The Market Value of Watling House - Coursework Example

Real E Appraisal Table of Contents 0 Executive Summary 3 2.0 Introduction 4 2 Purpose of the report 4 2. 2 Economy of UK and Commercial Property market 4 3. The Asset 6 4. Asset Investment Evaluation 6 SWOT Analysis 6 5.0 Estimation and justification of the main assumptions 9 6. Market Value estimation 10 6.1 Property Comparables summary tables 10 5.0 Estimation of Market value 11 7.0 Bibliography 12 Name of student: Name of Professor: Course Number: Date of Paper: Real Estate Appraisal 1.0 Executive Summary The purpose of the report is to critically examine the real estate issues in the United Kingdom and also evaluate the market value of Watling House, which is an A graded rental and office building built in the City of London. Watling House is situated in City of London. It is a Class A commercial property, which offers offices spaces and spaces for retail units. A brief introduction to the real estate market in the UK. Major issues encountered in the real estate market in UK Qualitative analysis of the assets invested in the project, Watling House. Few assumptions are made for modelling a financial cash flow for assessing the property investment. Estimation of Market Value with the help of Net Initial Yield approach gives the result £8,37,930 per annum 2.0 Introduction 2.1 Purpose of the report The report aims at assessing Watling House, based on the economic environment and commercial property market of the UK. Hence, the main objective of the report is to give a qualitative analysis of the property as well as evaluate the investment prospect of Watling House. 2. 2 Economy of UK and Commercial Property market According to Office for National Statistics (ONS), the gross domestic product (GDP) in the UK has increased by 0.8% in second quarter of 2014 as compared to its first quarter. The increase is encountered due to the over performance of the two key sectors in the economy such as services and production. The demand for output for construction project is low and flat; additionally there is 0.2% decrease in total output that will be required for agricultural. ONS also reported that GDP of the UK is 3.2% higher during the second quarter of 2014 in comparison to its previous year (“Investment Property Forum UK Consensus Forecasts 2014”). Hence, this can be ascertained that the UK economy has improved its financial ability with the passage of time. In light of the above mentioned information regarding growth in economic indicators in UK, it is observed that demand for commercial properties have also risen to about 9.7% the fourth quarter of 2013, which is 0.3% higher than that of 2012 (“Rising Demand for London Office Space Boosts UK Commercial Property Market”). According to Centre of British Industry, the real estate market in the UK has encountered the high growth even before the beginning of recession. It is observed that the rent has not exceeded the expectation of the tenants and there have been rapid increase in investment in the real estate. The CEO of British Land, Chris Grigg has given his opinion that the rise in demand for the commercial properties is basically driven by the international and domestic investments. Additionally, he also identified the fact that demand for commercial spaces have increased in the City of London (“Watling House 33 Cannon Street, EC4”; “Rising Demand for London Office Space Boosts UK Commercial Property Market”). However, the need for commercial spaces are not only restricted within the city, it spread all across the main cities in the UK. Figure 1: City take-ups (London) (Source: “Investment Property Forum UK Consensus Forecasts 2014”). From the above figure it is evident that in 2014, the construction plan for new buildings has decreased considerably and this indicates to the fact that there is demand and supply imbalance for the commercial spaces. 3. The Asset Watling House is located at 33 Cannon Street, London. (Postcode: EC4M5SB) with a long leasehold expiring in the year 2018. It is a property that holds Grade A offices and retail units with areas of 86,336 and 8,966 square feet respectively with a passing rent of £3,997,991 annually. 4. Asset Investment Evaluation SWOT Analysis Strength 1. Benefit from rental income: The rental lease will expire on 28 September 2148 (134 years unexpired), which will contribute to the total income of the property. The present rent is 10% her head, which also adds to the profit of the income of the property 2. Highly competitive market in London: Watling House is situated at the heart of City of London, which is the greatest strength of the property. There are a number of well known commercial properties, which gives hard competition to Watling House such as Goldman Sachs, Baker & McKenzie and British Telecom. However, the property has succeeded to provide a new look to the offices and rental units and earned good income for rents. The property can provide easy access to a number of public transports that includes bus stop, National Rail and London Underground. 3. The rents are reviewed after 5 years and also aim at preventing the rate of rent from deviating from market rent. Weakness 1. Issues related to the construction and development of real estate market in the UK such as vacancy rates, construction costs, refinancing, land cost, future price of commercial space and deleveraging. The future home prices will have huge impact on Watling House as the commercial spaces are increasing, as a result the vacancy rates are also growing. Hence, it is the main weakness of the property. 2. The economic factors such as job growth, wage and income growth, interest rate, inflation, energy prices, inflation, state and local budget problems and many more. These factors contribute to the imbalance of the real estate market in the UK. Hence, this can affect the market valuation of Watling House in future as the market value can decline. Opportunities 1. The growth in rent of Watling House is dependent on a number of factors including increase in demand for commercial spaces (“Watling House 33 Cannon Street, EC4”).. However, according to the research conducted by Research Program, the following figure elaborates the movement of growth in rent in the upcoming five years. Figure 2: Rental growth in the UK (Source: Research Program, 2014) The figure indicates the fact that there will be huge fluctuation in growth of rent in the UK in the next five years. The growth will be negative after the period 2015 and it is expected that there will be growth in collection of rent from 2018. Till 2018, the growth in rent is expected to be only 2.6%. This figure is quite significant for calculating the future rent of Watling House. 2. The rental reviews permits the rental units to generate higher income when the property market is rising. 3. The value of the local area increases when high profile development projects increase. Thus, the property value in London has increased after the projects such as Paternoster Square and the Bloomberg Place. 4. One of the significant advantage is that the cross rail services will be completed by 2018, which will further help in developing the public transportation network. 5. According to professional institutions, the rental and economic growth is predicted in the UK and steady rise will be noticed favouring the business of Watling House. 6. Till 2018, the growth in rent is expected to be only 2.6% (Research Program, 2014). Threats 1. With the decreases in interest rate, there is significant increase in development of new office buildings. Hence, there is serious imbalance between the supply and demand of commercial spaces in the UK. The threat for commercial real estate industry is regarding surplus supply of the commercial spaces, which will affect the valuation of the land in future. If the demand does not increase the price of commercial spaces will remain subdued. 2. The socio-political factors such as immigration, social inequality and global warming also contribute towards the imbalance of real estate market in the UK. Socio-political factors in London can affect Watling House to a great extent as property valuation are controlled by the government polices, which are modified according to the change in authority. 5.0 Estimation and justification of the main assumptions The assumptions that are considered for modelling the assets of financial cash flows are discussed henceforth along with the justification. The expected growth in rent is 2.6% (Research Program, 2014) as per the prediction. The property of 280 High Holborn is taken as the base property for the valuation. The net initial yield for the market value estimation is taken to be 4.30%. Among the seven tenants of Watling House, GHK Consulting Limited is chosen for the estimation. 6. Market Value estimation 6.1 Property Comparables summary tables Recent long-leasehold sales Property Date Price Net Initial Yield (%) 280 High Holborn August 2014 £86.56 million 4.30% 1 Plough Place, EC4 June 2014 £55.6 million 4.75% 23 College Hill, EC4 June 2014 £22.08 million 4.81% 28-30 Cornhill, EC3 April 2014 £26.1 million 4.18% 6-8 Tokenhouse Yard, EC2 February 2014 £22.8 million 4.75% Recent leasing deals of Watling House Address Tenant Deal date Price (£ per sq. ft. pa) 5th floor GHK Consulting Limited Dec-2013 £40.95 5.0 Estimation of Market value The market value of Watling House can be estimated by employing Net Initial Yield of similar types of property sales and market rent of the building. The rent value of the properties provided above is considered for calculation of the estimated market rent. 280 High Holborn is building is to Watling House. However, the 5th Floor of Watling House was leased to GHK Consulting Limited in December 2014. This provides with an estimate that market rent of the office space in the building is about £40.95 per sq. Ft per annum. The market value of Watling House is as follows: Estimate market rent (£40 times the totally area of 95,302 sq. ft.) £3,812,080 per annum Estimate Net Initial Yield 4.30% Estimate value (Estimate market rent divided by Estimate Net Initial Yield) £8,86,530 per annum Estimate market value (take off the transaction costs: dividing the estimate value by 1.058) £8,37,930 per annum 7.0 Bibliography “Rising Demand for London Office Space Boosts UK Commercial Property Market.” Free Office Finder. Free Office Finder, 2014. Web. 14 Nov. 2014. “Investment Property Forum UK Consensus Forecasts 2014.” Research Program. Research Program, 2014. Web. 14 Nov. 2014. “Watling House 33 Cannon Street, EC4.” Watling House. Watling House, 2014. Web. 14 Nov. 2014. Read More