RICS CPD Foundation

Valuation of Residential Blocks and Build to Rent

Agenda

Vacant blocks of flats

Blocks as residential investments

Yield or discount to vacant value?

Build to Rent

what is it?

what are the approaches

RICS guidance

Worked example

Questions

Vacant

residential

blocks

allsop.co.uk

allsop.co.uk

allsop.co.uk

Valuing Let Residential Blocks

• Traditionally % to vacant aggregate

• Gross yield more prevalent

• A measurement of both now essential

Consider who is likely to buy and their business plan:

HOLD BREAK-UP REDEVELOP

Who are the buyers

Under £1m

allsop.co.uk

£10m -

£20m

£1m-£5m

£25m +

£5m -£10m

Local buyers.

Corporates, Private Equity.

The sweet spot

Corporates, HNWs, Private

Equity, Housing Associations

Institutions, Private equity

As £1m to £5m but fewer

players

INV

ESTM

EN

TS

allsop.co.uk

INV

ESTM

EN

TS

28 flats £220,000 pa ERV £272,400Sold at £4,512,000 GIY 4.87% or 6.03% (ERV)

Manchester

allsop.co.uk

INV

ESTM

EN

TS

11 flats £124,800 pa ERV £126,000U/O at £1,900,000 GIY 6.56% or 6.03% (ERV)

Manchester

allsop.co.uk

INV

ESTM

EN

TS

24 units £169,860 pa ERV £207,000Sold at £2,825,000 GIY 7.32% or 6.01% (ERV)

Leeds

allsop.co.uk

INV

ESTM

EN

TS

26 flats £72,500 pa ERV £182,000Marketing at £1,850,000 GIY 3.91% or 9.83% (ERV)

Sheffield

allsop.co.uk

INV

ESTM

EN

TS

58 flats £366,390 pa ERV £404,390Sold at £4,500,000 GIY 8.1% or 8.98% (ERV)

Bradford

allsop.co.uk

INV

ESTM

EN

TS

36 flats £249,660 pa ERV £275,040Sold at £3,250,000 GIY 8.46% or 7.68% (ERV)

Liverpool

allsop.co.uk

INV

ESTM

EN

TS

26 flats £35,700 pa ERV £180,000Sold at £1,750,000 GIY 2.04% or 10.28% (ERV)

Middlesbrough

allsop.co.uk

INV

ESTM

EN

TS

42 flats £166,080 pa ERV £178,920Sold at £1,525,000 GIY 10.9% or 11.7% (ERV)

Sunderland

allsop.co.uk

INV

ESTM

EN

TS

27 flats £131,220 pa ERV £136,020Sold at £1,270,000 GIY 10.3% or 10.77% (ERV)

Newcastle

allsop.co.uk

INV

ESTM

EN

TS

Location Poor block Decent block Excellent block

Regional cities 9% 7.5% 6.25%

Secondary 11 % + 10% 8.75%

Headleasehold rather than freehold + 0.5%

Broken rather than unbroken + 0.75 to 1.0%

Gross initial yields on passing rent and with no allowance for purchaser’s costs

allsop.co.uk

Poor to Excellent – what makes the difference?

• Lettability

• Untapped rental growth

• Tenancy types (AST/AT/Regulated)

• Length of tenancies

• Occupancy history

• Arrears and bad debt history

• Tenant profile

• Condition

• Extent of common areas / landlord responsibility

• Quality of managing agent

• Potential for ancillary income

• EPC ratings

• Redevelopment potential

Build to Rent

allsop.co.uk

W

allsop.co.uk

What is Build to Rent?

• accommodation will typically comprise of at least 50self-contained dwellings or a concentration of a similarnumber of dwellings

• the dwellings will be separately let, but held in unifiedOwnership

• management and oversight will be under a singleentity, potentially with an onsite presence• the building(s) may be specifically designed or adaptedfor rent, and may include some form of shared amenityAnd

• the individual dwellings are typically let on assuredshorthold tenancies.

The Forge, Forth Banks, Newcastle

allsop.co.uk

allsop.co.uk

RICS Guidance July 2018

The primary driver for a buyer of a build-to-rent assetis the value of the existing and potential net income stream.

Key valuation considerations in this context are:• security of the existing income• the potential for rental growth and assessment of themarket rent• likelihood of tenant change, speed of let up, depth ofoccupier market and void rates• assessment of the likely expenditure necessary tosustain the current income and market rent• an assessment of any additional factors that couldmaterially affect the value of the asset, such as legal orplanning considerations (such as a covenant that maylimit individual dwellings to rent for a period)• an assessment of the appropriate investment return and• as a ‘sense check’ the underlying potential to sell off the individual dwellings, one by one for sale – oftenreferred to as the ‘break-up potential’ – assuming thisis permitted in planning/legal terms.

Areas to consider

Sustainable rent

allsop.co.uk

Operating costs

Occupancy

/voids

Investment rate

Likely depth of demand, demographic analysis, who will

rent, expected future supply. Today’s rents or at point of

delivery?

Are the costs aspirational or actual?

Professionally prepared or estimated.

Do they fit a benchmark.

How long to fill? Are incentives

required. Dynamic pricing

model?

BU

ILD

TO

REN

T

Valuation of Build to Rent assets

allsop.co.uk

Operating expenditure

allsop.co.uk

Typical expectations are around 25% to 28% operating cost

But pressure for operators to narrow below 25%

Process

Step 1

Establish rental

and ERV levels

Place VP value

on each dwelling

Identify market

depth and

sustainability of

location

Step 2

Obtain and

scrutinise

operating costs

If available,

consider

operational history

and trends

Form judgement

on income and

cost growth

Step 3

Obtain yield

evidence

Run DCF with sensitivity testing

Step 4

Measure DCF

outcome against

break –up value

(VP) and IRR

allsop.co.uk

Net initial yields – some recent deals

allsop.co.uk

Eccy Village, Sheffield 237 flats (Grainger) 5.2%

Sweet Street, Leeds 100 flats (Oakapple) 5.2%

The Strand, Liverpool 383 flats (Invesco) 4.9%

Valuation

example

allsop.co.uk

Any questions?

Services

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allsop.co.uk

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Office Leasing (Central London)

Private Rented Sector & Build to Rent

Valuation

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