(Part C) - Traditional Investment (Hardcore Layer Approach) PDF

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Applied Valuation Traditional Investment Valuation Part C (Hardcore/Layer Approach) The Hardcore/Layer Method How does it differ from Term and Reversion?     

Still traditional valuation but only value to the first reversion only Still use an All Risks Yield We still assume that all rental cash flows are received into perpetuity when were looking at hardcore/layer method Do not use of YP Single Rate We separate the rental income on a horizontal basis

When are valuing a property via the hardcore method We think about the Core and the Top slice. So the Core runs right through into perpetuity and is based on the passing rent. The top slice is based on the market rent and is valued on a YP in perpetuity basis but with an increase on the All risks yield from the core. And also the Present Value (PV) of £1 because we’re not going to receive that straight away, so we need to discount it, again on an increased ARY. The Core Income We need to use the passing vent this is presumed that we will receive this in right into perpetuity. We then capitalised this value by using YP in perp at the appropriate All Risk yield. The top slice or layer This is created at the first reversionary point is incremental difference is between the market rent and the passing rent. It is capitalised using the YP perp but at the higher All Risk Yield. We then discount this by using the PV of £1. Again remember this is done at the higher All risk yield Simple Example: The passing rent for a building is £10,000 per annum. The Market Rent has been estimated at £15,000 per annum. The rent is due for review in 3 years’ time (So this is the reversionary point) and an 8% ARY is appropriate. Calculate the MV of the freehold using the traditional hardcore method.

The core has a current passing rent of £10,000 per annum, this is capitalised by YP in Perp at the All-Risk Yield @8%. Giving you a total market value of the core of £125,000 pound. Top slice, the incremental income is the difference between the passing rent and the market rent which is £5000 in this instance. The YP in Perp is 9% because we’ve increased the all-risk yield by 1% to show the difference and the risk element attached. Again we must discount this value See the present value of £1 as we won't receive this money for three years giving you 11.1111. This gives you a market value of the top slice of £42,900. We had both the market value of the Koran the top size to give us a total market value of £160,900. Example two: Claridge’s, 49 – 57 Brook Street, London -

5-star Mayfair hotel Ground floor retail unit NIA 487 sq. ft ITZA Let to Paul Smith Ltd 10-year lease from Oct 2018 Passing rent £75,000 p.a. Market Rent £80,000 p.a. ARY 5%

Example three: 224 – 24 Regent Street, London -

Former Dickins and Jones Department Store 4 floors (inc. ground) NIA 12,000 sq ft ITZA Let to Nokia (UK) Ltd 10-year lease from Oct 2016 Passing rent £950,000 p.a. Market Rent £1,108,000 p.a. ARY 5.75%

Stepped Rents We also need to consider stepped rents: • • • •

Rent incentive Stepped increases in rent Creates more than one layer Gradually increase the yield for each layer depending on the yield approach/method

Example one: 18 – 22 Vanston Place, Fulham • • • • • • • • • •

Mixed use building Ground floor retail NIA 1,179 sq ft ITZA Let to Vagabond Wines Ltd 10-year lease from 2020 Passing rent £50,000 p.a. Year 2 £53,000 p.a. Year 4 £55,000 p.a. (MR) ARY 6.5%...