Real Estate Property Valuation in Victoria, Central London - Assignment Example

The checklist Yes if Report performance Checklist Applicable My report has a separate page Yes My report has a separate contents page Yes My ESis on separate page Yes My ES is in bullet-points Yes My ES states the purpose of the report Yes My ES states the key findings of the report Yes My report has an introduction Yes The introduction is after the ES Yes My introduction states the objective of the report Yes Chapters are numbered appropriately Yes Appropriate heading and sub-headings included Yes I have indicated provenance of figures cited in the report. Yes My report is written in clear and professional manner Yes There is no use of the first person (i.e. "I", "My"). Yes A conclusion is included in my report Yes All tables and figures have appropriate titles. Yes All tables have appropriate label on axes etc. Yes All tables figures include appropriate acknowledgement of data sources etc. Yes All tables and figures are numbered appropriately. Yes My report has a correctly formatted bibliography sources cited. Yes Signed ………………………………………. Date ……………………………. Total word count: 1,912 (without considering the checklists, the bibliography, table of content and the NPV and Cash flow table) Table of contents The checklist 1 Table of contents 2 1.0 Executive summary 3 2.0 Introduction 4 3.0 London Real Estate Market 5 4.0 Factors that led to the increase in housing prices in Victoria, Central London 5 5.0 Demand and Supply in Victoria, Central London 6 6.0 Viability analysis (office ) 8 7.0 Conclusion and Recommendation 10 6.0 List of References 11 1.0 Executive summary This report contains research data on the level of demand and supply of real estate property in Victoria, Central London. It also includes an assessment of the viability of investment in the real estate property in Victoria. The report is to be used exclusively by Ten Broadways to aid investment decision making. The performance of the real estate market in the United Kingdom has risen from the low levels witnessed during the recent financial crisis. The economy has recovered as the economic growth rate is fairly increasing. The rate of inflation is at its minimal, but far from causing deflation. The employment has been reported to increase at a steady pace. Being that the increased availability of mortgage loans, in part, caused both the rising in housing prices and the financial crisis; the Bank of England suggested the implementation of strict mortgage policy, which has successfully reduced the rate of mortgage loan approval in the U.K. The real estate prices in Central London are higher than in the U.K. the following factors have prompted the high price: the high demand for houses, and the recent increase in the availability of mortgage loans among others. The demand for houses in central London is still high. However, the supply is too low to meet the current demand. The situation has led to a further increase in both land and housing prices. The viability assessment of investing in Central London has been conducted using the profitability method. The analysis proves the viability of such an investment due to the positive cash flow. 2.0 Introduction 2.1 In Victoria, Central London, the transformation of real estate development policies have primarily contributed to the ongoing change in infrustractural development. Victoria is considered as the Central London’s economic powerhouse due to the recent increase in real estate development projects. The existence of a number of real estate development projects such as the renovation of old buildings and the construction of new multi-purpose housing structures in New Scotland and the proposed relocation of the metropolitan police offices to Curtis, are at the forefront of the ongoing major reorganization in Victoria. 2.2 The location of Ten Broadway is within Westminster’s administrative perimeter. The site is among the Westminster’s potential sites for real estate development. Thus, infrastructural improvement plans are welcome. Considering the developmental policy change in Victoria, Ten Broadway proposes to join efforts in the ongoing real estate development. However, the company is still not certain of the demand and supply levels of real estate products and the viability of such a project. 2.3 In order to save the situation, This report seeks to provide Ten Broadway with the following: the analysis of the demand and supply level of real state products in Victoria real estate sub-market and a viability appraisal of the development opportunities. 3.0 London Real Estate Market 3.1 In the last two years, the prices of both land and houses were fairly low within and around the central London zone. However, the current prices have almost doubled. The sharp increase has hardly been experienced in any real estate market in the United Kingdom. Comparatively, the London real estate market index still remains higher than the UK real estate market. The policy made by the Bank of England to reduce the approval rate on mortgage loans has borne some fruits. Even though there has been a decrease in lending to new home owners, the house prices in Central London are still high (Ballard & Patnaude 2014). 4.0 Factors that led to the increase in housing prices in Victoria, Central London 4.1 Victoria and other areas in Central London has been the central of attention from both local and international investors. The following are the reasons for the experienced high property prices in Victoria: friendly laws governing property ownership in the U.K., simple foreign currency conversion procedure, the stability of the British pound, high demand from both local and foreign investors, and the increase in the availability of the mortgage loans (Ballard & Patnaude 2014). 4.2 A stable currency is a sign of a better performing economy with low rates of inflation thus interest rates. Take, for instance, an economy with high interest rates. Higher interest rates increase the cost of borrowing funds. High cost of borrowing discourages borrowers, thus reduces the production levels in an economy. Lower production levels lead to shortages of products and services. The demand increases for the few available products and services, which, in turn, increases their prices thus inflation. Inflation reduces the value of a local currency, thus reduces the value of the local investment. Thus, despite the high housing prices in Central London, it is worth an investment (Manzur & Leong 2001). 4.3 The second reason for the high property prices in Victoria is the high demand. The Victoria’s west end sub-market is among the flourishing in London. It is the economic powerhouse of London thus attracts a large number of businesses, residents and entrepreneurs. The high demand has fueled the increase in prices for undeveloped land, improved land and houses. The second reason was prompted by the third, which is the substantial amount of mortgage loans approved by banks. The easy availability of mortgage increased home-owning desire, which, in turn, increased the demand for real estate in Victoria and its surrounding. The other two reasons for high property prices are straight forward (Manzur & Leong 2001). 5.0 Demand and Supply in Victoria, Central London 5.1 The level of demand for real estate products can be indicated by the rate at which individuals wish to take up the tenancy. The supply of the same, on the other hand, is shown by the actual rate of letting. The West End market has been characterised by a slow letting rate. Throughout quarter one, the space rented is determined to be less than 37,160 sq m (400,000 sq ft). Lower supply levels of the real estate in the West End market has been prompted by the high cost of development and stiff growth restrictions. High cost of developments and growth restrictions have sparked migration into affordable areas (West end office outlook 2013). 5.2 Retail supply and demand levels – considering the high cost of development and the limitations to growth opportunities in the West End market, the demand for real estate products for retail space remains low. This, in turn, has sparked a relocation to affordable areas such as Victoria, leading to an increase in demand. The site has seized to be an area occupied exclusively by the government buildings. Both private and local developers have been granted access. The change has led to the heavy infrastructural development in Victoria since various businesses have been set up such as luxury hotels, retail brand like tom Ford and Google, and grand theaters. However, restrictions negatively affect the supply (West end office outlook 2013). 5.3 Office demand and supply - The rate in Victoria is determined to have increased by 48% with major organisatios such as John Lewis leading the tenancy-up taking courses. In addition, the majority prefers small floor space. However, there is a shortage in supply, which has seen the rental prices go up. The rate of supply has declined by 5% . With continued restrictions on development, the supply levels are expected to remain low (West end office outlook 2013). 5.4 Residential demand and supply – considering the increase in demand for offices and the existence of retail and commercial organisations such as Ford and Google, the increase in the employment opportunities can only mean an increase in demand for residency in Victoria. However, restrictions are to blame for the low supply in such properties. According to a market commentary, the residential growth rate (West end office outlook 2013). The future rental growth predictions for office in West End market is 5.3% annually. The prediction affects the prices in Victoria (London office space 2013). 6.0 Viability analysis (office ) 6.1 Assume that Ten Broadway considers to develop structures to meet the demand for office spaces. The proposed project to be would include the cost of land, construction and other relevant costs. The cost of land can be extracted from the recent land transactions in Victoria as shown below. Table 1: Development Comparable Land Transactions CAP VAL Property sub-market Price £ m psf £ sq ft 1 Drummond Gate SW1 Victoria 65 607 107,000 123 Buckingham Palace, SW1 Victoria TCB TCB 205,200 50 Broadway, SW1 Victoria 63.5 882 77,827 Clive House, 70 Petty Victoria 90 1,040 86,500 France, Victoria London SW1 Partnership House SW1 Victoria 49 1,292 37,924 Great Minister North, Victoria 99.9 555 179,869 Horeseferry road, SW1 Source: (Ten Broadway 2013) 6.2 The market research indicates that the rental prices in Victoria for office space is at £ 100 per sq ft (West end office outlook 2013). Below is a sample of office floor space in Dacre street. The floor spaces could be used to guide the size of Offices to be constructed by Ten Broadway Company. Table 2: BLOCK A – DACRE STREET BLOCK - OFFICE Floor Use GIA sq ft NIA/NSA sq ft Ground Retail 10,333 8,072 Ground Reception 4,919 3,842 1 Office 15,252 12,927 2 Office 15,252 12,927 3 Office 15,252 12,927 4 Office 15,252 12,927 5 Office 15,252 12,927 6 Office 15,252 12,927 7 Office 15,252 12,927 8 Office 4,154 3,245 Total 126,170 105,648 Source: (Ten Broadway 2013) 6.3 Table 2 above provides a guide on the office spaces that could be developed. The mean construction costs for housing with shops, offices and workshops according to the estimates by BCIS (2014), is £ 1,613/ m2. Assuming that Ten Broadways acquired a piece of land to construct three 9-storey buildings with 20,000 sq ft per floor, the company would need approximately 22,000 sq ft plus 1000 sq ft, parking area, for each Blocks. Lets asume the blocks are E,F and G. Considering the comparable land transaction, the company should acquire land adjacent to Great Minster, North, Horeseferry Road, SW 1 since the cost per sq is cheaper compared to other locations (£ 555/ sq ft) (Ten Broadway 2013). Other costs related to the project and the cash flow are below: Table 3: Cash flow and other costs Revenue (quarterly) Office sq ft £/ sq ft Total Block E 200,000 300 60,000,000 Block F 200,000 300 60,000,000 Block G 200,000 300 60,000,000 Total revenue 180,000,000 Outlay Land acquisition costs Land cost (23,000*3*555) 38,295,000 Stamp duty 4.00% 1,531,800 Agent fee 1.25% 478,688 Legal fee 0.50% 191,475 40,496,963 Construction cost sq ft £ /sq ft Block E 200,000 150 30000000 Block F 200,000 150 30000000 Block G 200,000 150 30000000 90000000 Affordable housing cost 30% 27,000,000 Other costs Demolition & preparation 565,751 Car park 450,000 Landscaping 2.10% 1,885,836 Professional fees 7% 6,300,000 Marketing fees 2% 1,800,000 11,001,587 Total costs 168,498,550 Profit 11,501,451 6.4 The above profit is based on the current market conditions. The effect of a 5.3% increase in the rentals on the net profit by 2015 and 2016 would be (11,501,451)*1.053 = £ 12,111,027 and (11,501,451)* 1.053^2 = £ 12,752,912 respectively. The period for he compounding is two years since the rental growth estimates were done in the year 2013. Profit on costs = 6.826%, profit on GDV = 6.39% and profit on NDV = 6.39%. The weighted average cost of capital for Ten Broadway = 6%. Therefore, the IRR = 312.5% on a period of two years. 7.0 Conclusion and Recommendation 7.1 Despite the high cost of investments in Victoria, Central London, the level of returns as indicated above (GDV, NDV and the IRR) is worth facing the prevailing investment constraints such as shortage of constructors and construction resources. In addition, considering the estimated cash flow from investing in the selected real estate product, the net cash flow is positive. Therefore, the investment would increase Ten Broadway’s cash inflow thus increase the profitability level. However, further research is recommended to reliably determine various costs such constructions and other costs. The costs used in table 3 above have been derived from estimates made by organisations such as BCIS and other viability analysis previously done such as in Blackpool. 6.0 List of References Ballard, E & Patnaude, A 2014, ‘London rear-estate market shows signs of cooling’, viewed 16 November 2014, http://online.wsj.com/articles/london-real-estate-market-shows-signs-of-cooling-1414068378. BCIS 2014, Viewed 23 November https://service.bcis.co.uk.libproxy.ucl.ac.uk/BCISOnline/ London office space 2013, Viewed 25 November http://www.londonofficespace.com/officespacetrends-2013.html Manzur, M & Leong, PL 2001, ‘Key issues in the foreign exchange market: evidence from Australia and Singapore’, The Asia Pacific Journal of Economics & Business, vol. 5, no. 1, pp. 61–149, Viewed 16 November 2014, http://search.proquest.com/docview/208141711?accountid=45049. Ten Broadway 2013, Viewed 23 November https://docs.google.com/file/d/0B16P5SbvSm3CNlc4Mmh3Uy1Ha1k/edit West end office outlook 2013, Viewed 23 November http://www.cluttons.com/sites/default/files/documents/West%20End%20Summer%202013%20pp.pdf Read More