Suggested solutions to practical exercises

Suggested solutions to practical exercises Chapter 3 1. 450,000 231.5/189.4 = 550,026.36 = value now if just kept pace with inflation As actual value is 600,000 the real gain in value is 49,973.64 This is 49,973.64 100/ 450,000 = 11.1 real percentage gain from original sum invested 2. Red Company dividend = 0.09 50p = 4.5 pence Red Company yield = 4.5 100/72p = 6.25% Blue Company dividend = 0.06 1 = 6 pence Blue Company yield = 6 100/82p = 7.317% Conclusion is that Blue Company is paying higher yield by 1.067% 3. 18,275 100/ 400,000 = 4.569% 4. 5,244 100/(10,000 8.37) = 6.265% 5. 850,000 100/ 17,000,000 = 5% Chapter 4 1. (1+0.035) 7 = 1.272279 2. 1.0825 12 = 2.589017 250 = 647.25 3. 1.05 8 3,000 = 4,432.37 4. 1.05 10 22,500 = 36,650.13 5. Return on investment minus expected average inflation rate = 4% 2.6% = 1.4% real gain per annum (1.014 7 1) 1,000,000 = 102,213.40 total real gain compared to just keeping pace with inflationary increases = 102,213.40 100/ 1,000,000 = 10.22% total real gain on investment over the 7 years 6. 1.06 19 17,000 = 51,435.19 1.06 15 25,000 = 59,913.95 Total now = 111,349.14

2 Introducing Property Valuation: Suggested solutions to practical exercises 7. 1.08 2 6,500 = 7,581.60 1.07 5 = current value = 10,633.59 8 Amount of 1 for 7 years @ 4.5% = (1+0.045) 7 = 1.36086 50,000 = 68,043 Amount of 1 for 3 years @ 4.5% =(1+0.045) 3 = 1.141166 60,000 = 68,470 Therefore, total saved in account today = 136,513 9. 1.06 4 1.05 5 12,000 = 19,335.31 1.06 1 1.05 5 15,000 = 20,292.88 Total now in account = 39,628.19 10. 1.045 5 1.055 6 50,000 = 85,914.45 1.055 6 70,000 = 96,518.99 In 6 years from now total saved = 182,433.44 11. To calculate future rents it is necessary to allow for compound interest at the estimated annual growth rate to be added to the current market rent. This is found by using the Amount of 1 table. Thus future rents will be: In 5 years = 40,000 A 1 in 5yrs @ 2% = 40,000 1.1041 = 44,164 per annum In 10 years = 40,000 A 1 in 10yrs @ 2% = 40,000 1.219 = 48,760 per annum In 15 years = 40,000 A 1 in 15yrs @ 2% = 40,000 1.3459 = 53,836 per annum 12. PV is the inverse or reciprocal of the Amount of 1 formula. Thus if Amount of 1 (A) is found, the present value for the same time period at the same interest rate will be 1/A or 1/(1+i) n. 13. 1/1.0425 26 = 0.338862 14. 8,500 1/1.03 31 = 3,399.89 15. 220,000 1/1.09 18 = 46,638.62 16. 42,000 1/1.06 8 = 26,351.32 17. PV for 8 years @ 5% = 1/(1+0.05) 8 = 0.67839 100,000 = 67,839 needs to be invested now to reach the target amount required in 8 years from now. 18. PV of 80,000 in 4.5 yrs @ 4.85% = 80,000 1/(1.0485) 4.5 = 80,000/1.237563 = 64,644.57 19. 28 months = 28/12 = 2.333 years 11,500 1/1.04 2.333 = 10,494.43 20. The 300,000 will not be received for 2 years. Thus, its present value today at 9% all-risks yield will be: 300,000 PV 1 in 2 years @ 9% = 300,000 (1/1.09 2 ) = 300,000 0.8417 = 252,510 SAY Sale Price now = 252,500 21. 450,000 1/1.0725 25 = 78,213.19

3 Introducing Property Valuation: Suggested solutions to practical exercises 22. 10,500 1/1.035 3 = 9,470.40 8,000 1/1.035 8 = 6,075.29 12,000 1/1.035 13 = 7,672.85 Total current value = 23,218.54 23. 78,000 100/ 1,000,000 = 7.8% 24. 320,000 100/ 4,000,000 = 8% 25. Amount of 1 per annum for 8 years @ 6% = (1.06 8 1)/0.06 = 9.897468 4,000 = 39,589.87 now in the account 26. 1.04 7 50,000 = 65,796.59 5,000 (1.04 6 1)/0.04 = 33,164.88 Total now in account = 98,961.47 Chapter 5 1. 0.04/(1.04 6 1) = 0.150762 2. 150,000 0.03/(1.03 12 1) = 10,569.31 per annum 3. 50,000 0.045/(1.045 7 1) = 6,235.07 per annum 4. 80,000 0.0325/(1.0325 15 1) = 4,223.09 per annum 5. 75,000 0.0425/(1.0425 18 1) = 2,858.01 per annum 6. Net of tax asf rate = 5.5% (100 40)/100 = 3.3% 45,000 0.033/(1.033 9 1) = 4,375.66 per annum 7. 4,000 (1.0475 6 1)/0.0475 = 27,037.05 saved so far 1.05 6 27,037.05 = 36,232.23 will have been saved in 6 years from now as a result of the money already invested. This leaves a shortfall of 100,000 36,232.23 = 63,767.77 63,767.77 0.05/(1.05 6 1) = 9,374.96 per annum needs to be invested for next 6 years to reach target. 8. This requires use of two formulae or tables from Parry s: the Amount of 1 and the Amount of 1 per annum. 2,500 invested per annum for the past 9 years @ 3.75% will now amount to: A 1 per annum for 9 yrs @ 3.75% 2,500 2,500 (1.0375 9 1)/0.0375 = 26,187.50 This sum will continue to attract interest at 4 per cent before tax per annum for the next 3 years. But, investor pays income tax at 40 per cent. Thus net-of-tax (after deduction of tax) the investor will have 60 per cent of 4 per cent interest left, that is (100 40)/100 = 0.6 multiplier 0.6 4% = 2.4% net asf rate. So, original investment in 3 years time will amount to: 26,187.50 A 1 for 3 yrs @ 2.4% = 28,118.61 Target sum required is 50,000, so shortfall = 21,881.39 Annual investment per annum for next 3 years to meet this target is found by: annual sinking fund (asf) for 3 yrs @ 2.4% 21,881.39 = 0.32546 21,881.39 = 7,121.51 per annum

4 Introducing Property Valuation: Suggested solutions to practical exercises Conclusion: the investor needs to invest 7,121.51 per year for the next 3 years in order to achieve her target of a total sum of 50,000 in 3 years from now. 9. 5% (100 28)/100 = 3.6% net asf rate 60,000 0.036/(1.036 11.333 1) = 4,380.96 per annum 10. (1.13 15 0.13)/(1.13 15 1) = 0.154742 per annum 11. 160,000 (1.11 18 0.11)/(1.11 18 1) = 20,774.86 per annum 12. 250,000 (1.075 25 0.075)/(1.075 25 1) = 22,427.67 per annum 13. 25,000 (1.125 5 0.125)/(1.125 5 1) = 7,021.35 per annum 14. 190,000 (1.085 20 0.085)/(1.085 20 1) = 20,077.48 per annum 15. 240,000 (1.0725 22 0.0725)/(1.0725 22 1) = 22,149.16 per annum/12 = 1,845.76 per month 16. 3,852.74/((1.0875 10 0.0875)/(1.0875 10 1)) = 24,999.99 In other words a 25,000 loan. 17. First find the annual repayments: 15,000 (1.12 6 0.12)/(1.12 6 1) = 3,648.39 per annum Then divide by the annuity 1 will purchase for 3 yrs @ 12% or multiply by the years purchase single rate for 3 yrs @ 12%: 3,648.39/((1.12 3 0.12)/(1.12 3 1)) = 8,762.82 or 3,648.39 (1.12 3 1)/(1.12 3 0.12) = 8,762.82 to repay loan early Chapter 6 1. YP perp number from each of these all risks yields is: a. 5% = 20 b. 6% = 16.667 c. 7% = 14.286 d. 9% = 11.111 e. 11% = 9.091 f. 12.5% = 8 2. ARY% represented by the following YP perp numbers is: a. 5 = 20% b. 8 = 12.5% c. 10 = 10% d. 14.23 = 7% e. 16.667 = 6% f. 25 = 4% 3. 200,000 100/6.75 = 2,962,962.96 SAY = 2,963,000 4. 80,000 100/8.5 = 941,176.47 SAY = 941,200 5. 1,200,000 8/100 = 96,000 per annum

5 Introducing Property Valuation: Suggested solutions to practical exercises 6. Freehold valuation (MR) = 150,000 p.a. YP perp @ 7.5% 13.333 Market value = 2,000,00 YP perp = 100/ARY Client should offer 2 million for the freehold 7. Market rent (MR) = MV ARY/100 Thus anticipated MR = 950,000 6.8/100 = 64,600 p.a. 8. Annual rate of return on property = All-risks yield (ARY) ARY = MR 100/MV Thus: ARY = 175,000 100/ 2.1M = 8.33% 9. (1.09 15 1)/(1.09 15 0.09) = 8.0606884 10. 60,000 YP 3 yrs @ 7.25% = 156,743 SAY = 156,750 11. 87,500 YP 2 yrs @ 11% = 149,846 SAY = 150,000 12. 200,000/ 38,350 = YP for 10 yrs @ x% = 5.215123859 Look in Parry s Tables for YP single rate and across the 10 years rows until a YP of this number or as close to this as possible is found. It will be seen that YP for 10 yrs @ 14% is 5.2161156 and is as close to number sought as to be of marginal difference. Conclusion is that the investment has sold at a yield of close to 14 per cent. 13. YP single rate for 7 yrs @ 7.5% = ((1.075) 7 1)/((1.075) 7 0.075) = 5.2966 Present value of 30,000 p.a. for 7 yrs @ 7.5% = 30,000 5.2966 = 158,898 SAY = 158,900 14. 2,000,000/YP 15 yrs @ 12% = 2M/6.8108645 = 293,648 per annum 15. 1/(1.13 6 0.13) = 3.694757903 16. 1,200,000/YP perp def 3 yrs @ 6% = 1,200,000/13.9936547 = 85,753 per annum 17. 400,000 YP perp def 2 yrs @ 11% = 2,951,354 SAY = 2,9500,000 18. 60,000 YP perp def 3 yrs @ 8% = 595,374 SAY = 595,000 19. YP 12 yrs @ 9% = 7.1607253 PV 4 yrs @ 9% = 0.7084252 YP PV = 5.0728383 = YP for 12 yrs def 4 yrs @ 9% 20. YP single rate for 8 yrs @ 5% = ((1.05) 8 1)/((1.05) 8 0.05) = 6.46321 PV for 2 yrs @ 5% = 1/(1.05) 2 = 0.907029

6 Introducing Property Valuation: Suggested solutions to practical exercises PV = 25,000 p.a. YP for 8 yrs @ 5% PV for 2 yrs @ 5% = 146,558 SAY = 146,500 21. YP 8 yrs @ 7% = 5.9712985 PV 3 yrs @ 7% = 0.8162978 90,000 5.9712985 0.8162978 = 438,692 SAY = 438,500 22. YP 5 yrs @ 5% = 4.3294767 PV 4 yrs @ 5% = 0.8227024 70,000 4.3294767 0.8227024 = 249,330 SAY = 249,500 23. YP 25 yrs @ 8% = 10.6747762 PV 4 yrs @ 8% = 0.73502985 300,000/(10.6747762 0.73502985) = 38,235 per annum 24. asf = 0.032/(1.032 5 1) = 0.187603009 YP = 1/(0.08+0.187603009) = 3.73687875 25. 10,000 YP for 7 yrs @ 10% + 4% = 44,129 SAY = 44,100 26. 26,500 YP for 4 yrs @ 12% + 5% = 75,282 SAY = 75,300 27. Net asf rate = 7% 0.6 = 4.2% 25,250 YP 7 yrs @ 14% + 4.2% (tax 40%) = 72,197 SAY = 72,200 28. Net asf rate = 6% 0.8 = 4.8% 39,000 YP for 5 yrs @ 12% + 4.8% (tax 20%) = 112,352 SAY = 112,400 29. Net asf rate = 4.25% 0.72 = 3.06% Leasehold valuation Rent receivable (market rent)= 25,000 p.a. Less rent payable= 20,000 p.a. Net profit rent= 5,000 p.a. YP for 5 yrs @ 11.5% + 3.06% (tax 28%) 2.65752 Market value (assignment price) = 13,287 SAY = 13,300 30. Net profit rent = 6,500 p.a. YP for 6 yrs @ 12% + 3.5% & tax @ 21% 3.1923 Market value (assignment price) = 20,750 31. YP for 6 yrs @ 9% + 3%= 4.0883492 PV for 3 yrs @ 9% = 0.77218348 YP for 6 yrs @ 9% + 3% (no tax) def 3 yrs = 3.15695571 32. YP for 10 yrs @ 11% + 3% (tax 30%)= 4.2623019 PV for 4 yrs @ 11% = 0.658730974 YP for 10 yrs @ 11% + 3% (tax 30%) def 4 yrs = 2.8077103

7 Introducing Property Valuation: Suggested solutions to practical exercises 33. Net asf rate = 6% 0.6 = 3.6% YP for 4 yrs @ 9% + 3.6% (tax 40%)= 2.0625805 PV for 2 yrs @ 9%= 0.84167999 YP for 4 yrs @ 9% + 3.6% (tax 40%) def 2 yrs = 1.7360323 42,00 = 72,900 Chapter 7 1. a. 4.7665397 b. 4.9733123 c. 4.8369963 2. 25,000 4.1904252 = 104,761 SAY = 104,750 3. 100 (1.0225 4 1) = 9.308% 4. a. 50,000 11.23136 = 561,568 SAY = 561,500 b. = 125,000 p.a. YP perp @ 6.25% 16.620 = 2,077,533 SAY = 2.08 million c. Net asf rate = 4% 0.7 = 2.8% Then using the formula, the YP can be calculated 25,000 YP for 5 yrs @ 9.5% + 2.8% (tax 30%) QIA = 70,371 SAY = 70,400 Chapter 8 1. a. 328 feet 1 inch (328 1 ) or 109.36132 yards b. 1,312 feet 4 inches (1,312 4 ) or 437.4453 yards c. 0.6213881 mile or 1,096.643 yards or 3,280 feet 11 inches (3,280 11 ) d. 3.1069409 miles or 5,468.2159 yards or 16,404 ft 6 in (16,404 6 ) 2. a. 1,345.5328 square feet b. 5,920.3444 square feet c. 13,455.328 square feet d. 123,789.02 square feet e. 59.3032 acres 3. a. 3.81 metres or 38.1 centimetres or 3,810 millimetres b. 5.0799997 metres c. 7.0611997 metres d. 6.4372 kilometres or 6,437.2 metres e. 10.058125 kilometres f. 44.25575 kilometres g. 42.0888 hectares h. 35.39625 cubic metres

8 Introducing Property Valuation: Suggested solutions to practical exercises Chapter 10 1. Estimated market rent = 850 75 = 63,750 p.a. ARY = MR 100/MV ARY = 63,750 100/ 820,000 ARY = 7.77% 2. Comparable site has space for 1.5 33 = 49.5 dwellings Site value per dwelling = 2,000,000/49.5 = 40,404 Subject has space for 1 40 = 40 dwellings @ 40,404 each = 1,616,161 SAY = 1.62 million 3. MR = ARY MV/100 MR = 5.25 3,000,000/100 Market rent = 157,500 per annum /788 sq.m. = 199.87 SAY = 200 per sq.m. p.a. 4. Comparable = 217,000/3,100 = 70 psm Thus rental value of subject = 70 2,750 sq.m. = 192,500 p.a. 5. Comparables: 185,000/600= 308.33 per sq.m. p.a. 265,000/900= 294.44 per sq.m. p.a. Subject property s floor area is mid-way between these two comparables and it appears the market has made a quantum adjustment for their respective sizes. Thus adopt average of the two comparable rents: 750 301.39 per sq.m. = 226,040 SAY market rent of office = 226,000 per annum 6. Analysis of ITZA Zone A 16.5 6 = 99 @ x = 99 Zone B 16.5 6 = 99 @ 0.5x = 49.5 Zone C 16.5 6 = 99 @ 0.25x = 24.75 Zone D 16.5 2 = 33 @ 0 as non NIA = 0 GF Ancillary 16.5 7 = 115.5 @ 0.05x = 5.775 LG Sales = 260 @ 0.1x = 26 Mezz Sales = 270 @ 0.125x = 33.75 1st Flr stock = 302 @ 0.04x = 12.08 TOTAL ITZA (sq.m.) = 250.855 @ 60,000/sq.m Market value= 15,051,300 SAY= 15 million (on assumption VP value or property let at current market rent) 7. The return frontage will add to the value, but there is no single agreed approach on how this should be assessed. It is possible to adopt a diagonal zoning method, working from the front corner of the unit and using an average of the two zone A rental rates. The shop area will then be divided into triangular and trapezium-shaped zones rather than rectangles. Alternatively, zoning can take place from both frontages and highest figure per square metre adopted where zones overlap. However, this can lead to overvaluation. More simply a percentage addition can be made as an end allowance after the unit has been zoned in the conventional fashion from the highest zone A rental frontage. It is also essential the ITZA rental used has been derived in the same way as the method employed to value the subject premises. Possible analysis of floor area (note 10 sq.m. deducted from zone C square measurements to allow for non-nia area):

9 Introducing Property Valuation: Suggested solutions to practical exercises Zone Frontage Depth Area Value ITZA A 12.5 6 75 1 75 B 12.5 6 75 0.5 37.5 C 12.5 4 40 0.25 10 Ground floor ancillary 130 0.05 6.5 Mezzanine floor sales 105 0.125 13.125 1st floor ancillary 285 0.04 11.4 Lower ground sales 170 0.1 17 Lower ground ancillary 150 0.04 6 ITZA = 176.525 Add end allowance for Return frontage @ say 10% 17.6525 Total ITZA = 194.2 Total rent p.a. SAY = 350,000 Rent psm ITZA p.a. = 1,802.47 This rental assessment would apply if the subject was on the same terms as the comparables. However, there are differences that require further adjustment: Discount for longer lease length of 21 years= 5% Increase for longer rent review periods = +3% Reduction for restrictive user clause = 10% Total of these adjustments = 12% Reduce calculated rental by this amount = 350,000 0.88 = 308,000 Conclusion: recommended rent at review around 308,000 per annum. 8. A/E = cost of work/yp for number of years over which cost is to be written off. = 200,000/YP 20 yrs @ 11% = 200,000/7.9633 = 25,115 per annum Such a calculation is needed to calculate annual depreciation for accounts purposes or to find out what a capital expenditure would equate to on an annual basis. It will be used when finding the equivalent rent or net effective rent for a property (as defined in RICS Red Book Valuation Information Paper No. 8: The Analysis of Commercial Lease Transactions) from its headline rent. The headline rent is the sum payable by the tenant, but this ignores the value of any incentives incorporated in the lease agreement. For comparison purposes and to find the true market rent it is necessary to find the equivalent rent (see Chapter 16 for more information). 9. a. 175,000/YP for 7 yrs @ 6% = 31,348.63 per annum b. 185,000/YP for 5.5 yrs @ 7.25% = 41,976.92 per annum c. Net asf rate = 5% 0.72 = 3.6% 225,000/YP for 8 yrs @ 9% + 3.6% & tax @ 28% = 54,651.38 per annum 10. Annual equivalent = Capital sum/yp = 125,000/YP for 15 yrs @ 8%+3%(tax 40%) AE = 125,000/5.8958 = 21,202 per annum Chapter 11 1. YP perp deferred 2 yrs @ 6.2% = 1/((1.062) 2 0.062) = 14.3007 PV = 90 750 sq.m. YP perp def 2yrs @ 6.2% = 965,297 SAY value = 965,000

10 Introducing Property Valuation: Suggested solutions to practical exercises 2. Leasehold valuation Rent receivable (market rent)= 32,000 p.a. Less rent payable= 25,000 p.a. Net profit rent = 7,000 p.a YP for 4 yrs @ 9.50% + 3.0% & tax @ 40% 2.027 Market value (assignment price)= 14,188 SAY = 14,200 Freehold valuation = 25,000 p.a. YP for 4 yrs @ 7.00% 3.387 84,680 = 32,000 p.a. YP perp def 4 yrs @ 8.00% 9.188 = 294,012 Market value = 378,692 SAY = 379,000 Freehold ARY on reversion assumed at 1.5 per cent lower than leasehold ARY as better investment yield reduced by 1 per cent to reflect additional security of income compared to market rent 3. Net asf rate = 5% 0.72 = 3.6%. Say round down to 3.5%. Leasehold valuation Rent receivable (market rent)= 250,000 p.a. Less rent payable= 200,000 p.a. Net profit rent= 50,000 p.a. YP for 5 yrs @ 8.50% + 3.5% & tax @ 28% 2.907 Market value (assignment price) = 145,348 SAY = 145,000 4. Net asf rate = 3.5% 0.8 = 2.8%. SAY round down to 2.5% as next nearest in tables. Leasehold valuation Rent receivable (market rent)= 100,000 p.a. Less rent payable= 50,000 p.a. Net profit rent= 50,000 p.a. YP for 5 yrs @ 7.00% + 2.5% & tax @ 20% 3.249 Market value (assignment price) = 162,439 SAY = 162,500 5. Analysis of the comparables: Bannister House: 200/sq.m. but slightly smaller than subject although has 15 year term + 5-yearly rent reviews Coe House: 179.10/sq.m. but somewhat larger than subject and a straight 5 year term Thus use say 195/sq.m. as current MR on subject property; giving market rent of 321,750 per annum Freehold valuation of subject 250,000 p.a. YP for 3 yrs @ 6.5% 2.648 = 662,119 321,750 p.a. YP perp def 3 yrs @ 7.5% 10.733 = 3,453,281 Market value = 4,115,400 SAY = 4,110,000

11 Introducing Property Valuation: Suggested solutions to practical exercises Initial yield = 250,000 100/(MV+purchase costs) Assume costs @ 6% then initial yield = 250,000 100/ 4,356,600 = 5.74% Reversionary yield = 321,750/MV = 7.83% Equivalent yield found from tables, formula or simple DCF/interpolation: Years Income YP = DCF 1-3 250,000 4-perp 321,750 Calculated at 7.5% and say 6.5% and then results interpolated to find yield. Using conventional methods, this can be achieved as follows: Freehold valuation @ trial rate equivalent yield of 7.5% 250,000 p.a. YP for 3 yrs @ 7.5% 2.601 = 650,131 321,750 p.a. YP perp def3 yrs @ 7.5% 10.733 = 3,453,281 Market value = 4,103,412 SAY = 4,100,000 Freehold valuation at trial rate equivalent yield of 6.5% 250,000 p.a. YP for 3 yrs @ 6.50% 2.648 662,119 321,750 p.a. YP perp def 3 yrs @ 6.50% 12.736 = 4,097,853 Market value = 4,759,972 SAY = 4,760,000 True or Target MV found from above = 4.11 million MV @ 7.5% yield = 4.1 million MV @ 6.5% yield = 4.76 million Difference between MVs at two trial rates = 0.66 million Difference between target MV and MV at higher trial rate = 0.01 million Difference between the two trial rates = 1% Thus equivalent yield = 7.5% ((0.01 1%)/0.66) = 7.5% 0.015% = 7.48% To prove this is correct, insert it back into a conventional valuation: Freehold valuation 250,000 p.a. YP for 3 yrs @ 7.48% 2.601 650,368 321,750 p.a. YP perp def 3 yrs @ 7.48% 10.768 3,464,447 Market value = 4,114,815 SAY = 4,110,000

12 Introducing Property Valuation: Suggested solutions to practical exercises 6. First, assess the current market rent for each property: Unit 1 measures 1,000 sq.m. Unit 2 measures 2,000 sq.m. Unit 3 measures 1,500 sq.m. Comparables indicate rentals of 55 to 60 per sq.m. for similar units. Quantum adjustments to allow for differing sizes of units normally show higher rentals per sq.m. for smaller floorspaces. Thus adopt: 60 per sq.m. for unit 1, 55 for unit 2 and 57.50 for unit 3. Estimated market rents: Unit 1 = 60,000 p.a. Unit 2 = 110,000 p.a. Unit 3 = 86,250 p.a. Freehold valuation of Unit 1 50,000 p.a. YP for 1.5yrs @ 7.00% 1.379 68,934 60,000 p.a. YP perp def 1.5yrs @ 7.00% 12.907 = 774,422 Market value = 843,356 SAY = 843,000 Note: term yield not reduced as term income only marginally more secure than reversionary income (i.e. rent in term is only 10,000 less and is still 83 per cent of market rent) so little difference in risk involved. Freehold valuation of Unit 2 100,000 p.a. YP for 1yrs @ 7.00% 0.935 93,458 110,000 p.a YP perp def 1yrs @ 7.00% 13.351 = 1,468,625 Market value = 1,562,083 SAY = 1,562,000 Note: term yield not reduced as term rent only slightly more secure than reversion being only 10,000 (approximately 9 per cent) lower. Freehold valuation of Unit 3 85,000 p.a. YP for 0.33yrs @ 7.00% 0.315 26,811 86,250 p.a. YP perp def 0.33yrs @ 7.00% 13.970 = 1,204,937 Market value = 1,231,749 SAY = 1,232,000 Note: no adjustment made to term yield as term rent is virtually same as reversionary rent and is thus considered an equal risk rate.

13 Introducing Property Valuation: Suggested solutions to practical exercises As remaining term is so short, a simpler valuation would be: (market rent) = 86,250 p.a. YP perp @ 7% 14.286 Market value = 1,232,167 SAY = 1,232,000 Total value of freehold interest in the estate held by ABC Investments = Unit 1 MV = 843,000 Unit 2 MV = 1,562,000 Unit 3 MV = 1,232,000 Total market value SAY = 3.64 million Leasehold valuation of XYZ s interest in Unit 1 Rent receivable (market rent) 60,000 p.a. Less rent payable 50,000 p.a. Net profit rent 10,000 p.a. YP for 1.5yrs @ 8.25% + 3.0% & tax @ 21% 1.087 Market value (assignment premium) = 10,870 SAY = 11,000 Leasehold valuation of RST s interest in Unit 2 Rent receivable (market rent) 110,000 p.a. Less rent payable 100,000 p.a. Net profit rent 10,000 p.a. YP for 1yrs @ 8.25% + 2.5% & tax @ 28% 0.68 Market value (assignment premium) = 6,800 Leasehold valuation of DDP s interest in Unit 3: The rent paid by the tenant is virtually the market rent and there are only four months left to run on the lease, so the lease will have no saleable value. No valuation required. 7. Analysis of comparables The basis of this is to obtain a basic breakdown ( per sq.m.). Then see how the comparable differs from the subject property and adjust accordingly. The location of all the comparables is the same as the subject building (as they are in the same road) and so no adjustment is needed for this aspect. Features of subject property: Three-storey building, but this does not pose any special problem as there is a lift. Built 15 years ago if not refurbished this would be viewed as an older building and could be more difficult to let on the open market. Secondary office district so it is necessary to be looking for secondary ARYs not prime. Occupied by a PLC, so quite a good covenant, which means a slightly lower yield, could be accepted. Maintained to a good standard and has double-glazing, lift and central heating, so reasonably good for its age. Ten years without review means that this is not so good from the landlord s viewpoint as, although the income may be quite safe, there would also be no increases to keep pace with inflation. IRL (internal repairing lease) terms mean the landlord has to pay for external and structural repairs, insurance and management.

14 Introducing Property Valuation: Suggested solutions to practical exercises Analysis of Ascot House comparable 85,000/945 sq.m = 89.95 per sq.m. p.a. Differences to subject Adjustment Built 4 years later Nil; similar age 25 yr term Add say 5% to this comparable rent as such a long term is not favoured by tenants nowadays and the 10 year periodleft on the subject lease is more attractive Rent reviews No rent reviews are mentioned, so assume they are standard 5-yearly. Add say 5% to allow for no review on subject property which would lead to landlord seeking higher rent to offset loss of income over next 10 years Size/quantum Comparable is 26% larger; say add 3% for quantum for subject FRI terms Nil; rent on review/lease renewal of subject will either be on FRI terms OR IRL less outgoings which will = net FRI rental value anyway This year letting date Nil; assume no significant change in market since let Air conditioning Better than subject; say deduct 10% Adjusted comparable: for subject, the rental value needs adjustment by say +3% = 92.65/sq.m. Analysis of Sandown House comparable 102,400/1,170 sq.m = 87.52 per sq.m. p.a. Differences to subject Adjustment 5-storey building 2 storeys more than subject. Not a drawback providing the building has a lift. This is not stated, but can be assumed Built 4 years later Nil; similar age Lease term Lease has 10 years unexpired; the same as the subject building, so nil adjustment 5-yrly RRs (assumed) Add say 5% to allow for no review for 10 years on subject Size/quantum Comparable 56% larger; say add 5% for quantum for subject FRI terms Nil; rent on review/lease. Renewal of subject will either be on FRI terms or IRL less outgoings will = net FRI rental value anyway This year rent review Nil; assume no significant movement of market since let Adjusted comparable: for subject, the rental value needs adjustment by say 10% = 96.27/sq.m. In addition, the freehold sale last week provides evidence of the ARY. The rental receivable by the landlord is the market rent as at this year, so assume is up-to-date if market not changed since letting.thus: ARY = ( 102,400/ 930,700) 100 = 11% i.e. this is the freehold ARY when MR is payable for this building. Analysis of Chester Court comparable 73,750/680 sq.m = 108.45 per sq.m. p.a. Differences to subject Adjustment Built 1 year later Nil; similar age Lease term not known Assume as new lease this will be for currently common 5-year term for an older building; as subject lease is twice this length and less attractive to a tenant say deduct 5% 5-yrly RRs (assumed) Add say 5% to allow for no review for 10 years on subject Size/quantum Comparable 28% smaller; say deduct 5% for quantum allowance on subject IRI terms As rent on review/lease renewal of subject will either be on FRI terms or IRL less outgoings will = net FRI rental value, theoutgoings on this comparable need to be deducted; say deduct 15% (10% external & structural repairs + 5% management) Let this year Nil; current market evidence providing no significant change in market since let Poor condition Subject is better; say add 10% Adjusted comparable: for subject, the rental value needs adjustment by say 10% = 97.60/sq.m.

15 Introducing Property Valuation: Suggested solutions to practical exercises Summary of comparable analysis All the above are only suggestions on how percentage adjustments could be allocated. There is considerable room for differences in opinion on the percentages used and the method of analysis used. Also quite a lot more information needs to be found on each comparable, if possible, to ascertain why the figures differ between each building and what qualitative factors this may be due to it is never possible to have too much evidence! Unadjusted comparables show: 89.95, 87.52 and 108.45. Straight average of these figures is 95.30/ sq.m. although one comparable is considerably out-of-line with the others and there is a temptation to disregard this and just average the remaining two but this would be wrong! Having made qualitative and quantitative adjustments, the adjusted comparables are: 92.65, 96.27 and 97.60. These are a lot more consistent and logical and the straight average of these is 95.50/sq.m. Two of the comparables are higher than the strict average, thus the figure of 96.00/sq.m. will be adopted for the subject building. market rent valuation = 750 sq.m. 96.00 = 72,000 per annum Capital valuations The all-risks yields will need to be used in the calculations, based on any market evidence that can be obtained. The best and most direct evidence is provided by the sale of Sandown House last week.taking account of this evidence and the location and secondary nature of property, etc., an ARY of 11% for the freehold and 13% for the leasehold calculations can be adopted (i.e. 2% added to freehold for leasehold in absence of any direct leasehold yield evidence). a. Existing freehold valuation Gross income 70,500 p.a. Less outgoings: Ext/struct reps @ say 10% MR 7,200 Insurance 6,000 Management @ 5% rent 3,525 16,725 p.a. 53,775 p.a. YP for 10 yrs @ 10% 6.1445 330,420 Reversion 72,000 p.a. YP perp def 10 yrs @ 11% 3.2016 230,515 Capital value = 560,935 SAY = 561,000 b. Existing leasehold valuation Rent receivable (MR on FRI terms) 72,000 p.a. Add outgoings 16,725 p.a. Rent receivable on IRL terms 88,725 p.a. Less rent payable 70,500 p.a. Net profit rent 18,225 p.a. YP 10 yrs @ 13% + 3% (tax 28%) 3.982 = 72,565 SAY = 72,500 c. Freehold valuation with VP (MR) 72,000 p.a. YP perp @ 11% 9.0909 = 654,545 SAY= 654,500 Freehold with VP minus (present freehold + present leasehold) = 654,500 - ( 561,000 + 72,500) = 21,000

16 Introducing Property Valuation: Suggested solutions to practical exercises Thus there is a small potential marriage value from the merging of the leasehold and freehold interests (covered in Chapter 16). This is the release of potential latent additional value through the tenant purchasing the freehold and then being in possession of a property that could sell for more than the combined total of the present freehold and leasehold interests. 8. Valuation of head leasehold interest Rent receivable= 47,500 p.a. Less rent payable= 1,500 p.a. Net profit rent = 46,000 p.a. YP 2 yrs @ 11% + 4.5% (tax 30%) 1.2368 = 56,893 Reversion Rent receivable: 1,000sm @ 60 = 60,000 p.a. Less rent payable= 1,500 p.a. Net profit rent = 58,500 p.a. YP 20 yrs def 2 yrs @ 12% + 4.5% (tax @ 30%) 4.8157 = 281,718 Capital value = 338,611 SAY = 338,500 Notes yield 1 per cent lower to reflect term rent receivable is much lower and more secure than reversion rent. The subject property has a standard office content of circa 10 per cent GIA. A much higher office content could warrant a higher overall rental rate per sq.m. or a valuation on an excess office basis, where comparables have been obtained from buildings with approx. 10 per cent content. This excess approach would be to value all office content in excess of 10 per cent at a higher rate per sq.m. (usually 1.5 or 2 times the standard industrial/warehouse rental rate). Valuation of sub-leasehold interest Rent receivable (FRI terms)= 60,000 p.a. Less Rent payable (FRI terms)= 47,500 p.a. Net profit rent= 12,500 p.a. YP 2 yrs @ 12%+4.5% (tax 21%) 1.3532 Capital value = 16,915 SAY= 17,000 On next rent review, sublessee will pay MR and will have no profit rent; value of interest is thus over next 2 years only. 9. Head leasehold valuation Rent Receivable 225,000 p.a. Less Rent Payable 25,000 p.a. Net profit rent 200,000 p.a. YP for 4 yrs @ 8.00% + 2.5% & tax @ 28% 2.413 = 482,545

17 Introducing Property Valuation: Suggested solutions to practical exercises Reversion Rent receivable 240,840 p.a. Less rent payable 25,000 p.a. Net profit rent 215,840 p.a. YP for 12 yrs @ 8.00% + 2.5% & tax @ 28% 5.535 PV 4 yrs @8.00% 0.735 = 878,082 Market value (assignment price) = 1,360,627 SAY = 1,361,000 10. Comparable rent = 67.50 per sq.m. p.a. However, this property is considerably larger than the subject, so adjust for quantum and adopt say 70 for subject premises: 70 1,300 = 91,000 per annum. Freehold valuation = 60,000 p.a. YP for 7 yrs @ 8.00% 5.206 312,382 = 91,000 p.a. YP perp def 7 yrs @ 9.00% 6.078 553,112 Market value = 865,495 SAY = 865,000 Equivalent yield approach: freehold valuation = 60,000 p.a. YP for 7 yrs @ 8.91% 5.048 302,891 = 91,000 p.a. YP perp def 7 yrs @ 8.91% 6.175 561,939 Market value = 864,831 SAY = 865,000 Nominal equivalent yield = 8.91% (annually in arrear) Hardcore or layer approach: freehold valuation Hardcore = 60,000 p.a. YP perp @ 8.38% 11.933 715,990 Top slice = 31,000 p.a. YP perp def 7 yrs @ 10.38% 4.826 149,600 Market value = 865,590 SAY = 865,000

18 Introducing Property Valuation: Suggested solutions to practical exercises Freehold valuation: quarterly in advance basis = 60,000 p.a. YP for 7 yrs @ 8.45% 5.395 323,714 = 91,000 p.a. YP perp def 7 yrs @ 9.45% 5.953 541,686 Market value = 865,399 SAY = 865,000 Equivalent yield approach QIA: Freehold valuation = 60,000 p.a. YP for 7 yrs @ 9.36% 5.260 315,623 = 91,000 p.a. YP perp def 7 yrs @ 9.36% 6.041 549,767 Market value = 865,389 SAY = 865,000 True equivalent yield = 9.36% (quarterly in advance) The ARY has been found from annually in arrear analysis of comparables and must be reused in the same way so that devaluation and revaluation are on the same basis. The yields used in each of the other valuations should similarly be derived from analysis using the same approach as the valuation method. For example, a quarterly in advance yield must be found by both analysing and then valuing using this approach. The above uses an adjusted QIA yield to find the same capital value calculated from the conventional approach. If the same ARY was used as found from annually in arrear analysis, an overvaluation will result. Freehold valuation: quarterly in advance basis but using unadjusted annually in arrear ARY = 60,000 p.a. YP for 7 yrs @ 8.00% 5.464 327,851 = 91,000 p.a. YP perp def 7 yrs @ 9.00% 6.416 583,890 Market value = 911,741 SAY = 912,000 11. An insurance assessment is needed to find the annual premiums that will be payable: Site clearance and preparation SAY 30,000 Construction costs: 1,550 1300 2,015,000 Professional fees @ say 12% costs 241,800 = 2,286,800 Cost of alt accom for say 2 yrs rebuilding period for 1,220 sq.m. @ 130 psm MR 158,600 2,445,400 Plus allowance for inflation @ say 3% 73,362 Insurance sum 2,518,762 @ 35p per 100 = 8,816 p.a. premium

19 Introducing Property Valuation: Suggested solutions to practical exercises Freehold valuation Gross income 110,000 p.a. Less outgoings: Repairs & decs @ 5% MR = 7,930 Insurance = 8,816 Management @ 4% rent= 4,400 = 21,146 p.a. 88,854 p.a. YP for 5 yrs @ 5.50% 4.270 379,432 158,600 p.a. YP perp def 5 yrs @ 6.50% 11.229 1,780,909 Market value = 2,160,341 SAY = 2,160,000 Notes: Rent will be increased to MR in 5 years time when lease expires. Rent on reversion can be taken to FRI basis as even if relet on internal repairing terms the net figure after deduction of outgoings should equal FRI MR. ARY on term reduced by 1 per cent as term income lower than reversionary income and thus more secure. 12. Leasehold valuation Rent receivable (market rent on FRI terms) = 85,000 p.a. Add outgoings = 9,550 p.a. Market rent on existing lease terms = 94,550 p.a. Less rent payable = 55,000 p.a. Net profit rent = 39,550 p.a. YP for 4 yrs @ 10.00% + 3.0% & tax @ 28% 2.315 Market value (assignment price) = 91,555 SAY = 92,000 Freehold valuation Gross income = 55,000 p.a. Less outgoings: Repairs & decs @ 5% MR = 4,250 Insurance @ 3% MR = 2,550 Management @ 5% rent = 2,750 = 9,550 p.a. = 45,450 p.a. YP for 4 yrs @ 7.50% 3.349 = 152,227 = 85,000 p.a. YP perp def 4 yrs @ 8.50% 8.489 = 721,574 Market value = 873,801 SAY = 874,000 13. When comparables and subject property to be valued are on different lease terms, adjustments must be made to bring them all on to a common basis, otherwise the comparison is not like-with-like. It is usually simpler to convert everything to FRI (full repairing and insuring) terms, as these are the most common.

20 Introducing Property Valuation: Suggested solutions to practical exercises a. The landlord will view the rent collected as not net and need to deduct outgoings from it for IRT this will be external and structural repairs/decorations, insurance and management. b. From the tenant s viewpoint it is necessary to consider what the building is worth if it was sublet at MR on IRT. A prospective tenant would be prepared to pay more than the MR calculated on FRI terms since they are not responsible for some of the matters a tenant on FRI would be. That is they are saving money on not having to pay out for those outgoings and this would be reflected in them being prepared to pay more rent in the first place. This can be equated to the MR on FRI terms PLUS the value of the outgoings they are NOT responsible for, which are those the landlord IS responsible for summarised above. Once this is done the remaining figure will be the MR on IRT basis. Even better, of course, is to find comparables also let on IRT basis and then it is a more straightforward comparison! 14. Valuation of leasehold interest in high street shop Rent receivable (market rent on FRI terms) 70,000 p.a. Add outgoings Repairs & decs @ 5% MR = 3,500 Insurance @ 3% MR= 2,100 Management @ 5% rent = 2,500 8,100 p.a. Market rent on existing lease terms 78,100 p.a. Less rent payable 50,000 p.a. Net profit rent 28,100 p.a. YP for 4 yrs @ 7.50% +2.5% & tax @ 28% 2.442 Market value (assignment price) = 68,625 SAY = 69,000 Notes: Outgoings are added back to bring comparable value in line with internal repairing only terms as under existing lease. Spot figures or assumptions on percentage of rental value need to be adopted as no other evidence available. Chapter 12 1. Equated yield approach: freehold valuation Assumed annual rental growth rate = 3.00% Equated yield (annually in arrear) = 10.00% True equated yield (quarterly in advance) = 10.66% Years Income p.a. PV factor DCF 1 to 5 80,000 3.791 303,263 6 to 10 92,742 2.354 218,294 11 to 15 107,513 1.462 157,132 16 to 20 124,637 0.907 113,106 21 to 25 144,489 0.563 81,416 26 to perp* 167,502 1.231 206,130 GPV = 1,079,342 SAY = 1,080,000 * Income capitalised @ ARY of 7.5% found from formula in Secton 12.4 to reflect continued future rental growth but then discounted at equated yield. 2. Equated yield approach: freehold valuation Assumed annual rental growth rate = 2.50% Equated yield (annually in arrear) = 9.00% True equated yield (quarterly in advance) = 9.53%

21 Introducing Property Valuation: Suggested solutions to practical exercises Years Income p.a. PV factor DCF 1 to 3 420,000 2.531 1,063,144 4 to 6 452,294 1.955 884,065 7 to 9 487,071 1.509 735,150 10 to 12 524,522 1.165 611,320 13 to 15 564,853 0.900 508,347 16 to perp* 608,285 4.128 2,511,240 GPV = 6,313,265 SAY = 6,316,000 * Income capitalised @ ARY of 6.65% found from Formula 2.1 to reflect continued future rental growth but then discounted at equated yield. 3. a. Using formula in Section 12.4, implied annual rental growth = 2.29% per annum. b. Using equated yield formula the all risks yield = 5.86%. 4. Freehold valuation = 50,000 p.a. YP for 3 yrs @ 7.00% 2.624 131,216 = 75,000 p.a. x YP perp def 3 yrs @ 8.00% 9.923 744,218 Market value = 875,434 SAY = 875,000 Equated Yyeld approach: freehold valuation Assumed annual rental growth rate = 3.00% Equated yield (annually in arrear) = 10.50% True equated yield (quarterly in advance) = 11.23% Years Income p.a. PV factor DCF 1 to 3 50,000 2.465 123,256 4 to 8 81,955 2.774 227,347 9 to 13 95,008 1.684 159,979 14 to 18 110,140 1.022 112,574 19 to 23 127,682 0.620 79,216 24 to perp* 148,019 1.258 186,164 GPV = 888,537 SAY = 889,000 * Income capitalised @ ARY to reflect continued future rental growth but then discounted at equated yield. Shortcut DCF valuation Current rent= 50,000 p.a. YP for 3 yrs @ 10.5% 2.4651235 = 123,256 plus Market rent = 75,000 p.a. A 1 for 3 yrs @ 3% 1.092727 = 81,955 YP perp @ 8% 12.5 PV for 3 yrs @ 10.5% 0.7472316 = 765,492 Market value = 888,748 SAY = 889,000

22 Introducing Property Valuation: Suggested solutions to practical exercises The three appraisals produce slightly different values, but a variation of 14,000 at this value level is comparatively small. Assume final value adopted is around mid-way between the conventional and DCF valuations, say at 880,000, and then the variation between the appraisals is less than 1.6 per cent. 5. 72,000 p.a. YP for 2 yrs @ 7% 1.808 130,177 84,000 p.a. YP perp def 2 yrs @ 8% 10.717 900,206 Market value = 1,030,383 SAY = 1,030,000 Assumed annual rental growth rate = 3% Equated yield = 10.5% (annually in arrear) Years Income p.a. PV factor DCF 1 to 2 72,000 1.724 124,125 3 to 7 89,116 3.065 273,170 8 to 12 103,309 1.861 192,224 13 to 17 119,764 1.129 135,264 18 to 22 138,839 0.686 95,182 23 to perp 160,953 1.390 223,686 GPV = 1,043,651 SAY = 1,044,000 Again, there is some relatively small variation in values between the different approaches. The difference of 14,000 is not too significant at this value level (less than 1.36 per cent of lowest value found). Conclusion: freehold market value is around 1.037 million. 6. The two open market comparables need to be analysed to arrive at the estimated market rent (MR) for the subject building now. Macduff House = 300000/1500sq.m. = 200/sq.m. p.a. Macbeth House = 575000/3200sq.m. = 179.69/sq.m. p.a. Interpolating between these figures to take into account quantum adjustment as floor area of subject property is 2,200 sq.m., an estimated MR of 191.60/sq.m. is taken. With 10 years until rent review on the subject property, against five-yearly pattern on comparables, it is possible to argue that a small increase in this amount could be used. Note when current lease expires, it is assumed building will be relet on normal five-yearly rent reviews and this is reflected in the DCF analysis. Market rent of subject building = 2200 191.60 = 421,520 SAY = 421,500 p.a. a. Freehold valuation = 320,000 p.a. YP for 3 yrs @ 7.00% 2.624 839,781 = 421,520 p.a. YP perp def 3 yrs @ 8.00% 9.923 4,182,702 Market value = 5,022,483 SAY = 5,022,000

23 Introducing Property Valuation: Suggested solutions to practical exercises b. Equivalent yield approach: freehold valuation = 320,000 p.a. YP for 3 yrs @ 7.98% 2.578 824,969 = 421,520 p.a. YP perp def 3 yrs @ 7.98% 9.953 4,195,515 Market value = 5,020,484 SAY = 5,022,000 Nominal equivalent yield = 7.98% (Annually in arrear) True equivalent yield = 8.39% (Quarterly in advance) Equated yield approach: freehold valuation Assumed annual rental growth rate = 2.50% Equated yield (annually in arrear) = 10.18% True equated yield (quarterly in advance) = 10.86% c. Years Income p.a. PV factor DCF 1 to 3 320,000 2.479 793,278 4 to 8 453,931 2.821 1,280,609 9 to 13 513,581 1.737 892,323 14 to 18 581,070 1.070 621,767 19 to 23 657,427 0.659 433,244 24 to perp* 743,819 1.344 1,000,031 GPV = 5,021,252 SAY = 5,022,000 * Income capitalised @ ARY to reflect continued future rental growth but then discounted at equated yield. 7. Freehold valuation 250,000 p.a. YP for 3 yrs @ 6% 2.673 = 668,253 300,000 p.a. YP perp def 3 yrs @ 7% 11.661 = 3,498,419 Market value = 4,166,672 SAY = 4.2 million Equivalent yield approach: freehold valuation 250,000 p.a. YP for 3 yrs @ 6.95% 2.627 = 656,679 300,000 p.a. YP perp def 3 yrs @ 6.95% 11.762 = 3,528,532 Market value = 4,185,211 SAY = 4.2 million

24 Introducing Property Valuation: Suggested solutions to practical exercises Nominal equivalent yield = 6.95% True equivalent yield = 7.26% (quarterly in advance) Hardcore or layer approach: freehold valuation Hardcore 250,000 p.a. YP perp @ 6.70% 14.925 = 3,731,343 Top slice 50,000 p.a. x YP perp def 3 yrs @ 8.70% 8.949 = 447,468 Market value = 4,178,811 SAY = 4.2 million Hardcore or layer approach using equivalent yield: Freehold valuation Hardcore 250,000 p.a. YP perp @ 6.95% 14.388 3,597,122 Top slice 50,000 p.a. YP perp def 3 yrs @ 6.95% 11.762 588,089 Market value = 4,185,211 SAY = 4.2 million Equated yield approach: freehold valuation Annual rental growth rate = 3 %; equated yield = 9.6 % Years Income p.a. PV factor DCF 1 to 3 250,000 2.504 626,117 4 to 8 327,818 2.909 953,635 9 to 13 380,031 1.839 699,062 14 to 18 440,560 1.163 512,447 19 to 23 510,730 0.736 375,649 24 to perp* 592,076 1.735 1,027,157 GPV = 4,194,067 SAY = 4.2 million * Income capitalised @ ARY to reflect continued future rental growth but then discounted at equated yield.

25 Introducing Property Valuation: Suggested solutions to practical exercises Chapter 13 1. 5,120 2,000 = 10,240,000 1,500 200 = 300,000 800 120 = 96,000 Total construction costs = 10,636,000 2. a. Zone A = 8 6 = 48 sq.m. @ 2,000 = 96,000 Zone B = 8 6 = 48 sq.m. @ 1,000 = 48,000 Zone C = 8 4 = 32 sq.m. @ 500 = 16,000 Grnd flr ancillary = 8 4 = 32 sq.m. @ 100 (1/20) = 3,200 1st floor sales = 80 sq.m. @ 200 (1/10) = 16,000 1st floor ancillary = 80 sq.m. @ 80 (1/25) = 6,400 Market rent per shop = 185,600 p.a. GDV: Offices MR= 562,500 p.a. YP perp @ 6% 16.666 = 9,374,999 Shops MR = 2,227,200 p.a. YP perp @ 5.25% 19.0476 = 42,422,814 = 51,797,813 GDV SAY = 51.75 million b. Letting fees @ 10% of MR = 278,970 Sales fees @ 3% GDV = 1,552,500 3. a. ((1.07) 2 1) 15M/2 = 1,086,750 b. ((1.075) 2 1) 15M/2 = 1,167,188 c. ((1.08) 2 1) 15M/2 = 1,248,000 d. ((1.0825) 2 1) 15M/2 = 1,288,547 e. ((1.09) 2 1) 15M/2 = 1,410,750 4. a. ((1.07) 1.75 1) 11.5M/2 = 722,759 b. ((1.075) 2.25 1) 11.5M/2 = 1,016,076 c. ((1.08) 1.667 1) 11.5M/2 = 787,102 d. ((1.0825) 2.833 1) 11.5M/2 = 1,447,839 e. ((1.0775) 3.083 1) 11.5M/2 = 1,487,862 5. 5,000,000 PV 2.25 yrs @ 8% = 5,000,000 0.841 = 4,205,005 4,205,005/1.05 = 4,004,767 Site value SAY= 4 million 6. 3,250,000 risk and profit = 20.96% GDV = 26.53% costs

26 Introducing Property Valuation: Suggested solutions to practical exercises 7. See example residual method valuation illustrated below: Freehold industrial development Gross Development Value: Market Rent = 807,500 x YP perp 16.000 = 12,920,000 SAY = 12,920,000 Less Costs of Development: Compensation to site's existing occupiers = - Demolition of existing buildings = - Site clearance/remediation/preparation = 70,000 Other initial/miscellaneous/contingency costs = 200,000 Construction costs: industrial/distribution units constructable floor area in sq.m. = 9500 m ² @ construction cost per sq.m. = 775.00 /m ² Costs = 7,362,500 surface parking and loading areas constructable floor area in sq.m. = 7000 m ² @ construction cost per sq.m. = 50.00 /m ² Costs = 350,000 landscaping constructable floor area in sq.m. = 0 m ² @ construction cost per sq.m. = 0.00 /m ² Costs = 90,000 Arch, QS & other prof. fees as % of const. costs 12 % 936,300 Agents & Legals on letting as % of MR 10 % 80,750 Agents/Legals on investment sale as % of GDV 3 % 387,600 Finance charges on costs over devt. period @ 6.25 % 451,112 Developer's Risk & Profit: as % of costs 1,489,239 as % of GDV 1,292,000 SAY = 1,390,000 Total Costs = 11,318,262 Balance = 1,601,738 Less Site Purchase finance over devt. period @ 6.25 % = 139,231 = 1,462,507 Less site purchase costs @ 6 % = 82,783 Site Value = 1,379,724 SAY = 1,370,000 8. First analyse retail ITZA and market rents for each shop unit. Zone Front Depth Area Value ITZA A 7.5 6 45 1 45 B 7.5 6 45 0.5 22.5 C 7.5 5 37.5 0.25 9.375 1st F Ancillary 130 0.02 2.6 Total ITZA = 79.5 Total Rent = 143,000 p.a. Rent psm ITZA p.a. = 1,799.31 = per hectare: 796,512

27 Introducing Property Valuation: Suggested solutions to practical exercises Then provide residual valuation using all information provided and making reasoned assumptions where necessary as illustrated below: Offices Gross Development Value: Market Rent = 528,000 x YP perp 14.286 = 7,542,857 SAY = 7,540,000 Retail units Gross Development Value: Market Rent = 1,430,000 x YP perp 16.667 = 23,833,333 SAY = 23,830,000 Less Costs of Development: Compensation to site's existing occupiers = 150,000 Planning fees = 15,000 Site clearance/remediation/preparation = 70,000 Promotion and marketing costs = 100,000 Other initial/miscellaneous/contingency costs = 500,000 Construction costs: Offices constructable floor area in sq.m. = 4700 m ² @ construction cost per sq.m. = 1,900.00 /m ² Costs = 8,930,000 Retail units constructable floor area in sq.m. = 3100 m ² @ construction cost per sq.m. = 1,500.00 /m ² Costs = 4,650,000 Arch, QS & other prof. fees as % of const. costs 13 % 1,765,400 Agents & Legals on letting as % of MR 10 % 195,800 Finance charges on costs over devt. period @ 7.75 % 1,142,582 Developer's Risk & Profit: as 15% of costs 2,627,817 as 10% of GDV 3,137,000 SAY = 2,880,000 Total Costs = 20,398,782 Balance = 10,971,218 Less Site Purchase finance over devt. period @ 7.75 % = 1,343,472 = 9,627,746 Less site purchase costs @ 7 % = 629,853 Site Value = 8,997,893 SAY = 9,000,000 Conclusion is that proposed purchase price of 7 million is reasonable. a. 4,880,000 would be total available for risk and profit b. This equals 27.86% of the costs. c And 15.56% of the total GDV.

28 Introducing Property Valuation: Suggested solutions to practical exercises Chapter 14 1. Gross receipts 225,000 Less purchases ( 85,000) Gross profit 140,000 Less working expenses 65,000 Net profit 75,000 Less proprietor s share @ 50% 37,500 Balance= 37,500 Return on proprietor s capital: Fixed assets 35,000 Stock 7,000 Cash 4,500 Total capital 46,500 Interest @ say 5% 0.05 = 2,325 Remaining balance for rent + rates = 35,175 Less business rates = ( 9,000) Rental value= 26,175 p.a. Value of land and buildings Rental value= 26,175 p.a. YP perp @ 8% 12.5 Capital value= 327,187 SAY = 327,000 Value of goodwill = share 1.5 = 37,500 1.5 = 56,250 Total value could be assessed as land and buildings, goodwill and fixed assets = 418,250 As a check, compare to gross receipts: 418,250/ 225,000 = 1.858 YP This is within range of other comparable properties, but on higher side of figures achieved, so may wish to consider reducing multiplier on goodwill and/or increase ARY as at 1.5 YP total value would only be 337,500. 2. Gross receipts: Room lettings Average occupancy rate = 66% Weekly charge per room = 450 Total receipts from room lettings = 930,150 Fitness room/gymnasium lettings 9,600 Functions rooms lettings 62,400 Restaurant/coffee shop/bar takings 69,600 Total gross receipts: 1,071,750 Less Purchase of new equipment 60,000 Less general working expenses 416,000 Net Profit 595,750 Less proprietor s share including interest on proprietor s capital 327,663 Rent + Rates = 268,088 Less estimated annual rates 43,000

29 Introducing Property Valuation: Suggested solutions to practical exercises Market rental value of completed development = 225,088 p.a. Market rent SAY = 225,000 p.a. YP perp @ 8% 12.5 Market value (capital value) = 2,812,500 (of completed development) SAY = 2,800,000 SAY land value = 40 per cent of completed development value as city centre site (but comparables needed to support this), then market value of site = 1,120,000 (/0.3) = per ha: 3,733,333 SAY = 3,700,000 per hectare Chapter 15 1. Depreciated replacement cost valuation Construction costs: 1,000 sq.m @ 900 psm = 900,000 Site works; say = 60,000 Allowance for any necessary adjustments & additions say = 50,000 = 1,010,000 Date of replacement assumed as valuation date (now) and no allowance to cost needed for this aspect Allowance for professional fees and statutory fees say @ 12% = 121,200 Allow for short-term finance over half the construction period @ say 7% = 87,668 Gross Replacement Cost (excluding VAT) = 1,218,868 Say useful life of building is 60 years total. Therefore, unexpired useful life is 30 years. Say allow 50% for simple straight-line depreciation to reflect age, obsolescence and existing repairs required of 125,000. Thus 50% of 1,218,868 + site value = current capital value 50% of GRC = 609,434 Site value: 0.182 ha @ say 2.5M per ha = 455,000 (from comparables) = 1,064,434 Conclusion: asset value of existing building = SAY 1.064 million. Chapter 16 1. YP single rate for 4.5 yrs @ 6% = ((1.06) 4.5 1)/((1.06) 4.5 0.06) = 3.84417 PV for 0.5 yrs @ 6% = 1/(1.06) 0.5 0.971286 PV = 50,000 p.a. YP for 4.5 yrs @ 6% PV for 0.5 yrs @ 6% = 186,689 SAY = 186,700