Solar PV: Shedding light on the opportunities Guide to Solar PV and Valuation Methodology

Transcription

1 Solar PV: Shedding light on the opportunities Guide to Solar PV and Valuation Methodology Chris Strathon 1 st April 2015

2 Introduction 1. Guide to Solar PV 2. Market Context 3. Valuation Methodology 4. Scenario Valuations 5. Attributes and Risks of Solar PV in relation to Commercial Buildings 6. Conclusions

3 Guide to Solar PV

4 Solar PV Overview How it works

5 Solar PV Overview Reasons to Install

6 Implementation Options Different options available for PV Installation Comments Option Landlord Tenant Sub-lease option Acquires a sublease for the roof space in order to install the PVs Puts in place a PPA in order to sell the energy back to the tenant at an agreed rate Insures the PV with installer roof warranty as a backup Retains FRI liability for the roof Installation during Construction Period Pre-lets the property and agrees with the tenant to install Pre-lets the property on an the PV FRI basis Installation post-construction Installs the PV for the tenant Puts a PPA in place in order to sell the energy back to the tenant at an agreed rate Landlord receives income from PPA and FITs Retains FRI responsibility as originally agreed in the existing lease.

7 Potential Revenues and Costs Revenues Feed in Tariff - Inflation linked payment for every kwh of electricity generated - Guaranteed for 20 years and index linked In addition:- - Electricity paid for directly by tenant And/or - Inflation linked payment for electricity exported to grid Levy Exemption Certificates (exemption from the Climate Change Levy) Savings in payments for electricity for power that is consumed from the Solar PV system rather than the Grid Costs Initial Installation Annual running costs - maintenance Insurance

8 Market Context

9 Market Context Solar PV Transactions Aviva s c. 22m acquisition of an 11.4MWp UK residential solar PV portfolio from Zouk Capital in August 2014; Oxford Capital Partner s c. 16m acquisition of an 8MWp UK residential solar PV portfolio from Kingspan in May 2014; Aviva s c. 25m acquisition of an 8.6MWp UK commercial solar PV portfolio from Zouk Capital in July Aviva s 100m acquisition of a 23MWp UK residential solar PV portfolio from Homesun in August 2012; Aviva s 51m acquisition of a 12.3MWp UK residential solar PV portfolio from Ecovision Renewable Energy in July Transactions occurring but relatively immature market

10 Market Context Solar PV - Property Transactions Waltham Abbey 704,780 sqft modern distribution warehouse let to Sainsbury s with 15 years unexpired on the lease. Extensive solar PV system installed by Sainsbury s. Property transacted in July 2014 at 107million reflecting a net initial yield of 4.75% Woking Hollywood House comprising Grade A office of 43,440 sqft. Refurbished by tenant including solar PV on roof. Sold for 15m reflecting net initial yield of 6.44% (quoting 7.5%) Feedback:- No impact on liquidity Premium prices achieved Transactions reflected strengthening market and quality of assets

11 Active Players Landlord and Tenant

12 Commercial Real Estate Valuation Methodology

13 Commercial Real Estate -Valuation Methodology Market Value definition reflects a transaction Main methods of valuation:- - Investment Method capitalisation of income stream at a yield (growth implicit) - Discounted Cashflow net present value of income and costs over a defined period discounted at appropriate discount rate Reflect Investors in the market place Reflects comparables

14 Scenario Valuations

15 Valuation Scenario 1 - Butcher s Pet Care Crick, Northamptonshire Property Type: Distribution Warehouse Constructed by: Gazeley Landlord: Legal and General Tenant: Butcher s Pet Food Roof area: 260,000 sq ft Solar PV roof coverage: 10-15%

16 Valuation Scenario 1 - Butcher s Pet Care Roof area ( sq ft) 260,000 PV installation system size (kwp) 249 Annual power output (kwh) 217,875 Solar PV installation costs 249,000 Power output (kwh/kwp) 875 Degradation (annual post 1st year) 0.40% First year degradation 0.9% Total revenue (p/kwh) Feed in Tariff (July 2014) (p/kwh) 9.89 On site electricity price (p/kwh) 8.00 Export price (p/kwh) 4.77 Percentage consumed on site 100% LEC (p/kwh) 0.54 LEC term FiT term LEC & FiT (p/kwh) RPI 2.5% Energy price inflation 4% Installation costs ( per sq m) 117 Annual running costs ( /kwp) 15 Insurance costs ( /kwp) 5 Annual gross income 40,316 Nominal gross income over 20 years 1,007,891 Annual net income 35,316 Nominal net income over 20 years 882,891 IRR 12.74% Payback 8 years Consider initial costs versus income generated Payback on investment 8 years

17 Valuation Scenario 1- Butcher s Pet Care Indicative rent per sq ft 5.75 FRI? Yes Annual rent 1,495,012 Net initial yield 5.50% Value 25,700,000 Net income from solar 35,316 Solar income discount rate 9.00% Floor area 260,000 NPV of solar income 414,614 Indicative rent per sq ft 5.75 FRI? Yes Solar income yield 8.00% Annual rent 1,495,012 Solar value 417,425 Net initial yield 5.50% Value 25,700,000 Total income 1,530,327 Net income from solar 35,316 Value 26,100,00 Solar income discount rate 9.00% Net initial yield 5.54% NPV of solar income 414,614 Solar income yield 8.00% Solar value 417,425 Value of income stream 414,614 versus installation cost of 249,000 Total income 1,530,327 Discount rate based on hurdle rates within the market Value 26,100,00 Net initial yield 5.54%

18 Valuation Scenario 2 - Wolverhampton Wolverhampton, Staffordshire Property Type: Manufacturing facility Potential Sale and Leaseback Roof Area: 800,000 sq ft Solar PV Roof Coverage: 45-50%

19 Valuation Scenario 2 - Wolverhampton Roof area (sq ft) 828,000 PV installation system size (kwp) 5,800 Annual power output (kwh) 4,930,000 Solar PV installation costs 5,800,000 Power output (kwh/kwp) 850 Degradation (annual post 1st year) 0.40% First year degradation 0.9% Total revenue (p/kwh) Feed in Tariff (July 2014) (p/kwh) 6.38 On site electricity price (p/kwh) 8.00 Export price (p/kwh) 4.77 Percentage consumed on site 100% LEC (p/kwh) 0.54 LEC term FIT Term LEC & FiT (p/kwh) 6.92 RPI 2.5% Energy price inflation 4% Installation costs ( per sq m) 100 Annual running costs ( /kwp) 15 Insurance costs ( /kwp) 5 Annual gross income 735,605 Nominal gross income over 20 years 14,712,106 Annual net income 619,605 Nominal net income over 20 years 12,392,106 IRR 11.22% Payback 9 years Substantial use of large roofspace User of significant amount of electricity

20 Valuation Scenario 2 - Wolverhampton FRI? Yes Annual rent 3,312,000 Net initial yield 5.50% Value 56,920,000 Net income from solar 619,605 Solar income discount rate 9.00% Floor area (sq ft) 828,000 NPV of solar income 7,470,000 Indicative rent per sq ft 4.00 Solar income yield 7.90% FRI? Yes Solar value 7,410,000 Annual rent 3,312,000 Net initial yield 5.50% Total income 3,931,605 Value 56,920,000 Value 64,330,000 Net income from solar 619,605 Net initial yield 5.78% Solar income discount rate 9.00% NPV of solar income 7,470,000 Solar income yield 7.90% Solar value 7,410,000 Total income 3,931,605 Value 64,330,000 Installation Cost of 5.8m versus value of 7.41m Net initial yield 5.78%

21 Key Attributes and Risks

22 Key Attributes and Risks Key Attributes:- Risks:- Potential Income generator Contribution towards CSR Reduces Energy Costs for Tenants Increase EPC rating of Property Security of Income Portfolio Diversification Contribution to service charge saving Roof repair liability Obsolescence Longterm future of Feed in Tariffs Potential liquidity impact Tenant default

23 Conclusions

24 Conclusions Significant expansion in use of solar PV due to positive developments in legislation, increased efficiency in technology and tenant demand Solar PV provides additional revenue and cost savings to commercial property assets Greater understanding of solar PV required within the property industry if deployment levels for commercial installations are to increase Greater consistency and sophistication in valuation approach is required Discounted cashflow methodology is most appropriate and robust approach Recent commercial property transactions benefitting from solar PV have continued to trade at premium prices demonstrating good liquidity

25 Contact Chris Strathon Director Valuation Advisory, JLL +44 (0)