Residual valuation

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EXECUTIVE SUMMARY

This paper will be divided into two parts. The first part will be a supplementary review of the group course work, which will add further comments and corrections on to the group work. All the supplementary comments are mentioned within the context of the particular course work section that they affect.
This first section will analyze the importance of having covenanttenants and will explore a methodology to find them. Then, it will discuss the market in terms of rental values and yields that will ultimately affect the assumptions taken initially to calculate the development value. Finally, it will go through a correction of office net internal areas and rent free periods. After these topics are discussed, a new GDV and Residual Value calculation for the Red Edgedarea is presented.

The second part will focus on analyzing the possibility of adding (by acquiring it) the blue edged area to the existing site. The analysis will explore the location, actual situation, gaining possession and finally a residual valuation and conclusion.
INDEX

PART 1 3

RETAIL MARKET 4
SELECTING TENANTS 5
GROSVENOR SQUARE CASE STUDY 7
PROPOSAL 9
RENTALVALUES 10
YIELDS 11
NIA 12
RENT FREE PERIODS 12
GDV CALCULATION FOR RED EDGED AREA 12
CONCLUSION OF WORK REVIEW 13

PART 2 14

INTRODUCTION 15
ASSUMPTIONS 15
LOCATION 16
SITUATION 19
COMUNICATION 19
LOCAL DEVELOPMENTS 20
MAP 21
DESCRIPTION 22
TERMINATION OF LEASES AND GAINING POSSESION 23
VIDEO DATING ENTERPRISES 23
DOMESTIC MAIDS RUS 25
EXTREME SPORTS PROMOTIONS 25
SUMMARY ON TENANCIES 25
RESIDUAL VALUATION 25
CONCLUSION 30

BIBLIOGRAPHY 31

ANNEXES

NOTES FOR RESIDUAL CALCULATION IN BEST CASE SCENARIO
RICS CONSTRUCTION COST CALCULATION
RESIDUAL CALCULATION FOR MEDIUM CASE SCENARIO RESIDUAL CALCULATION FOR WORST CASE SCENARIO
MARKETING PARTICULARS

APPENDIX GROUP COURSE WORK

PART 1SUPPLEMENTARY REVIEW ON THE GROUP WORK

RETAIL MARKET

Although tenant’s covenant was mentioned briefly in the group presentation, it is a very important topic which should be analyzed more deeply.

This factor is more important in the commercial property sector, in which the financial structure of the developments relies heavily on long term income flow from the tenants. Therefore longterm leases and strong covenant tenants play an important factor when it comes to development’s performance.

In theory, covenant strength should have a direct bearing on yield choice and consequently on the property market value. The All Risk Yield used on the residual valuation to calculate the Gross Development value is derived by, a risk free rate, usually long gilt bonds, plus a rate premiumwhich reflects the risk of the business (Hoesli and MacGregor, 2000). Based on the assumption that risk premium is correlated to the risk of rent default, diversifying the risk amount of many tenants could be a strategy to reduce the development’s overall risk.

Unfortunately this can only be done in big shopping centres, where, unless big anchors exists, no single tenant accounts to more than5% of the total rental income (Hutchison, Adair, McWilliam, 2007). In this situation individual tenant defaults have a limited impact on the cash flows.

In the commercial property market, it is a common practice for Landlords to appoint a specialist company which will analyze the prospectus tenant financial information and will give a tenant score out of a 100. This analysis is commonly called“Delphi” score.

The past method is useful in times where tenants approach you or when the market is in a boom and the developer can wait to let their premises until the project is finished, allowing him to capitalize any increase in rental values (Brett, 1997). In this case developers can choose a mixture tenants based on their credit scores, reducing and spreading the risk of rent default....
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