the percentage of persons in the “under 25” and “over 65” age groups which consists of 37% and 10.4% of the population respectively have experienced declines (Gomez 2006). In 2011 the population of Newham was 25% Black (ebusinessconsultant.co.uk 2012) xi. During the recession the unemployment rate in the area ran as high as 16%. However, the London Olympics brought some well needed activities and an increased level of tourism to the area. xii. The crime rate for the Newham area is 11.22% which represents the average for the city of London (ebusinessconsultant.co.uk Stat 2012). 4. Estimation of Fair Market Value i. The price given by the vendor is $350,000 (Rightmove 2012). This was assessed to determine if it is a fair price. ii. In determining the fair market value of the property the income method was utilised. This method is used for a property which is used to generate income from rent and leases (Kimmons n.d.b). It is also the most widely used method and it uses the net rental income and other factors to calculate the current value if sold. iii. Case law and history suggests that the value based on the vendor’s asking price varies between 10% above and 10% below. Therefore, at a selling price of £350,000 the range of values for the property would lie between £315,000 and £385,000. iv. Recent sale prices of properties equivalent to 20 Barking Road may also provide a basis for arriving at a fair valuation. Information collected on the recent sale of equivalent properties indicates that there were two shops sold for £575,000 and £650,000 (Zoopla 2012). They are H&M Electronics which is located on Barking Road and a similar shop/flat which is also located there and which has a single four bedroom flat respectively (Zoopla 2012). v. An internet search resulted in only a few commercial properties available for rent in this area. This is an indication that the demand for rental space in the Barking Road area is great as there were only three shops available – including one in close proximity. vi. An old fireworks shop which is located on Barking Road and which also has security shutters is rented for £1,200 per month. However, it is a smaller space consisting of 351 sq ft and there is no storage area available. Therefore, the rental of the shop area at 20 Barking Road would be priced higher. vii. A Thai restaurant which also has basement storage on the same road commands a monthly rental of £1,416. Another £45,000 in stock and fixtures may also be required. viii. Similar shops like the old optometrist office located at 13 Plashet Grove, Upton Park is available for letting at £1,666 per month. This shop is similar to that at 20 Barking Road. The only difference is the location. ix. Similar flats on Barking Road rent at a price of £950 per month (Zoopla 2012), and this translates to an annual rental of £1,900 - £950 x 12. x. If an allowance is made of the additional space in comparison to the abovementioned properties, a rent of £5,000 may not be far fetched. However, a more conservative figure of £4,000 will be used in our calculation xi. There are a number of ways in which the income approach can be applied. We have used the Gross Rent Multiplier (GRM) which is easy to calculate. The calculation of the GRM using the vendors selling price is 7.29 (See Table 1 below for calculations). Description Formula Computation Value Gross Rent Multiplier (GRM) GRM = Market Value/Annual Gross Rent £350,000/£4,000 7.29 GRM Market value = £350,000 Annual Gross Rental Income = £4,000 x 12 Table 1 – Calculation of the Gross Rent Multiplier This value of the GRM in Table 1 indicates that a rental income of £4,000 being £2,000 for the shop and £1000 each for the flats would allow for the repayment of a purchase price of £350,000 in less than eight (8) years. However, this does not take into consideration the interest rate which is a function of the time value of money. Although the GRM is easy to calculate, it is not very accurate but serves as a method of finding a quick assessment (Kimmons n.d.a). Further research would be required n order to facilitate the use of a different method. 5. Assumptions and Limitations i. We assume that the current tenant will be willing to pay at least £4,000 and that only cash will be given in consideration ii. We also assume that the £50 per month for the flat will discontinue and a new tenancy agreement will be effected. iii. Additionally, no damages of interior fixtures and fitting have been taken into consideration as only the exterior was considered and so there are no major repairs. iv. Furthermore, the market will remain the same over the next ten years v. There was insufficient information to warrant another basis of calculation. vi. No expenses have been considered as it is assumed that these will be negligible 6. Recommendation Given the comparative information obtained and taking into consideration the assumptions and limitations, it is our opinion that a fair estimate has been provided. The property is at a very good location based on the vehicular and foot traffic that passes through the area on a daily basis. It is a prime area for the sports store based on the location of complementary activities. Additionally, the two flats can be reverted to commercial use. The demand for shop space in the area is a strong indication that the price of rent will continue to increase n the near future. We strongly recommend 20 Barking Road as an excellent long term investment in which a return can be realised in a short period of time. Signed: _________________________ Name, MRICS Date: 5th November 2012 References ebusinessconsultant.co.uk. (2012). Crime Stats for: 2012-09. [Online] Retrieved from http://www.ebusinessconsultant.co.uk/police-crime-map/index.php?forces=merseyside&hoods=E6 [Accessed 3 November 2012] Gomez, R. (2006). Focus on Newham: local people and local conditions. [Online] Retrieved from http://s3.amazonaws.com/zanran_storage/www.newham.info/ContentPages/46961414.pdf [Accessed 3 November 2012] Kimmons, J. (n.da). How To Calculate and Use the Gross Rent Multiplier (GRM). [Online]. Retrieved from http://realestate.about.com/od/knowthemath/ht/howgrm.htm [Accessed 3 November 2012] Kimmons, J. (n.db). The Income Method of Real Estate Appraisal and Valuation. [Online] Retrieved from http://realestate.about.com/od/appraisalandvaluation/p/income_method.htm [Accessed 3 November 2012] Newham.gov.uk. (2012). Safer Newham Crime and Disorder Reduction Partnership: Strategic Assessment 2010 – 2011. [Online] Retrieved fromhttp://www.newham.gov.uk/NR/rdonlyres/8AD80DB7-6822-461B-AD6F-80A4680FE4F8/0/Strategic_Assessment_201011.pdf [Accessed 3 November 2012] Rightmove PLC. (2012). Shop for Sale. [Online] Retrieved from http://www.rightmove.co.uk/commercial-property-for-sale/property-38078324.html?premiumA=true> [Accessed 2 November 2012] Zoopla. (2012). 5 bedroom terraced house for sale. [Online] retrieved from http://www.zoopla.co.uk/for-sale/details/18635451 [Accessed 2 November 2012] Read More