SECTION A

Answer all questions, each answer carries 12.5 marks.

Please start each answer on a new page.

Use calculation inputs correct to 4 decimal places. Show all steps in your

calculations.

Question 1.

A freehold office building is let to two tenants on fully repairing and insuring (FRI)     lease terms, with upwards only rent reviews, with lease and tenant details as shown in the table below. Assuming an All Risks Yield (ARY) of 4.50%, produce a market  valuation of the property using a split yield term and reversion approach for each     tenant and comment on the assumptions made and approach used for each tenant.

(12.5 marks)

Question 2.

a)     What are the characteristics of commercial real estate that enable an investor to leverage the asset?

b)     Briefly explain why commercial real estate lenders use the interest cover ratio and the debt service cover ratio to help make lending decisions

c)      What are the formulae for each of these ratios?

(12.5 marks)

Question 3.

The 5-year cash flow for a multi let office property is shown below, indicating that the property is being offered for sale at a price of £2.795 million. Assuming you are an    investor who has a required rate of return of 7.50%, use the cash flow below to         determine the maximum amount you would bid for the property. Additionally, if the    seller would only accept a bid of £2.795 million, use linear interpolation to estimate   the Internal Rate of Return (IRR) you would achieve and explain why the IRR using  linear interpolation is an estimated calculation. Assume income is received annually in arrears, ignore all transactions costs and landlord’s costs in your calculations.

(12.5 marks)

Question 4.

Define the term All Risks Yield (ARY), breakdown the ARY into its constituent parts   and explain what each part represents and where it is derived from. Explain what      adjustments you would make to an ARY and why you are making those adjustments, when using a split yield approach for a layer method to value an under rented            freehold property.

(12.5 marks)

SECTION B

Answer ONE question, your answer carries 50 marks.

Use calculation inputs correct to 4 decimal places.

Show all steps in your calculations.

Question 5.

a)     A multi-let industrial property has three units as shown in the table below. All current leases are on fully repairing insuring (FRI) terms, with upward only rent reviews every 5 years. You may assume that the vacant Unit 2  will be let on a similar 10-year lease in 2 years’ time, with no tenant          inducements.

Assuming income is received annually in arrears, produce a market          valuation of the property applying an equivalent yield of 5.25%, using a     Short Cut DCF method for unit 1 and a layer method (also called the Hard Core and Top Slice) for units 2 and 3 and explain why the Short Cut DCF method is the most appropriate method for unit 1. Your analysis of the      market suggests investors typically require a return of 6.25% and expect  market rental growth of 1.00% per annum.

Additionally, complete a market valuation of unit 3 using a Term and       Reversion method, comment on your answer compared to that using the layer method for unit 3 and highlight the main differences between both  methods.

(30 Marks)

b)     Define the terms price, value and worth. Outline the main differences       between conventional valuation methods and worth appraisal. Why might market valuations become problematic in rapidly changing markets?

(10 Marks)

c)     Explain and define an equated yield, equivalent yield and true equivalent   yield. Explain how the equivalent yield is calculated from comparable         evidence and why it is a more reliable approach in conventional valuations than applying initial yields or reversionary yields taken from comparables   to use on the target property.

(10 Marks) (Total:   50 Marks)

Question 6.

a)     A multi let office property shown in the table below is being offered for     sale at a price of £3.45 million. All current leases are on FRI terms, with  upward only rent reviews and have at least 10 years before expiry, with  the exception of unit 2, which market analysis indicates will be vacant for

1 year when the lease expires and be re-let at the prevailing market rent  on a 10-year lease on FRI terms, with a tenant fit out contribution of          £15,000 and a 9-month rent free period. You may assume that the vacant Unit 1 will be let on a 10-year lease on FRI terms in 1 years’ time with a 1 year rent free period.

Produce a worth appraisal for the property investment, using a 5-year     discounted cash flow to determine if the sale price of £3.45 million is a    suitable bid price, to achieve the minimum required rate of return.           Assuming income is received annually in arrears, a rental value growth  rate of 1.25% per year, a required return of 7.75% per year and a sale at the end of year 5 at a reversionary yield of 6.50%. You may ignore all     transactions costs, landlord’s costs and letting agent fees and                 management fees in the analysis.

Additionally, based on the bid price, calculate a reversionary yield at   purchase and comment in this instance why it is reasonable to apply a 6.50% reversionary yield at sale.

(30 Marks)

b)     Define and explain the terms Internal Rate of Return (IRR) and Net        Present Value (NPV). What are the investment decision making criteria, when using IRR & NPV for evaluating independent projects and the       problems when using IRR for this purpose?

(10 Marks)

c)      Explain how sensitivity analysis can be applied to a discounted cash flow worth appraisal to determine the suitableness of the target investment.

(10 Marks) (Total:   50 Marks)