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Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria

Property Valuation Report Report: Property Valuation Report Type: Multi-Tenant Professional Office building Address: 599 Doncaster Road, Doncaster, VIC, 3108

(CoreLogic, 2014)

Under Instruction From: Property Investment Trust (Unnamed) From the Use and Benefit Of: Lachlan Sinclair

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria

1.0 - Executive Summary 1.1 - Report Date

Friday May 22, 2015

1.2 - Report Type

Complete Property Valuation Report

1.3 - Property Identification

1.4 - Purpose & Function of Report

1.5 - Objectives

1.6 - Property Location 1.7 - Highest & Best Use

1.8 - Easements

1.9 - Occupancy

The property is a multi-tenant professional office building with 1,663m2 net rentable square metres situated on a total of 1891m2. The property is located along the north side of Doncaster Road, South of Williamsons Road in Doncaster, Victoria. The street address is 599 Doncaster Road, Doncaster, Victoria, 3108.

This report has been prepared in conformance with API standard guidelines for the intentions of providing a market valuation of the property to the client. The client has decided to invest in the office building under consideration and wants to receive a market update as to the value of the investment in the current marketplace. Assess the market value of the subject property as of May 22 2015 using the Direct Capitalisation method and Discounted Cash Flow method of valuation with the objective to produce an accurate and up-to-date valuation.

599 Doncaster Road, Doncaster, VIC, 3108.

Continued use as a multi-tenant professional office Encumbered utility easements exist. Subject to a formal site survey 100%

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria 1.10 – Value Indications Method 1.11 – Aggregate Market Value

Direct Capitalization Method & DCF

$7,115,800

2.0 – Introduction 2.1 – Scope of the Report We have been asked to prepare a valuation report of a multi-tenant two (2) level office building located at 599 Doncaster Road, Doncaster, VIC 3018. The building contains 1,663m2 of lettable floor space according to the details provided. Additional site improvements include secure basement parking, on-site parking, air-conditioning, landscaping and all utilities. The purpose of this valuation is to establish the market value of the property in its ‘as in’ condition. In arriving at these value estimates, we have drawn on the direct capitalisation method of valuation and the discounted cash flow (DCF) method of valuation. The scope of the valuation included all previous data recorded from the market report that has been conducted. All public information was obtained from the Victorian Department of Housing & Infrastructure. Information regarding sales of comparative properties has been obtained from RP Data and other public sources, as has comparable rental information. We can confirm that that this valuation has been prepared in accordance with the standard practices of the API guidelines We can also confirm that the value of the properties has been assessed based on market value in accordance with the International Valuations Standard Council. Market Value is defined as: “the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction wherein the parties had each acted knowledgeably, prudently and without compulsion” (www.ivsc.org) 2.2 – Legal Description

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria The property known as 599 Doncaster Road, Doncaster has the following legal description: Title Volume 10652 Folio 536 Being Lot 4 on Plan of Subdivision No. 06415A 3.3 – Ownership History The subject is under ownership of our client who purchased the property after receiving the initial report from our firm surrounding the analysis of the market the property is situated in. Our understanding of the purpose of this valuation is to receive an updated appraisal of the value of the investment.

3.0 - Rental Rationale: 3.1) Subject Property: Level

Tenant

Area Leased m2

Lease Commence Date

Lease expiry

Term & options

Lease Type

Rent Reviews

Current Rental $pa

Cars

Parking Rental $pa

Part ground

ABM

610

15/3/13

14/3/16

3y+3y

Gross

4% pa

$195,600

21

26,208

Part ground

Guardian Security Group

205

1/6/14

31/5/18

4y+4y

Gross

3.25% pa

$71,750

7

8,400

848

3/1/14

2/1/17

3y+2y

Net

4.5% pa

$240,350

37

46,398

-

-

-

-

-

-

-

7

8,400

507,700

72

89,406

Level 1 Casual Parking Total

Ambulan ce Victoria Shaver Shop

1,663

3.2) Analysis of Current Rents: Comparative Properties Net Rental Rate per m2 per annum: Address

Comm. Date

Term (yrs)

Review s

Out’s $m2

Gross Rental p.a

Area m2

Net Rental Rate

Gross Rent al

Cars

Parkin g Rental

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria 660 Doncaster Rd, Doncaster

March 2013

3+3

3.5%

$60

$316,96 9

1,25 0

$m2

Rate

$254

$314

25

$p.a $31,05 0

Net Rent per m2 P/A = $254 Net Rental Income P/A = NRR$m2 x Area m2 = $254 x 1250 = $317,500 Comparison: The gross rental income that is received before expenses per square metre of lettable floor area. The rents have not had the reviews taken into consideration in the leasing evidence, please see calculations as to influence of rental review:  Year 1 (’13): $392,500  Year 2 (’14): $392,500 x 3.5% = 13,738 + $392,500 = $406,238  Year 3 (’15): $406,238 x 3.5% = $14,218 + $406,238 = $420,456 = $336 per m2 This property is of similar specifications to the subject property in its relative size, the terms of its lease, comparative rents reviews but most importantly its geographical relationship with the subject property, being the closest of all comparative properties. The properties share close capitalization rates of 8.5% for 660 Doncaster and 8.3% for the subject property of 599 Doncaster.

Net Rent per m2 P/A = $3,760 Net Operating Income P/A = $782,000 The properties share similar capitalization rates, 8.02% and 8.3% respectively, but also have multiple tenants occupying the space.

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria

Net Rent per m/2 P/A = $2659 Net Operating Income P/A = $352,000 The properties share similar capitalization rates, 8.5% and 8.3% respectively, but also have multiple tenants occupying the space. The Net Lettable Areas are fairly similar aswell, 1450m2 and 1663m2 respectively. Geographically the properties reside a mere 2.5km from each other.

Sale 3 Property: 552 Blackburn Road, Doncaster

Net Rent per m/2 P/A = $3108 Net Operating Income P/A = $475,600 The properties share structural similarities with frontages to main roads, containing several stories and basement parking that is serviced by a lift, that is occupied by multiple tenants and have a comparable Net Lettable Area of 1866m2 and 1663m2 respsectively. The properties also share comparable capitalization rates of 8.2% and 8.3% (subject property).

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria Net Rent per m2 P/A = $3882 Net Operating Income = $614,625 This property is a close comparable to the subject property of multiple fronts. The Net Operating Income is the closest comparable to the subject property who’s is $579,152. The properties also share the same number of tenants who occupy the building and also have the closest comparative car parking availability out of the comparative sales.

4.0 - Valuation Approaches In assessing the market value of a property, the valuer has two approaches to employ; the Direct Capitalization Method (DCM) and the Discounted Cash Flow Analysis Method (DCF). Both approaches have their benefits but the mitigating difference is established by the way they estimate value (Etter 1994). DCM establishes value by dividing a property’s NOI by its capitalization rate. Estimating a properties market value using the DCF requires estimates of the NOI for each year along with the property’s expected return value at the end of each analysed period, which is then discounted at an appropriate rate to obtain a projected market value.

4.1 – Direct Capitalization Method The Direct Capitalization Method will establish the value of the 599 Doncaster Road, Doncaster through the capitalization of its income at a certain rate of return. This method of valuation works on the basis that there are similarities between the market value of the property and the sum of its income discounted to the present date (ANZ Property Standard & Valuation 1999). In the direct income capitalization method the estimated income stream from the property has been capitalize educing a market supported yield to arrive into a value indication for the property

The Subject Property; 599 Doncaster Road, Doncaster 5 9 9Do n c a s t e r Rd , Do n c a s t e r

Ne t L e t t a b l e Ar e am2

Gr os sRe n t Ne tRe n t I nc o mem2 p e rm2( $ )

Ne tRe n t I n c o me

Gr o s sRe n t I n c o me

Ou t g oi n g s

Pa r k i n g Re v e n ue P/ A

Va c a n c y Al l o wa n c e ( 8 . 5 %)

NOI

Ca p Ra t e

Es t i ma t e d Va l ue( $ )

ABM (37%)

610

422

$347

$211,670

$257,420

$46,372

$26,208

$21,881

$215,375

8%

$2,692,188

GSG (12%) AMBULANCE VICTORIA (51%) SHAVER SHOP (0%)

205

436

$361

$74,005

$89,380

$15,040

$8,400

$7,597

$75,143

8%

$939,288

848

371

$296

$251,008

$314,608

$63,918

$46,398

$26,742

$270,346

8%

$3,379,325

$0

$8.400

8%

$105,000

$56,220

$569,264

8%

$7,115,800

Totals

0 1663

410

$0.00

0

0

$335

$536,683

$661,408

$0 $125,330

$8,400 $89,406

a)

1,663m2: Refers to the Net Lettable Area of the property (NLA). The proportions of lettable area allocations between the tenants are the following:  Tenant 1: ABM – 610m2 (37%)  Tenant 2: Guardian Security Shop – 205m2 (12%)  Tenant 3: Ambulance Victoria – 484m2 (51%)  Tenant 4: Shaver Shop – Car Parking (0%)

b)

$410: The GRI that is received exc. outgoings per m2 of lettable floor area on avg between all tenants. Calculated by:  ABM pay $422 per m2 - potential gross income is 610m2 x $422 = $257,420  Guardian Security Shop pay $436 per m2 - potential gross income is 205m2 x $436 = $89,380

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria 

Ambulance Victoria pay $371 per m2 – potential gross income is 848m2 x $371 = $314,608

c)

$75: Outgoings are provided on the basis of the each tenant’s pro-rata which refers to items such as rates, taxes or levies calculated on a per square metre basis.  Outgoings in total = $125,330  AMB @ 37% of NLA = $46,372  Guardian Security Group @ 12% of NLA = $15,040  Ambulance Victoria @ 51% OF NLA = $63,918  Therefore, $75.4 x 1663 = $125,330

d)

8.5%: Vacancy rate refers to an estimated loss of income due to tenants vacating the property or defaulting on their repayments expressed as a % of potential Gross Income (PGI). Based on current market indications, the use of the average vacancy rate for Melbourne Suburban Grade B Office’s of 8.5% (Savills 2015).  Vacancy Allowance = 8.5% x $661,408 = $56,220: o ABM = 37% of $56,220 = $21,881 o Guardian Security Group = 12% of $56,220 = $7,597 o Ambulance Victoria = 51% of $56,220 = $26,742  $21,881+ $7,597 + $26,742 = $45,629

e)

$569,264: Refers to Net Operating income which is the annual income generated by the income-producing property after taking into account all income collected from operations and deducting all expenses incurred from operations. Please see the provided sales evidence for correspondence. OPEX CALCULATIONS: 

PGI = i. ii. iii.



Less Vacancy Expenses = i. (ABM = 37%) = $21,881 ii. (Guardian Security Group = 12%) = $7597 iii. (Ambulance Victoria = 51%)= $26,742 - $56,220



Equals Effective Rental Income = $605,188



Plus Other income (Parking Revenue) = i. AMB (21 cars) = ii. GSG (7 cars) = iii. Ambulance Australia (37 cars) = iv. Shaver Shop (7 cars) = $89,406

 



1250m2 x $410 = (AMB: 610m2 x $422) $257,420 (GSG: 205m2 x $436) $89,380 (Ambulance Victoria: 848m2 x $371) $314,608 $661,408

Equals Gross Operating Income = $583,063 Less OPEX Shares = i. ABM (37%) = ii. Guardian Security Group (12%) = iii. Ambulance Victoria (51%) = $125,330 Equals Net Operating Income = $569,264

$26,208 $8,400 $46,398 $8,400

+

$46,372 $15,040 63,918 -

As seen in the OPEX calculations each tenancy is broken down into shares. This is the share of the pro-rata Net Lettable Area in which each of them occupies. As

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria all outgoings are recoverable, the amount of space in which they occupy determines the amount of operating expenses they are accountable for. The lease type for ABM and Guardian Security group is gross meaning that their OPEX contributions are built in to their rent. Ambulance Victoria are one a net lease meaning that their OPEX are paid by them ontop of theit rent. To ensure these calculations are done correctly, Ambulance Victoria’s lease was grossed up to align it with the other tenants in which then all OPEX were subtracted in accordance with their shares. f) 8%: Refers to the capitalization rate (initial yield – passing), which is the rate of return on an investment property based on the expected income it will generate. The use of the comparative sales and leasing information produces an average of 8%, which is used to establish estimated value. It is calculated by:  Annual Net Operating Income/Sale Price  = $569,264/$7,115,800= 8%  (8.5% + 8% + 8.8% + 8.2% + 8.2%/5 = 8.3% (rounded to 8%) g)

$7,115,800: Refers to the estimated value of the property based on the input of financial figures surrounding the property. It Is calculated by:  NOI/Cap Rate =  $569,264/8% = $7,257,138

h) No miscellaneous income has been accounted for in this year of operation. This is due to the properties inability to provide anything that is beneficial to the tenants to receive more income. Two vending machines have been used in previous years but they produced negative income. i)

In the 2015 – 2016 financial year period no capital adjustments have been accounted for. This is due to the continued occupancy of all tenants so no reletting fees, fit outs or incentives have been required, nor have any maintenance or improvements of the building been outlaid by the owner as all of these costs have been recovered through the OPEX recoup from tenants.

4.2 – Discounted Cash Flow Analysis The Discounted Cash Flow analysis is the second method of used to establish the market value of 599 Doncaster Road, Doncaster. This method employs the concept of Time Value Money to assess what the future benefits are worth in today’s money (HVS International 2006). All future cash flows are estimated and then discounted to give their present values in which the sum is of these present values is the value of the property. * PLEASE SEE ATTACHED EXCEL SREADSHEET FOR FURTHER INFORMATION

6.0 – Reconciliation This is the final stage of the valuation process in which in which the final value is estimated from the various indicators that have been developed by the use of the Direct Capitalization Method and the Discounted Cash Flow Analysis. The significance and applicability of each method’s values is analyzed to determine which method would give the most accurate value to the property being valued (Schmidt, 2012) . Based on the data that has been analyzed in this report, the following value indications have occurred. Approach:

Value Indication:

- Direct Capitalization

> $7,257,138

Assignment 2: Valuation Report for 599 Doncaster Rd, Doncaster, Victoria - Discounted Cash Flow

> $9,563,000

On the merits of both methods, each has their strengths and weaknesses. Using the Direct Capitalization Method the property’s NOI is estimated through market data of that is available (rents, vacancy, operating expenses etc) of properties the valuer deems to be comparable (Market Language:: Finch Freeman Commercial Property Professionals, 2007). The problem with this method is the situational variables that can arise that could easily sway the properties value.

Depending on market conditions the comparative properties could have high or low vacancy rates, which may create dramatic fluctuations in the future, and if a market vacancy rate is used it may result in a larger NOI for the property meaning its value will be inaccurate. Secondly, if it could be expected that the property’s NOI will increase in the future due to greater demand that may lead to higher rental rates meaning the direct capitalization of a single years’ NOI may belittle the properties value. Using the DCF method allows for annual changes in financial variables such as rents, vacancy rates and operating expenses (Australian Property Institute 2012). The ability to alter these variables will allow for a much more accurate NOI estimate rather than capitalizing a single years NOI. Ultimately it can be said that the Direct Capitalization method is appropriate for properties expecting to uphold a stable NOI where as the DCF analysis is well suited for properties with fluctuating NOI (CBRE, 2011). Therefore for this property we have deemed that the use of the Direct Capitalization method is a more accurate method of valuation due to the consistency of the rents over the terms of each tenancy and the known rental review rates.

7.0 – Conclusion Therefore we conclude that with our extensive experience in commercial valuation the processes used to establish the value of the property through the use of the Direct Capitalization Approach are comparable to those of valuer’s who work within the guidelines of the API. For this reason it is believed that the ...