Valuation of a Building on Camden High Street

General Instructions:

• You should assume that the reader knows more than you!
• Don’t over-explain basic variables e.g. depreciation.
• The fund manager is interested in your rationale for the figures selected and you should always explicitly state the value of every variable that you use.
• Get a range of views on rental growth, market rent, exit yield etc. and you need to explain in detail the underlying assumptions behind those numbers.
• Citations for SWOT
• The report should include an executive summary (consist of 6-8 single sentence bullet points that address the purpose of the report, the issues addressed, the key-findings, as well as conclusions and recommendations)

Scenario:

NB: You may not need to use all of this information for your assignment. Some of it is here to add to your knowledge and understanding of real estate investments and markets. You have joined the acquisitions team of a real estate investment fund. Your role as a junior analyst is to assist your team in the evaluation of potential real estate investment opportunities. Your boss is the real estate fund manager for a large open-ended office fund based in the UK Central London Office Unit Trust (CLOUT) that is run by Henvesco, a large mixed-portfolio investment fund. CLOUT is one of a number of real estate funds where Henvesco is the operator and investment manager. You are part of the acquisitions team of CLOUT. With varying lot sizes, CLOUT owns 25 office assets spread around theWest End, Midtown and The City with a total portfolio Gross Asset Value of Åí 1,250,000,000. The Net Asset Value of the fund is Åí 700,500,000 with a gearing ratio of approximately 45%. The fund is marketed as “core plus” and their investment strategy is to target a fund gearing ratio of 45% – 55%. CLOUT has recently “screened” the introduction of a new asset on sale (brochure on Moodle) by CBLL (a hypothetical) real estate investment broker (think of CBRE or JLL). The CLOUT Investment Screening Committee has decided that they would like to “run the numbers” on this potential investment with a view to possibly make a bid. The asset is expected to be sold in a “best bids” tendering process at the beginning of January and it is expected that the transaction will be completed on March 31st. CLOUT has recently agreed a borrowing facility with Met-life (a major US financial services and life insurance group who has entered the UKs real estate lending market). They have agreed to an amortizing loan of 50% of asset acquisition price at 5% annual interest rate fixed for five years with constant interest repayments quarterly in arrears. Additional fees include a 3% (of loan

principal) arrangement fee payable upon acquisition and a 1.5% (of loan principal) payable upon redemption. CLOUT has a target rate of return for unlevered assets of 6.5% and 8% for levered assets.

Tasks

The fund manager would like you to provide an estimate of the Investment Value of the proposed investment assuming an acquisition date of April 1st 2023. However, you must also recommend a bid figure for the asset. The fund manager requires you to write a 2,500 words professional report and provide the related Excel model (that you must upload to Moodle). The professional report should include:

(1) an estimate of the Investment Value of the proposed investment assuming an acquisition date of April 1st,
(2) an appropriate sensitivity analysis,
(3) a recommended bid figure for the asset.

This will rely on the preliminary analysis of:
(1) a qualitative evaluation of the asset as an investment (e.g. SWOT-type analysis or else),
(2) estimations and justifications of your key assumptions to be used in the modeling of the asset’s financial cash flows,
(3) an estimate of the Market Value of the asset by using a simple Net Initial Yield
approach with appropriate comparable, which the fund manager requires you to describe in a group presentation in mid November (after Reading week).

In particular, in terms of cash flow assumptions, your fund manager is concerned about exit yield, rental growth, market rent, depreciation, void periods and costs, capital expenditures, management and transaction costs and other variables that you think may be relevant. In the Excel model, you should display annual and quarterly financial models of the investment on both unlevered and levered bases. Your Excel model should provide all the necessary information and justification for the Market Value, Investment Value and recommended bid figures as well as for the sensitivity analysis.

Structure
There is no single approach to structuring and formatting a report. Usually, good reports should cover the following sections:
(1) Executive Summary
(2) Introduction or Terms of Reference or Scope of the Report
(3) Could be “Background and Context” “Key Definitions” or something else
(4) Should cover “Assumptions”, “Methodology”, “Analysis”
(5) Should cover “Results”, “Key Points”, “Conclusions”, “Recommendations”

(6) Bibliography
(7) Appendixes

Assessment Criteria:
The main emphasis of the project is on your ability to justify assumptions regarding the determinants of future revenues streams (rental growth, depreciation, management costs, exit yields, void costs etc.) and to provide a clear and well-executed financial model of the future cash flows, estimating Internal Rates of Return and showing the sensitivity of the quantitative results to the assumptions made. In particular, it will asses:
(1) Ability to collect and analyze appropriate data to solve real-world valuation problems;
(2) Ability to communicate key findings into a clear, incisive business report;
(3) Ability to evaluate the investment qualities of real estate assets;
(4) Evidence of research, reading and data gathering relevant to the problem;
(5) Good presentation skills. In particular, you should be able to provide clear and easy to understand valuations and cash flows for the asset.