Your client is a large UK life fund that is looking to increase their exposure to the London office market. They have been contacted about Saffron House, an office property in the Farringdon area of Central London that is currently on the market. The client has asked you to analyse the property further so that they can understand what the building might sell for and what would be an appropriate bid for them to make given their own target rate of return, currently 5.5% p.a. for prime London office assets. This rate is not adjusted for leverage and no debt will be used for the purchase.
Estimate Market Value for the property as at a valuation date of 31 December 2020. You must use growth-implicit market valuation techniques that are typical for the market in which this investment is situated. The task will involve assessing the Market Rent psf and selecting an appropriate capitalisation rate based on comparable evidence (such evidence to be tabled and discussed in the report).
Estimate Investment Value as at 31 December 2020 assuming that your client will hold the asset for five years, i.e. to 31 December 2025. Model the cash flow on a quarterly basis and present this cash flow in your report along with discussion of your main inputs and assumptions.
Compare your Market Value and Investment Value with each other and with the stated asking price, and advise your client on whether they should bid for the property. In your discussion, draw attention to the main sources of uncertainty that affect your valuations and their implications for prospective returns should the client actually
acquire the asset
real estate investment
do you plan to use CoStar or EGI as well as the Ascension cash flow modelling platform?
1. Valuation Concepts, Bases and Processes
Reading list that accompanies session 1
2. Property Pricing: Target Rates and Yields
Reading list that accompanies session 2
3. Comparison, Analysis and Market Valuation
Reading list that accompanies session 3
4. Market Valuation: The Investment Method
Reading list that accompanies session 4
5. Discounted Cash Flow Appraisal #1
Reading list that accompanies session 5
6. Discounted Cash Flow Appraisal #2
Reading list that accompanies session 6
7. Cash Flows and Debt Financing
Reading list that accompanies session 7
Real estate investment: a strategic approach (Ch 2)
Book by Andrew E. Baum 2015 Recommended
The basis of valuations for secured commercial property lending in the UK in Journal of European Real Estate Research
Article by Neil Crosby; Cathy Hughes 25/10/2011 Further
A Vision for Real Estate Finance in the UK
Webpage 2014 Further
CBRE European Debt Map
Commercial Real Estate Lending Survey – Year-End 2019: Update Report & Forecast 2020
Document by Nicole Lux; Tony Key 2020 Recommended
Note for students
Access through HBS Business Library Blackboard site. Click on ‘Real Estate & Planning database’ button > then UK Commercial Property Lending Market Reports
8. Introduction to Cash Flow Risk Analysis
Reading list that accompanies session 8
Property investment appraisal (Ch 8)
Book by Andrew Baum; Neil Crosby 2008 Recommended
Property valuation (Ch 16)
Book by Peter Wyatt 2013 Recommended
Flexibility and real estate valuation under uncertainty: a practical guide for developers (Chs 3-6)
Book by David Geltner; Richard De Neufville 2018 Recommended
An Investigation of Hurdle Rates in the Real Estate Investment Process
Webpage by Norman Hutchison; Colin Lizieri; Bryan MacGregor; Nick Mansley; Rachel Portlock; Rainer Schulz; Yuan Zhao 2017 Further
Break Clauses – Who holds the Risk in your Rental Income?
Document by Michael Reevey; Andrew Blower; Malcolm Frodsham; John Danes 2010 Further
For collecting data we must use CoStar or EGI as well as the Ascension cash flow modelling platform
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