Prepare valuations for the proposed office acquisition both on a traditional investment method and DCF basis.

Following on from Assignment 1, you are still working for your departmental Director, Richard Lewis. He is preparing for the next quarterly meeting with Chandos Street Properties Ltd and your assistance is required concerning the following.
 

First, Chandos Street properties are considering an addition to their portfolio. The opportunity is the acquisition of the freehold interest in a modern office building, let to a multinational firm of lawyers. It is situated in a major regional city, in a good location in the central business district.

It was let three years ago on a full repairing and insuring lease (FRI) for a term of 20 years. The passing rent is £265,000 per annum, and the lease is subject to 5 yearly upwards only rent reviews. The present market rental value of similar office buildings is £280,000 per annum.

Second, they own a hotel at a well-established seaside resort, which they are thinking of selling.
Third, they acquired some land, part of which is a disused petrol filling station. Chandos Street Properties are considering the development of the site. Planning consent has been obtained for a distribution warehouse of 7,000 sq m gross internal area (GIA). 

The following information has been provided:

Land price £5,500,000
Estimated market rent £2,000,000
ARY 5%
Build cost £800 per sq m
Finance cost 9% per annum
Build period 2 years plus 6 months void
Site clearance and remediation £250,000
Contingency at 5% of build costs
Marketing £50,000
Sale costs 4%
Acquisition costs 6%
Letting fees 15%
Professional fees 12.5%.

Fourth, Chandos Street Properties are concerned about their corporate responsibility and the ‘sustainability’ of their portfolio. Their private aim is to enhance their portfolio so that it is the most sustainable compared to similar size funds.

Task
Provide a report for internal use by Richard, dealing with the following points:

Prepare valuations for the proposed office acquisition both on a traditional investment method and DCF basis. Your valuations should be annually in arrears assuming, where appropriate, an ARY of 5% and an anticipated rental growth of 2% per annum. Assume a holding period for the unexpired lease term, i.e. 17 years. State the market value for the property, and investment worth of the office. Critically appraise the proposed investment to determine whether your client should make an offer for this investment.
Discuss and constructively criticise your selected method of valuation for the hotel.
For the development site, set out a valuation calculating the amount of profit Chandos Street Properties could make, adopting the inputs stated above, and making any other reasonable assumptions.
Your report should contain a section on their private aim; ‘to enhance their portfolio so that it is the most sustainable compared to similar size funds’. Your report should include a discussion on corporate responsibility and typical ‘green’ features that may be found on new or refurbished buildings, together with how they are certified. This should lead to acritical examination of the meaning of sustainability; and whether Chandos Street Properties will be able to prove their aim.

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