Valuation Report of. 14 Pierpoint Street. sw.co.uk. Worcester Worcestershire WR1 1TA

Transcription

1 Valuation Report of 14 Pierpoint Street sw.co.uk Worcester Worcestershire WR1 1TA 12 th

2 14 Pierpoint Street Worcester Worcestershire WR1 1TA Prepared by Sanderson Weatherall 6th Floor Central Square 29 Wellington Street Leeds LS1 4DL David Haugh BSc (Hons) MRICS

3 Contents 1. Summary Instructions Purpose of Valuation Asset Type & Classification Scope of Instruction Bases of Valuation Assumptions Valuation Procedure Conflicts of Interest Liability The Property Location Description Accommodation Condition Statutory Enquiries Highways Planning Registration/Licences Houses in Multiple Occupation (HMO) Property Taxation Equality Act 2010 & Disability Discrimination The Regulatory Reform (Fire Safety) Order Services Site and Ground Conditions Environmental Issues Asbestos Flooding Energy Performance Certificates Tenure Occupational Leases and Other Agreements Current Tenancies / 2019 Academic Year The Market Market Trends & General Comments General Economic and Market Commentary Sector Market Commentary University of Worcester Commentary Rental Analysis Property Specific Comments... 19

4 4.5. Comparable Transactions Valuation Valuation Considerations Market Rent (MR) Market Value (MV) subject to the existing tenancies in place Security for The Loan SWOT Insurance Reinstatement Estimate Signatures Appendices Appendix I Photographs Appendix II Site Plan Appendix III Sales Particulars Appendix IV Copy Letter of Instruction & Terms of Engagement and Guidance for Clients... 27

5 1. Summary Report Date 12 th Our Reference VLV/DAH/ Addressee FAO: Rob Weaver, Investment Director The Directors PPNL SPV B87-1 Limited and PPNL SPV B87 Limited 3rd Floor 51 Bishopgate London EC2N 3AR Purpose of Valuation Internal purposes The Property 14 Pierpoint Street Worcester Worcestershire WR1 1TA Description The subject property comprises a converted studio apartment block providing a total of x17 selfcontained studios over three storeys. The premises are situated to the southern side of Pierpoint Street, close to its junction with Foregate Street, within the core of Worcester city centre. Approximately 250 yards to the west of the site is the University of Worcester s City Campus. The subject property is currently fully let and producing a gross rental income of approximately 120,795 p.a. The vast majority of tenancies are by way of 11 month Assured Shorthold Tenancies (AST). The various rental rates being achieved are inconsistent due to the property being let on an ad-hoc basis. The University of Worcester has a student population of circa 10,750 students, which has steadily grown over the past 5-10 years. Formerly a satellite campus of the University of Birmingham, the University of Worcester was granted full university status in According to The Complete University Guide, it is ranked 104 th out of a total of 129 universities within the UK. The premises are currently being marketed for sale via local agents, Platinum-Property, with an asking price of 1,250,000. The property has been on the market for circa 5 weeks and we understand from the selling agents that good levels of interest have been received. We are aware that you have agreed 1

6 a purchase price of 1,235,000, which equates to a Net Initial Yield (NIY) of approximately 6.95% - when deducting purchaser s costs at their prevalent rate. Areas The building extends to circa 5,700 sq ft (GIA) upon a site of approximately acres. Tenure Freehold Tenancies The subject property is currently fully let and producing a gross rental income of approximately 120,795 p.a. The vast majority of tenancies are by way of 11 month Assured Shorthold Tenancies (AST). The various rental rates being achieved are inconsistent due to the property being let on an ad-hoc basis. Likely occupational and investor demand and likely purchasers; Should the property be offered for sale once again, we would anticipate interest in the form of student property investment specialists and institutional investors. We would also envisage a good level of interest from overseas investment vehicles with demand driven by the fall in Pound Sterling since the well documented EU Referendum. Volatility of property performance, capital value and rental value or maintainable operating profits; The student investment market has been relatively non-volatile over the past 5-10 years, with prime rents and yields rising year on year. This is particularly apparent for studio apartments, with this room type priced 34% higher weekly and 45% higher annually than average en-suite prices. The material conditions attaching to existing planning consent(s) /Section 106 or Section 38 Agreements; N/A Any title issues requiring further investigation; N/A Any pertinent issues, whether adverse or otherwise, requiring further investigation; N/A Necessary capital expenditure We recommend a planned schedule of maintenance and redecoration is carried out at the property. In the short term, the entrance and communal areas would benefit from redecoration and some refurbishment works. We have had regard to this potential future expenditure in our yield adopted. 2

7 Opinions of Value You have specifically requested our opinion of value on the following bases: Valuation Bases Market Value (MV) subject to the existing tenancies in place Market Rent (MR) 14 Pierpoint Street, Worcester, Worcestershire, WR1 1TA 1,235,000 (One Million Two Hundred and Thirty Five Thousand Pounds) 90,000 p.a.* (Ninety Thousand Pounds Per Annum) *Our opinion of Market Rent (MR) is provided on a net rental basis on assumed 48 week Assured Shorthold Tenancies (AST). Reinstatement An estimate has been arrived at using an instantaneous basis of value, adopted without regard to future inflation and without provision of loss of rent, any consequential loss or VAT. However, the estimate includes allowances for demolition, site clearance and professional fees. 800,000 (Eight Hundred Thousand Pounds) NB This summary should be read in conjunction with the full report attached hereto. 3

8 2. Instructions We refer to your ed instructions dated 11 th, a copy of which is appended to our report. You have requested valuation advice in respect of the above student investment premises and we are pleased to report as follows: 2.1. Purpose of Valuation You have informed us that our valuation is to be prepared for internal purposes Asset Type & Classification It is our understanding that the asset to be valued is a Freehold student investment premises which contains a total of 17 self-contained studios Scope of Instruction The property has been valued on the bases requested, as defined in VPS4 of The Red Book and in accordance with our Standard Terms of Engagement and Guidance for Clients, which is appended to this report. You have specifically requested our opinion of value on the following bases: Market Value (MV) - subject to the existing tenancies in place Market Rent (MR) In accepting your instruction we confirm the following: The valuation date is at the date of our report, 12 th. That we carry Professional Indemnity Insurance on a per claim basis which is adequate in respect of this instruction. This report has been prepared by David Haugh MRICS (Associate Partner) under the supervision of Ian Naylor MRICS (Partner) who accepts responsibility for this report, has sufficient skills, knowledge and understanding to provide an unbiased and objective valuation and undertake this instruction competently, is a member of the RICS Valuer Registration Scheme and is qualified to provide this advice as an External Valuer in accordance with PS2 and VPS3 of the RICS Valuation Global Standards (July 2017) published by The Royal Institution of Chartered Surveyors (RICS) ( The Red Book ). The property was inspected on 10 th, in rainy and overcast weather conditions. We have not made any investigations into the Capital Allowance position in respect of the subject property in the preparation of this valuation; we recommend that the owner of the property makes their own investigations to satisfy themselves in this respect. 4

9 2.4. Bases of Valuation As requested, the property has been valued on the following bases as defined in PS3 of the RICS Valuation Standards; Market Value (MV) The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Market Rent (MR) The estimated amount for which a property, or space within a property, should lease (let) on the date of valuation between a willing lessor and a willing lessee on appropriate lease terms in an arm s length transaction after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion Assumptions The property has been valued in pounds sterling ( ). We append a report on the property, including descriptions and notes as to location, extent and features of the site, construction and accommodation of the building, its apparent condition and the results of enquiries of the various authorities. We also include an extract of the Ordnance Survey plan showing the extent of the site, as we understand it to be, outlined in red and include some photographs. Details of the extent of the property, tenure, tenancies, permitted uses and related matters have been supplied by the vendor. Where possible this information has been checked on site Valuation Procedure This Valuation has been prepared in accordance with the RICS Valuation Global Standards (July 2017), the IVSC International Valuation Standards (IVS) and our Standard Terms of Engagement and Guidance for Clients, which is appended to this report Conflicts of Interest We have no prior involvement with the property. As you are aware, we have provided valuation advice to you in respect of other properties although this is not considered to constitute a conflict of interest Liability Our valuation is provided for the stated purpose and is for the use of the addressee only and no responsibility is accepted to any other party for the whole or any part of its contents. In particular, our liability is not extended to your customer, nor to any other party or financial institution who might obtain a copy of this report. Neither the whole or any part of this report, or any reference thereto, may be included in any document, circular, or statement nor our opinions of value disclosed without our prior written approval of the form and context in which they will appear. 5

10 3. The Property 3.1. Location The subject premises are situated to the southern side of Pierpoint Street, close to its junction with Foregate Street, within the core of Worcester city centre. Approximately 250 yards to the west of the site is the University of Worcester s City Campus. Foregate Street forms part of the A38, which is the main vehicular route through Worcester city centre. The M5 Motorway is accessed at Junction 6, 3.50 miles to the north east, or Junction 7, circa 3 miles to the south east. The M5 links South West England and Bristol to the West Midlands. In the vicinity of the subject property, Pierpoint Road is the location of a several similar properties configured as student accommodation. Foregate Street forms a town centre leisure pitch, with occupiers including Wetherspoon s, Gala Bingo, Odeon and various local restaurants and bars. The historic Cathedral city of Worcester, with a population of circa 100,000, is located approximately 30 miles south west of Birmingham, 60 miles north east of Bristol and 125 miles north west of London. Prominent industries include tourism, manufacturing and service sector work. The University of Worcester has a student population of circa 10,750 students, which has steadily grown over the past 5-10 years. The University of Worcester, formerly a satellite campus of the University of Birmingham, was granted full university status in According to The Complete University Guide, it is ranked 104 th out of a total of 129 universities within the UK. The main St John s Campus is situated circa 1 mile west of the city centre, however much of the recent investment in the university has been directed at the City Campus which is circa 250 yards west of the subject property. The general location of the property is illustrated on the following Ordnance Survey extracts: 6

11 Not to Scale 7

12 3.2. Description For the purposes of this instruction, we do not intend to describe the forms of construction adopted in detail, but would instead refer you to our photographs within this report and appendices. The subject property comprises a converted studio apartment block providing a total of x17 self-contained studios over three storeys. The building is understood to date back approximately 150 years and was originally constructed as offices. The property was redeveloped into student accommodation approximately 2 years ago, before which it was occupied by a recruitment company. The building is formed of three storeys and is of traditional solid brick construction with stone detailing. We were unable to visually inspect the roof, however from satellite imagery we believe it to be pitched and hipped, timber framed, and covered with tiles. Windows are single glazed timber framed sash units. The various studio apartments comprise an open plan bedroom with kitchenette and en-suite shower room. The rooms are of a variety of shapes and sizes, with the x2 largest studios benefitting from a differentiated lounge area with sofa. We are of the opinion that the largest studios could be marketed as apartments in their own right. Internally, the various studios were found to be of a good condition and specification, commensurate with them being converted approximately two years earlier. Floors are a mixture of carpet and vinyl coverings, with walls and ceilings of painted plaster. Partial tiling is present in bathroom and kitchenettes, with plastic wall cladding noted in showers. A variety of light fittings are present including spotlights and standard domestic lighting. Heating is provided by way of a mixture of wall mounted radiators, served by gas fired boilers, and electric wall mounted heaters. En-suite facilities comprise electric shower, sink and toilet. Kitchenettes have fitted cabinets, sink, integrated electric oven and hobs, integrated fridge and wall mounted extractor unit. We are of the opinion that the size and specification of the rooms is good, when compared with other student apartment schemes we have been involved with. In particular, we note that many students favour self-contained studios with their own kitchen facilities, and a premium is typically payable for these rooms above traditional accommodation with shared kitchen and/or bathroom facilities. The communal areas comprise entrance hall, corridors, stairwell with velux skylight, three boiler rooms, three laundry rooms and bin store. The communal areas were generally found to be in a somewhat dated appearance and in our opinion would benefit from cosmetic improvements. 8

13 Front Elevation Photo - From the West Front Elevation Photo From the East 9

14 3.3. Accommodation A summary of the accommodation is provided in the table below: Description Approximate Gross Internal Floor Area m² sq ft Ground Floor Studios 1-5, laundry, boiler room ,900 (External Bin Store) (12.00) (129) First Floor Studios 6-11, laundry, boiler room ,900 Second Floor Studios 12-17, laundry, boiler room ,900 Total ,700 The above areas have been ascertained from measurements taken during our inspection Condition We have not carried out a building survey and our comments that follow should not be regarded as such. However, the following points are worthy of note: Externally, the property appeared to be in a solid state of repair and no major issues were noted. The property is circa 150 years and is slightly dated in appearance. Wear to brickwork and minor cracking was noted. Windows are somewhat dated in appearance albeit not in need of immediate repair or replacement. Foliage is present in guttering and chimney breasts, which should be removed immediately. Internally, the property appears to be generally in good condition. Communal areas would benefit from some cosmetic improvements, such as replacement of the carpets and re-painting of the walls Statutory Enquiries Highways From enquiries made of the local Highways Authority we understand that the main roads and footpaths in the vicinity of the property are made up and adopted. As such we assume there are no outstanding liabilities pertaining to the property Planning The South Worcestershire Development Plan (SWDP) was adopted in February The subject site is within the following policy areas: Archaeological Sensitive Area Foregate Street & The Tything Conservation Area 10

15 Worcester City Development Boundary Worcester City Green Infrastructure Area None of these policy designations are considered to be valuation significant. The property is not Listed, but is named by Worcester City Council as a Building of Local Significance, in addition to its location within a Conservation Area. We have had sight of the planning application (Ref: P15A0561) which proposes Change of use from Class B1 office use to 17 No. self-contained bedsits. This plan was approved in February 2016 and the property appears to have been converted in accordance with the plans found on Worcester City Council s website. We assume that the property has full consents for its existing use and that there are no formal proposals which would have an adverse effect upon our valuation. Following our enquiries, we are not aware of any issues in this regard Registration/Licences Our report assumes that there have been no undisclosed statutory matters which could have a material effect on our valuation. Unless stated to the contrary in this report, we have assumed that the use of the property complies with all Building Consents, Planning Permissions, Public Health Statutes and Regulations and Bye-Laws Houses in Multiple Occupation (HMO) The subject property is not a licensable HMO Property Taxation We assume that each of the 17 studios are assessed within Band A for Council Tax purposes, with 1, payable for the year per studio. Students are currently exempt from Council Tax payments, although council tax is payable for any empty units Equality Act 2010 & Disability Discrimination It should be noted that our inspection of the premises does not constitute an accessibility audit for Equality Act purposes. There is no lift at the property and there is no level access from the pavement. This is not considered to be valuation significant. On the basis that an accessibility audit for Equality Act purposes has not been undertaken, we would recommend that the occupiers commission an audit to ensure compliance with the relevant legislation and undertake those works identified that are considered to be economically viable The Regulatory Reform (Fire Safety) Order 2005 We have not had sight of any Fire Safety Assessment for this property. We recommend that the occupiers take appropriate measures to ensure that they are in compliance with the legislation. 11

16 Our valuation assumes that a Fire Safety Assessment has not been carried out but that the findings of any such report would not be valuation significant Services Mains services: Heating: Other: We understand that all mains services are connected to the site. Gas fired boilers serving wall mounted radiators. Some electric wall-mounted heaters were noted. Electric showers. Intercom entry. Three laundry rooms with washer and dryer. Wi-Fi throughout. None of the above services were tested during the course of our inspection of the property Site and Ground Conditions Site Area hectares (0.050 acres) Notes on Site The site is rectangular in shape, level throughout and approximately 95% building covered. The building covers the entire site except for a small external bin store/cycle store to the south western corner, which is accessed from the inside of the building. This bin store is secured by a brick wall. Pedestrian entry to the building is from Pierpoint Street to the north. There are no car parking spaces or additional outdoor areas associated with the subject property. The northern site boundary is marked by Pierpoint Street itself. The eastern and southern site boundaries are marked by land and buildings associated with the residential property 14a Pierpoint Street. The western site boundary is marked by the adjacent vacant office property known as 15 Foregate Street (Jenkins House); the buildings are currently interlinked at ground floor level and we are informed that rights of access over part of the adjacent demise will be retained by the subject property. The extent of the site boundaries, as we understand them are shown edged red on the 1:1250 scale Ordnance Survey extract attached within Appendix II Environmental Issues We are not Chartered Environmental Surveyors and we have not been instructed to make any investigations, in relation to the presence or potential presence of contamination or other environmental features in land or buildings or affecting the property. We have not carried out any investigation into past uses, either of the properties or any adjacent land, to establish whether there is any potential for contamination from such uses or sites, and have therefore assumed that none exists. In practice, purchasers in the property market do require knowledge about contamination and other environmental factors. A prudent purchaser of this property would be likely to require appropriate investigations to be 12

17 made to assess any risk before completing a transaction. Should it be established that contamination does exist, or the property is affected by other environmental factors, this might reduce the value now reported. No indications of past or present contaminative land uses or other environmental features were noted during our inspection. Our inspection was of a limited visual nature and we cannot give any assurances that previous uses on the site or in the surrounding areas have not contaminated subsoils or groundwaters. In the event of contamination being discovered or if it transpires there are other environmental features specifically affecting the property, further specialist advice should be obtained. You are advised to ensure that your legal adviser takes up the usual enquiries on your behalf, in respect of possible contamination or environmental issues, prior to entering into any commitments. The building was historically used as an office and is located in Worcester city centre; therefore, there is believed to be limited risk in an environmental regard. However, we have not had sight of any environmental reports Asbestos Our inspection of the property does not constitute a survey in compliance with Government Directives and as such we will not comment in detail on any potential asbestos containing materials believed to be present in the property. We have not had sight of any Asbestos Register for this property, however it is likely that small amounts of asbestos are present, and if further redevelopment is considered the correct care should be taken in removing or containing these materials. Our valuation assumes the findings of an asbestos survey would not be valuation significant Flooding From enquiries made of the Environment Agency website, we understand the agency classifies the subject property as being within an area categorised as: Flood Zone 1 - Land assessed as having a less than 1 in 1,000 annual probability of river or sea flooding (<0.1%). We are not aware of any flooding issues with the property, nor are we aware of any underground culverts or history of flooding within the area Energy Performance Certificates Having searched the Non-Domestic Energy Performance Certificate register, we have ascertained that an EPC was compiled for the subject property in April 2011, which found the property had an energy efficiency rating of 98 within Band D. Substantial changes to the property have occurred since this EPC was compiled. Properties within the UK require an Energy Performance Certificate (EPC) when bought, sold, built or rented. An EPC measures the asset rating of a building in relation to its energy performance. The 2015 Energy Efficiency Regulations, passed in March 2015, set out minimum energy efficiency standards (MEES) for England and Wales. These regulations will make it unlawful for landlords to grant a 13

18 new lease of properties that have an energy performance certificate (EPC) rating below E, from 1 April This is seen as a long stop date and the regulations therefore could be introduced sooner. Furthermore, it is conceivable that in the future, the minimum energy efficiency rating could be more stringent. It is also proposed that from April 2023 this requirement will extend to all premises, including those where a lease is already in place and a tenant is already in occupation Tenure FREEHOLD We have not examined the title documents nor have we been provided with a report on title in respect of the subject property. We therefore assume that the freehold interest is not subject to any onerous restrictions, charges, easements or rights of way and is in all respects good and marketable. We recommend that legal advice is taken to verify our assumptions to be correct Occupational Leases and Other Agreements The property is fully let for the current academic year, 2017/18. There are a variety of rents paid and tenancy lengths vary between 48 and 52 weeks. We are informed that tenancies have historically been granted on an ad-hoc basis, and are being standardised for the 2018/19 academic year Current Tenancies The current tenancy schedule we have been provided with is summarised below. We assume the details are accurate and current. Rents are inclusive of gas, electricity, water and Wi-Fi. Council Tax is not payable by full-time students, albeit it is payable on empty units, which represents a potential liability to the owner of the property. All rental figures in the table are provided on a gross basis. We have analysed the passing rentals as equating to per week, with the majority of rooms being let at 138 per week (circa 600 pcm). Studio Tenancy Total Rent Weekly Rent 1 Let - 48 weeks 6, Let - 48 weeks 6, Let - 48 weeks 8, Let - 48 weeks 7, Let - 48 weeks 6, Let - 52 weeks 7, Let - 48 weeks 6, Let - 48 weeks 6, Let - 48 weeks 7, Let - 52 weeks 7, Let - 48 weeks 6, Let - 52 weeks 8, Let - 52 weeks 8, Let - 48 weeks 6, Let - 48 weeks 7, Let - 48 weeks 6,

19 17 Let - 48 weeks 6, ,795 2, /2019 Academic Year We are informed that 12 tenancy agreements have been granted for the 2018/2019 academic year. Although we have not been provided with details in this regard, these are presumed to be 48 week ASTs. We are informed that rents for 2018/19 are set at 600 pcm with a 50 pcm premium payable for double occupancy. Where non-students are resident, they will be charged council tax. We also assume that the largest rooms, 9 & 15, will attract a further premium. For the purposes of this valuation, we have adopted 138 per week (circa 600 pcm) as the gross Market Rent (MR) for the x15 smaller rooms, and 155 per week (circa 675 pcm) as the gross Market Rent (MR) for the x2 larger rooms. Assuming 48 week tenancies, this calculation produces a total of 114,240 p.a. We have rounded this figure to 115,000 p.a. as our opinion of gross Market Rent (MR). 15

20 4. The Market 4.1. Market Trends & General Comments General Economic and Market Commentary The UK economy expanded by 0.5% in Q4 to December 2017 compared with 0.4% in Q3 and 0.3% in Q1 and Q The Q4 figures were driven by 0.6% growth in the dominant services sectors and in particular business services and finance, and also by 0.6% growth in industry and manufacturing stimulated by strong global recovery and the weak pound. Weaknesses were mainly attributed to consumer-facing sectors such as motor trades, hotels, catering and communications. Construction output is estimated to have fallen by 1% during Q4. ONS preliminary figures show GDP growth for 2017 at 1.8%, compared with 1.9% in 2016 and 2.2% in 2015; this is the slowest since 2012 but a far cry from the slowdown predicted by the pre-brexit vote warnings. In November 2017 the Office for Budget Responsibility (OBR) reduced its forecast that the UK economy will grow by 1.4% in 2018, citing the dampening effects of Brexit, low productivity and low pay growth. At the Davos January 2018 summit, the IMF forecasted 2018 growth in the UK at 1.5%, down from 1.6% previously, the IMF is however frequently over-pessimistic about the UK economy. There remains uncertainty surrounding the stability of the UK Government following the 2017 General Election and the hurdles presented with the Brexit negotiations. However, it appears at present that the strength of the economy is resisting any negative effects and indeed there has been hope that the political weakness and the vagueness surrounding the first stage Brexit Agreement could bring about a more business-friendly soft Brexit deal. Annual UK inflation fell to 3% in December 2017 compared with 3.1% in November and 3% in September and October, this has squeezed real incomes which are growing at only 2.4% (September to November 2017) and has reduced consumers purchasing power. There are indications that the worse is over and that the inflationary surge driven by the Brexit devaluation may be receding. The inflation rate is expected to fall back towards target over 2018 as the impact of sterling s fall starts to fade. The increase in the Bank base rate last August from 0.25% to 0.5% has had negligible impact but is expected to keep inflation under control. With unemployment at only 4.3%, the lowest level since 1975, and employment at an all-time high of 75.3% (32.21 million, Nov 2017), the overall UK economic outlook for 2018 looks positive, if rather subdued Sector Market Commentary The UK Government s decision to increase tuition fees to up to 9,000 per annum in 2012 caused uncertainty in the market with student numbers falling by 7% in September However, this appears to be no more than a one-off structural change with UCAS recording the highest ever intake of undergraduate students for the 2015/16 academic year. Indeed, in 2014 acceptances from the UK increased by +3.2% to 447,500, whilst EU acceptances increased by +7.6% to 26,400 students. Applicants from countries outside 16

21 the EU also increased to 74,600 (+5.7%). These increases are forecasted to continue over the coming years at a rate of 3.5% per annum. The uplift of tuition fees has forced many Universities to try and extend their reach to the overseas markets where higher fees can be charged. Indeed, the UK is already the biggest beneficiary of overseas students in Europe and it is anticipated that in the next decade some 30,000 more international students are expected to join university courses in the UK, second only to Australia, but more than the United States. In this regard the academic record of Universities certainly helps, but purpose built student accommodation is becoming a key factor in attracting students. Established universities such as the Russell Group of Universities are well placed to take advantage of the changing market. Of course poorer located universities that have low university league rankings will increasingly struggle to justify their tuition fees and the lack of adequate accommodation deters some students, particularly those from overseas. A further fee increase to 9,250 for the 2017/2018 academic year has re-invigorated the debate concerning perceived lack of value-for-money in parts of the university sector, and Prime Minister Theresa May announced a review of tuition fees in February The growth in student numbers, coupled with an undersupply of purpose built accommodation in strong university centres, has changed the investment market over recent years, and student accommodation is increasingly becoming a mainstream asset class. Traditionally, institutional investors only looked to long leases or indirect investment but they are now entering the direct let markets. This has led to a compression in yields with domestic and overseas buyers entering what was previously a specialist asset class. Due to increased activity levels there is also a greater transparency in both performance and transactional data, which helps to lower the risks of investing in student accommodation. We have ascertained the following average yield table from the Savills Spotlight UK Student Housing 2017 publication: Lease Nomination Agreement Direct Let Prime London 3.75% 4.25% 4.25% Super Prime Regional 4.25% 4.75% 5.25% Prime Regional 4.50% 5.00% 5.50% Secondary Regional 5.00% 5.75% 6.50% In-line with the wider commercial and residential property markets, yields for accommodation in London are lower than the rest of the country. There is also a clear differential between properties with lease agreements in place with universities, nomination agreements and direct lets. We believe the subject premises to fall into the bottom right quadrant Secondary Regional let direct to students, with an average 17

22 yield of 6.50%. However it is necessary to make an adjustment in our yield selection to reflect the particular strengths and weaknesses of the subject property University of Worcester Commentary The University of Worcester has a student population of circa 10,750 students, which has steadily grown over the past 5-10 years. Formerly a satellite campus of the University of Birmingham, the University of Worcester was granted full university status in According to The Complete University Guide, it is ranked 104 th out of a total of 129 universities within the UK. The main St John s Campus is situated circa 1 mile west of the city centre, however much of the recent investment in the university has been directed at the City Campus which is circa 250 yards west of the subject property. Students at the University of Worcester have a range of accommodation options, including universityowned blocks, private halls such as the subject property, and traditional housing stock. The University guarantees accommodation for first-year undergraduate students in university-owned halls, which comprise approximately 1,000 single occupancy rooms across the various campuses. Rental rates achievable in Worcester vary greatly depending on obvious factors such as specific location, quality of accommodation and length of tenancy granted. Much of the accommodation currently advertised through the Worcester University website comprises cluster rooms within standard student houses of 5-8 rooms with shared kitchen and bathroom facilities. These are not considered comparable to the offering at the subject property. We have summarised some halls / apartment schemes below which we have had regard to in arriving at our opinion of Market Rent (MR): University Halls of Residence : per week The university owns over 1,000 rooms across circa 23 halls, which are priced in-line with each other based on a room grading system. Rents are inclusive of bills and the accommodation is generally well located on, or near to, the university s campuses. The highest standard rooms, En-Suite Extra, are 159 per week and comprise an en-suite bedroom with ¾ size bed and generous shared kitchen and dining facilities. Smaller, or older, en-suite bedrooms are 144 per week. Woodstock Road, Worcester, WR2 5NE per week A double bedroom in a shared house with 5 bedrooms in total. The house has shared kitchen and bathroom facilities. The room is currently offered to rent for 120 per week inclusive. Although a very different proposition to the subject rooms, it has been included here to illustrate the upper end of the market for traditional rooms with shared bathroom and kitchen facilities. Farrier House, Farrier Street, WR1 3BH : per week Farrier House is a privately owned student property with a total of 69 bedrooms. The building is a converted NHS Walk-in Centre and is situated in close proximity to the subject property. The property has 15 en-suite rooms with kitchenette facilities, which are offered to let at 139 per week inclusive of bills. The rooms have 18

23 recently been converted and are assumed to be in good condition. The remaining 54 rooms are en-suite in nature but do not have kitchenette facilities, and are let at 129 per week Rental Analysis Our analysis of the room rates above is that the subject rooms are priced at the top of the market, commensurate with the facilities offered, and the age and quality of the accommodation. 138 per week (circa 600 pcm), is the proposed rate for the rooms set by the vendor, which is supported by the evidence of other schemes above. For the purposes of this valuation, we have adopted 138 per week (circa 600 pcm) as the gross Market Rent (MR) for the x15 smaller rooms, and 155 per week (circa 675 pcm) as the gross Market Rent (MR) for the x2 larger rooms. Assuming 48 week tenancies, this calculation produces a total of 114,240 p.a. We have rounded this figure to 115,000 p.a. as our opinion of gross Market Rent (MR). In arriving at our opinion of net rental, we have deducted costs of 20% which allows for utilities, letting fees, management, maintenance and void costs. This is our opinion of likely gross to net rental conversion in the short term. This produces a rounded net figure of 90,000 p.a Property Specific Comments The subject property comprises a converted studio apartment block providing a total of x17 self-contained studios over three storeys. The premises are situated to the southern side of Pierpoint Street, close to its junction with Foregate Street, within the core of Worcester city centre. Approximately 250 yards to the west of the site is the University of Worcester s City Campus. The subject property is currently fully let and producing a gross rental income of approximately 120,795 p.a. The vast majority of tenancies are by way of 11 month Assured Shorthold Tenancies (AST). The various rental rates being achieved are inconsistent due to the property being let on an ad-hoc basis. The University of Worcester has a student population of circa 10,750 students, which has steadily grown over the past 5-10 years. Formerly a satellite campus of the University of Birmingham, the University of Worcester was granted full university status in According to The Complete University Guide, it is ranked 104 th out of a total of 129 universities within the UK. The rooms were found to be in good condition throughout, having relatively recently been converted from office accommodation. The style of accommodation, comprising x17 studio rooms with kitchenette facilities, is considered to be a key strength of the property. Only a relatively small proportion of the existing stock is of this room type, however demand is believed to be high, especially for postgraduate students and undergraduates in later years of study. The property s location, in close proximity to the amenities of Worcester city centre and the University of Worcester s City Campus, is an additional strength. However, there are competing on-campus properties, and we believe that the rental rates will have to be monitored closely to ensure high occupancy, in addition to the undertaking of a planned scheme of refurbishment, and redecoration on an annual basis. 19

24 A slight concern with the property is the condition of the communal spaces, which were found to be somewhat untidy in appearance. In addition, foliage is present in guttering and chimney breasts, which should be removed immediately. The windows are original timber framed sash units and will require maintenance and periodic refurbishment. The premises are currently being marketed for sale via local agents, Platinum-Property, with an asking price of 1,250,000. The property has been on the market for circa 5 weeks and we understand from the selling agents that good levels of interest have been received including offers near to the purchase price. We are aware that you have agreed a purchase price of 1,235,000, which equates to a Net Initial Yield (NIY) of approximately 6.95% - when deducting purchaser s costs at their prevalent rate Comparable Transactions In arriving at our opinion of Market Value (MV) we have had regard to the following comparable transactions: Address Description Sale Date Sale Price Ty Glyn, High Street, Bangor, Gwynedd, LL57 1YH The subject property comprises a former HM Revenue & Customs building which is believed to date back approximately 60 years. The building was comprehensively reconfigured and refurbished in 2014 to provide a total of 60 self-contained studio apartments, in addition to an office / reception, lounge, games room and storage. Each studio is self-contained in nature and contains a double bed, desk, fitted kitchen and en-suite shower room. We understand that the property produced a net rental income of 337,673 for the 2016/2017 academic year, with approximately 330,000 forecast for the 2017/2018 academic year. It is worth noting that this premises was purchased by an inter-related company of Property Partner. Early ,535,000 (6.95% NIY / 75,583 per studio) Ladybarn House, Manchester The subject property was constructed in 1994 and comprises a direct-let investment containing a total of 117 self-contained studios and 4 retail units. We are unaware of specific rental information. March ,250,000 (NIY 6.50%) 20

25 The Pavilion, Birmingham Comprising a substantial student accommodation block purpose built in The premises are formed of five storeys and contain a total of 147 ensuite bedrooms, 138 of which are studios with the remaining 9 of a one bedroom nature. Situated to the eastern side of William Street, at its junction with Bishopgate Street, in the Five Ways district of Birmingham. The property is strategically located a short distance from the core of Birmingham City Centre, with excellent access offered to the University of Birmingham, Birmingham International College, Aston University, Birmingham City University and Birmingham City Hospital. At the date of sale the premises was producing a gross rental income of approximately 1,025,000 per annum, which equates to 133 per person per week when assuming the property is fully let for the entirety of the year (52 weeks). This was then discounted to a net rental of 766,760 per annum when taking into account utility bills, maintenance, voids, management etc. June ,250,000 (NIY 6.45% / 76,500 per studio) Metchley Hall, Birmingham Comprising a purpose-built student accommodation scheme constructed in September 2011 providing a total of 67 en-suite bedrooms divisible between 58 studios, 7 one bedroom flats and 2 two bedroom flats. The premises are strategically located to the south of the University of Birmingham campus and had had an agreement in place with the University of Birmingham which guaranteed 97% occupancy although this was drawing to a close. The property was producing a total gross rental income of 580,721 per annum (average of 167 per person per week on an all-inclusive basis), with a net February ,050,000 (NIY 6.20% / 105,000 per bed space) 21

26 rental of 460,121 per annum ( 132 per person per week) when taking into account utility bills, maintenance, voids, management etc. Court Mews, Farrier Street, Worcester, WR1 3BZ Comprising a purpose-built student accommodation scheme constructed approximately 2 years ago. The building is divisible into x6 flats, each of which having 8 en-suite bedrooms. The premises are situated approximately 0.10 mile west of the subject site and is within close proximity to the University of Worcester s City Campus. We are For Sale Offers in the region of 3,500,000 We are informed by the selling agents that vendor is seeking offers in excess of 3,000,000. Assuming a purchase at this level informed that the property is producing a gross rental income of 290,400 p.a. by way of 11 month AST s which equates to per week or 546 pcm assuming the premises are fully let. Deducting 20% from the above figure produces a net rental of approximately 232,500 p.a. this equates to a NIY of circa 7.20% or 62,500 per bedroom. We believe the premises to be inferior to the subject property. 22

27 5. Valuation 5.1. Valuation Considerations The studio rooms were found to be in a good condition throughout, having relatively recently been converted from office accommodation. The style of accommodation, comprising x17 studio rooms with kitchenette facilities, is considered to be a key strength of the property. Only a relatively small proportion of the existing stock is of this room type, however demand is believed to be high, especially for postgraduate students and undergraduates in later years of study. The property s location, in close proximity to the amenities of Worcester city centre and the University of Worcester s City Campus, is an additional strength. However, there are competing on-campus properties, and we believe that the rental rates will have to be monitored closely to ensure high occupancy, in addition to the undertaking of a planned scheme of refurbishment, and redecoration on an annual basis. The premises are currently being marketed for sale via local agents, Platinum-Property, with an asking price of 1,250,000. The property has been on the market for circa 5 weeks and we understand from the selling agents that good levels of interest have been received including offers near to the purchase price. We are aware that you have agreed a purchase price of 1,235,000, which equates to a Net Initial Yield (NIY) of approximately 6.95% - when deducting purchaser s costs at their prevalent rate. We believe the purchase price to be reflect of current market conditions and therefore we have adopted this as our opinion of Market Value (MV). If the property was re-offered to market, the likely purchaser would be a specialist student property investor, or regional investor looking to diversify their portfolios. In our opinion a reasonable marketing period is 9-12 months. Assuming the rooms continue to be advertised well in advance of the commencement of the academic year, we believe that occupancy will be close to 100%. The student rental market is highly cyclical and it would be difficult to let the rooms during the academic year. Indeed, the marketing period for the next academic year is now well-advanced, with 12 rooms let for 2018/2019. As explained above, rental demand is believed to be very strong in the short to medium term. The rooms are currently let at an average of 140 per week by way of 48 week tenancies and are let inclusive of utilities. This is considered to be broadly in line with Market Rent (MR), which we have calculated as 138 per room per week for the x15 smaller rooms, and 155 per room per week for the x2 larger rooms Market Rent (MR) As explained above, our opinion of gross Market Rent (MR), assuming full occupancy and 48 week tenancies, is a rounded total of 115,000 p.a. This equates to 138 per room per week for the x15 smaller rooms, and 155 per room per week for the x2 larger rooms. We have deducted costs of 20% which allows for utilities, letting fees, management, maintenance and void costs and is our opinion of likely gross to net rental deduction in the short term. This produces a rounded net rental figure of 90,000 p.a. 23

28 Say 90,000 p.a. (Ninety Thousand Pounds Per Annum)* *Our opinion of Market Rent (MR) is provided on a net rental basis on assumed 48 week Assured Shorthold Tenancies (AST) Market Value (MV) subject to the existing tenancies in place As explained above, we are informed that you have agreed a purchase price of 1,235,000 for the subject property. This equates to a Net Initial Yield of 6.95% on our opinion of net rental value, when accounting for purchasers costs. Given the comparable sales evidence above, the quality of the accommodation and the anticipated demand for the studio apartments in the short to medium term, we are of the opinion that a NIY of 6.75%-7.00% is appropriate. In short, your proposed purchase price is believed to be reflective of Market Value (MV). 1,235,000 (One Million Two Hundred and Thirty Five Thousand Pounds) Having regard to the above commentary we are of the opinion that the value of the unencumbered freehold interest on the bases requested is: 14 Pierpoint Street, Worcester, Valuation Bases Worcestershire, WR1 1TA Market Value (MV) subject to the existing tenancies in place 1,235,000 (One Million Two Hundred and Thirty Five Thousand Pounds) Market Rent (MR) 90,000 p.a.* (Ninety Thousand Pounds Per Annum) *Our opinion of Market Rent (MR) is provided on a net rental basis on assumed 48 week Assured Shorthold Tenancies (AST). We stress the importance of the valuation date as recent experience has shown that property values may change quite significantly over a relatively short period of time. Where statements are made upon the prospect of future growth or fall in rental and/or capital values it must be appreciated that such change may not occur and that values can fall as well as rise. 24

29 5.2. Security for The Loan SWOT Strengths Good location in Worcester city centre, close to a prominent leisure pitch and within a 5 minute walk from the University of Worcester s City Campus. Small lot size of x17 studio apartments means that it should be relatively easy to keep high occupancy rates. Weaknesses Communal areas including entrance and signage would benefit from refurbishment / upgrade. No residents parking albeit this is not unusual for a property of this type with the vast majority of students not requiring a vehicle. All bedrooms are self-contained studios with kitchenettes, which are highly valued by students and attract a premium in terms of rental value. The building is relatively attractive and secure, having intercom access. Opportunities The property should continue to perform well as an investment asset in the medium term, assuming effective management and a planned scheme of maintenance and redecoration is undertaken. Potential for rental growth in the coming years. Threats Competition within Worcester itself, including more modern properties and on-campus purpose-built student schemes. Some uncertainty in the universities sector, including concerns with student funding arrangements. We consider that the property is suitable security bearing in mind the Bank is contemplating a loan, subject to the usual prudent lending criteria. We do not consider that there is any hope value or synergistic value associated with adjoining buildings. We do not believe that there is any higher alternative use value. We consider that the property is marketable and should perform in line with its peers. We do not consider that values will rise in the short to medium term. The building has an estimated economic life in excess of 25 years, assuming appropriate maintenance is undertaken. The building is approximately 150 years, and will require increasing expenditure on maintenance, repair and ultimate renewals. For mortgage regulation purposes, we confirm that more than 40% of the property to be held as security is residential in nature. We are aware that you are proposing to purchase the property at a price of 1,235,000. We have had due regard to this transaction as prima facie evidence of the level the market would pay for the subject premises. As explained above, we believe that this proposed transaction reflects the fair market value of the premises. We consider that a reasonable marketing period in which to achieve our opinion of Market Value (MV) to be 9-12 months. 25

30 5.3. Insurance Reinstatement Estimate You have also requested that we provide an estimate of the likely reinstatement cost for fire insurance purposes. This estimate has been arrived at using an instantaneous basis of value, adopted without regard to future inflation and without provision of loss of rent, any consequential loss or VAT. However, the estimate includes allowances for demolition, site clearance and professional fees. We recommend that a level of cover be effected to the sum of: 800,000 (Eight Hundred Thousand Pounds) 5.4. Signatures David Haugh MRICS Associate Partner, Valuation Services RICS Registered Valuer RICS Number: Ian Naylor MRICS Partner, Valuation Services RICS Registered Valuer RICS Number: th Authorised to sign for and on behalf of Sanderson Weatherall LLP 26

31 sw.co.uk Sanderson Weatherall LLP. Registered in England Company Number OC BIRMINGHAM BRISTOL DARLINGTON EXETER LEEDS LONDON MANCHESTER Registered Office 6 th Floor, Central Square, 29 Wellington Street, Leeds, LS1 4DL NEWCASTLE TEESSIDE BIRMINGHAM BRISTOL DARLINGTON VAT Number EXETER 83 Registered by LEEDS RICS LONDON MANCHESTER NEWCASTLE TEESSIDE BIRMINGHAM BRISTOL DARLINGTON EXETER LEEDS LONDON MANCHESTER NEWCASTLE TEESSIDE BIRMINGHAM BRISTOL EXETER LEEDS LONDON MANCHESTER NEWCASTLE TEESSIDE