Uauim Gm Ppt 13april11

8/6/2019 Uauim Gm Ppt 13april11

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1

LONDON SOUTH BAN K

UNIVERSITY

Evaluarea Riscului Financiar in DezvoltareaCladirilor Comerciale

The Cit of London

LONDON SOUTH BAN K

UNIVERSITY

DEPARTMENT OF

THE BUILT ENVIRONMENT

Dr Gheorghe Multescu

Senior Lecturer

Agenda London South Bank University

The City of London

DEPARTMENT OF


Value & Risk Assessment for Commercial Property

Discounted Cash Flow / Gearing Ratio of Capital

The Gherkin / Plantation Place

Dr Gheorghe MultescuBArch PgDip MSc Arch PhD ACIAT

Graduate from UAU Ion Mincu 1996

Advanced Studies Diploma / MSc from UAU Ion Mincu 1998

PhD fromLondon South BankUniversit 2009

DEPARTMENT OF


2001 2004 Research Assistant London South Bank University

2004 present Senior Lecturer at LSBU

Course Director for RICS accredited

BSc (Hons) Surveying (Building Surveying &

Quantity Surveying) and MBA International Real

Estate Management (London Block)

Erasmus programme Co-ordinator, etc

LSBU HistoryWeve been providing inspiring education with a strong focus onour students future employability for 115 years.

Originally called Borough Polytechnic Institute and established1892.

DEPARTMENT OF


Became a university in 1992.

In 2003 was namedLondon South Bank

University.

Mission:

To provide students with relevantand practical employment skills tosupport local employers

Over 23 500 students

DEPARTMENT OF


Arts and Human Sciences

Business

Engineering, Science & the Built Environment

Health and Social Care

StructureWe have 4 faculties: ARTS AND HUMAN SCIENCES (AHS)

Media, English & Performing Arts, Law, Criminology, Psychology , Social& Policy Studies and Tourism & Hospitality

FACULTY OF BUSINESS (BUS)

Accounting & Finance, Business, Marketing, BIT, Computing and

DEPARTMENT OF


International foundation course

ENGINEERING, SCIENCE AND THE BUILT ENVIRONMENT (ESBE)

Architecture, Surveying & Construction, Product Design, Engineering,Applied Sciences and Forensic Science

HEALTH AND SOCIAL CARE (HSC)

Nursing, Social Work, Physiotherapy, Occupational Therapy andRadiography


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We have over 23,500 students from over 120 different countries! 10% Built Environment students 57% are full time students 69% are undergraduate students 44% are international students

A few facts

DEPARTMENT OF


63% are over 25 years of age 42% are male 1 in 5 nurses are taught at LSBU We have over 600 courses to chose from!

We have strong links within the industry and the local community. We host the oldest bakery school in the world! It was established 1894 Kevin Spacey, Desmond Tutu and Tessa Sanderson are honouree

graduates of the University

Ranked 3rd in Engineering research amongst modern(post-1992) UK universities in Research Assessment

Exercise RAE 2008.

FACULTY OF ENGINEERING, SCIENCE AND THE BUILTFACULTY OF ENGINEERING, SCIENCE AND THE BUILTENVIRONMENTENVIRONMENT

Department of The Built Environment

DEPARTMENT OF


.

Departments within Our Faculty

Applied Science Built Environment Engineering & Design Urban Engineering

2012 Olympics

Regeneration Projects

Thames Gateway

Environmental andsustainabilit

Opportunities and ThreatsOpportunities and Threats


DEPARTMENT OF


Performance ofbuildings

Property maintenanceand asset management

DEPARTMENT OF THE BUILT ENVIRONMENT

Approximately 1,900 students split between Full-Time and Part-Time (sponsored by employers).

50 staff.

DEPARTMENT OF


All courses accredited by:

RIBA (Royal Institute of British Architects)

RICS (Royal Institution of Chartered Surveyors)

CIOB (Chartered Institute of Builders)

CIAT (Chartered Institute of Architectural Technology)

APM (Association of Project Managers)

ARCHITECTURE

UNDERGRADUATE &POSTGRADUATE

PROPERTY,SURVEYING &

CONSTRUCTION

POSTGRADUATE

PROPERTY,SURVEYING &

CONSTRUCTION

UNDERGRADUATE

BA ArchitectureDiploma ArchitectureRIBA Part3

MSc Real EstateMSc Property,Development & Planning

FdSc ConstructionExtended DegreeHNC Construction

DEPARTMENT OF


RIBAaccredited

MSc Quantity SurveyingMSc Construction ProjectManagementMSc Planning Buildingsfor Health

RICS, APM accredited

TechnologyBSc ConstructionManagementBSc CommercialManagementBSc PropertyManagementBSc Surveying

RICS, CIOB, CIAT

Programme LeaderMary-Jane Rooney

Programme LeaderSteve Pearson

Programme LeaderPeter Haywood

1 Semester including min 3 units + practice

1 LSBU unit = 20 CAT credits = 10 ECTS credits

(3 units = 30 ECTS + practice = 40 ECTS)

Cost per Semester 1690.00 (2010-11*)Units offered are from Semesters 5/6 of UG courses:

STUDENT EXCHANGE PROGRAMMESTUDENT EXCHANGE PROGRAMME


DEPARTMENT OF


BSc Surveying (Building or Quantity Surveying)

BSc Commercial Management (Quantity Surveying)

BSc Property Management (Building Surveying)

BSc Construction Management

Architectural Technology

LONDON SOUTH BANK UNIVERSITY


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WHERE ARE WE?

DEPARTMENT OF


WHERE ARE WE?

DEPARTMENT OF


WHERE ARE WE?

DEPARTMENT OF


WHERE ARE WE?

DEPARTMENT OF


WHERE ARE WE?

DEPARTMENT OF


WHERE ARE WE GOING TO BE?

DEPARTMENT OF



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UNITED KINGDOM BRITISH

UnitsFeet/inches 1 foot = 0.305m10 sq ft approx = 1 sq mE.g. 500,000 sq ft building approx = 50,000 sq m

Area 1 acre = 0.405 hectare

DEPARTMENT OF


urrency pounds 1 = 1.15 euros

Will UK EVER join the euro! (will there be one tojoin?)

Lease structuresRents are paid quarterly in advance and quoted per annumE.g. 35 per sq ft per annum approx = 410 euros per sq m

Life Cycle of CommercialProperty

Stakeholders:

DEPARTMENT OF


1) Developer / Investors + Financial Institutions2) Planning (Professional Services include: Architects,

Planners, Surveyors, Engineers, Services, etc)3) Contractor + Project Manager + Professional Services4) Real Estate Services

5) Asset Management

6) Developer + Contractor + Professional Services

Developers inthe City of London

Major: British Land, Land Securities,

DEPARTMENT OF


, ,

Other: Legal & General, Swiss RE, etc

What Risk?

DEPARTMENT OF


....../ Investment and Financial Perspective

over Commercial Buildings!!!

FINANCIAL DECISION MAKING

COMMERCIAL

DEPARTMENT OF


CITY OF LONDON

LONDON PROPERTY MARKET

DEPARTMENT OF



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5

LONDON OFFICE MARKET

The London office market is made up of several

distinct markets:City 8.4 million sq mWest End 9.9 million sq m

Docklands 1.8 million sq m

DEPARTMENT OF


The City is driven by Londons status as a globalfinancial centre.

Market value of City offices:

8.0m sq m @ 400 psm @ 6% yield = 53bn

CITY OFFICES OWNERSHIP BY NATIONALITY

Nationality 2005 1995 1985

UK 53.5% 74.7% 87.4%

Germany 18.0% 2.8% 0.7%

W. Europe 10.9% 4.8% 4.4%

DEPARTMENT OF


USA 6.8% 0.7% 0.5%

Japan 2.5% 10.0% 3.0%

International 4.6% 0.3% 0.0%

Other 3.7% 6.8% 4.0%Source: University of Reading

CITY OFFICES OWNERSHIP BY ORGANISATION

Organisation 2005 1995 1985

Traditional 7.0% 15.0% 25.0%

Institutional 28.0% 38.0% 37.0%

Pro ert Com an 24 0% 25 0% 15 0%

DEPARTMENT OF


. . .

Private vehicle 14.0% 1.0% 0.0%

Other Financial 20.0% 16.0% 19.0%

Other 7.0% 5.0% 4.0%Source: University of Reading

Core FringeCity Central

Nationality City City Total London (%)

UK 60.6 87.3 68.5 76.1

USA 16.5 6.5 13.4 12.0

Germany 6.3 0.3 4.4 2.0

W Euro e 9 0 2 5 7 3 6 4

CITY OFFICES OCCUPATION BY NATIONALITY

DEPARTMENT OF


. . . . .

Japan 3.5 0.5 2.8 1.5

Other Asian 0.6 0.2 0.5 0.2Other 3.5 2.7 3.1 1.8

Not Known 5.1 14.2 5.7 7.1

Source: University of Reading

6 The Gherkin

DEPARTMENT OF


DEPARTMENT OF



6/15

6

1 - THE HERON TOWER

230m tower (46 storey 40,000 sq m)

Built speculatively

March 2011 completion

10 x 3 floor villages and 1 x 6 floor village individualself sufficient units

DEPARTMENT OF


Developer Heron International PLC

Architect Kohn Pedersen Fox Associates

Quantity Surveyor Davis Langdon LLP

Services Engineer Foreman Roberts

Structural Engineer Arup Group

Main Contractor Skanska

Concrete Frame Contractor Byrne Brothers

2 - THE PINNACLE

Helter-skelter 288m tower (60 storey 95,000 sq m)

Scheme put together by German fund Union

Investment Real Estate (formerly known as DIFA). May 2007: Sale to Khalis Affaras Arab Investments for

200m (Shariah compliant fund).

DEPARTMENT OF


Developer Arab Investments (current)

Architect Kohn Pedersen Fox Associates

Services Engineer Hilson Moran Partnership

Structural Engineer Arup Group

Main Contractor Brookfield Group

Lift Supplier Schindler

4 - WALBROOK SQUARE

2006: Legal & General get French architect JeanNouvel to design 107m tall Darth Vader helmet toweras part of 500,000 sq m scheme.

Sep 2007: L&G get Spanish developer

Metrovacesa excited and sell it to them for 240m.

DEPARTMENT OF


MARKET CRASHES

Aug 2009: Force Metrovacesa to pay 100m in return

for walking away from the deal which has cost it 162mto date (including previous payment of 40m to L&G).

Discussion DriversQuestions:

Why Commercial Buildings (Offices)?

What is the Value of Commercial Buildings?

What are the Financial Risks?

DEPARTMENT OF


How do these influence the value ofbuildings?

How important is the Architectural Design forthe Value of Buildings?

Landmark Design vs. Shoebox Design


The word value is often used to describe threedistinct, albeit related, concepts. In these notes,the following convention is adopted:

DEPARTMENT OF


WORTH

PRICE

VALUE

FINANCIAL DECISION MAKING - WORTH

Worth is a specific investors perception ofthe capital sum that he/she would beprepared to pay (or accept) for the stream of

DEPARTMENT OF


benefits that he/she expects to be producedby the investment.

Worth = value in use (economics)


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7

FINANCIAL DECISION MAKING - PRICE

Price is the actual observable exchange pointin the open market.

DEPARTMENT OF


FINANCIAL DECISION MAKING - VALUE

Value (or Market Value) is an estimation of theprice that would be achieved if the propertywere to be sold in the market (subject to certain

DEPARTMENT OF


assumptions) .

Price & Value = value in exchange(economics)

Valuations: Definitions

DEPARTMENT OF


Valuations: Definitions

DEPARTMENT OF



When the decisions we make turn out to be

DEPARTMENT OF


result of our own ability. However, when they go

wrong we usually blame the market.

Known & Unknown

There are known knowns. There are thingswe know that we know. There are knownunknowns. That is to say, there are thingsthat we now know we dont know. But there

DEPARTMENT OF


are also unknown unknowns. There arethings we do not know we dont know.

Statement made by Donald Rumsfeld (2002) at a Defense Department Briefing


8/15

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UNCERTAINTY & RISK

Measurable uncertainty

Risk can be quantified mathematical models usingprobability.

DEPARTMENT OF


Immeasurable uncertainty

RISK & HISTORICAL DATA

Uncertainty is present in the decision-making

process, not so much because there is a future asthat there is, and will be, a past . . . . . We are

prisoners of the future because we will be ensnaredby our past.

Robert Dixon, 1986 (Australian economist)

DEPARTMENT OF


100,000

120,000

140,000

160,000

LAND REGISTRYSALES VOLUME

DEPARTMENT OF


0

20,000

40,000

60,000

80,000

Apr00

Jul00

Oct00

Jan01

Apr01

Jul01

Oct01

Jan02

Apr02

Jul02

Oct02

Jan03

Apr03

Jul03

Oct03

Jan04

Apr04

Jul04

Oct04

Jan05

Apr05

Jul05

Oct05

Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Oct-

10

80

100

120

140

160

UK MORTGAGE APPROVALS 1993 to date

DEPARTMENT OF


0

20

40

60

88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8

Source: Bank Of England

10

MORTGAGE APPROVALS

BANK OF ENGLAND

DEPARTMENT OF


Oct-10

RISK & ECONOMIC DATA

Financial Markets

Economic figures

DEPARTMENT OF


Demand & Supply


9/15

9

FINANCIAL TIMES2008 Headlines

September 15Fight for survival on Wall Street

Ground prepared for Lehman BankruptcyMerrill Lynch and B of A in merger talks

September 17Markets rise amid hope of loan for AIGFinancial Turbulence for second day

DEPARTMENT OF


September 18Panic grips credit markets

HBOS takeover Government grips credit marketsTurmoil Worsens Volatility sparks biggest flight to safety since second world war

Lending between banks grind to a haltUS Treasury yields lowest since 1941

Jobless claims riseLloyds TSB poised to rescue HBOS

Global markets;Three month Treasury bill yield 0.02%

FTSE 100 2.25%S&P 500 4.7%

Russia: Its two main stock exchanges were closed to halt a market rout


September 22

Mansfield offers 100% mortgage

DEPARTMENT OF


Landsecs sells Bullring stake to Australian fund

Bank of England Report drives sterling lower

September 23Rich increase wealth in spite of crisis

Banks hit back at tax avoidance crackdown


September 23

Bank crisis bring long-lasting scarsBarratt and Redrow set for 850m cash call

DEPARTMENT OF


Minerva breathing space

Distressed hotels fund

Level the global playing field for the horrid hedgiesDollars weakness reinvigorates equity traders

M&S climbs 1.7% on hopes of a positive update

PROPERTY WEEK2009 Headlines

August 7

Hammerson and Liberty post big first-

DEPARTMENT OF


September 18

Anglo Irish compelled to exitYorkshire Shopping Centre

Pramerica heralds UK return with inflation-linked fund

ESTATES GAZETTE2009 Headlines

September 12

Valuations appear to have passedlowest oint

DEPARTMENT OF


September 19Forced shopping centre sales to test investment markets appetite

Irelands bad bank could push loans to UK marketStrong prices see Allsop raise 32m

Competitive bidding hands Savills 92%Surveyors report more price rises than falls


September 13

Greece seeks to woo investors

DEPARTMENT OF


Borrowing by Europes banks hits fastest rate for almost

six months

Merrill property team buy-outBasel brings acceptance mixed with relief

Deutsche Bank calls for 9.8bn


10/15

10


September 13

Basel deal reached on banks

DEPARTMENT OF


reservesSlowdown fears ease as China hits a sweet

spot

No Irish Lazarus -Dublin should let banking sector zombies die

ESTATES GAZETTE2010 Headlines

September 11

RBS hunts for lenders for 3bnloan vehicle

DEPARTMENT OF


Anglo Irish to be split into two separate parts

Investream City portfolio sinks intonegative equity

Latest IMA figures reveal inflows are falling

C&Ws $2.4m loss is up on Q1Sinking share price sees SEGRO slip out of FTSE 100

No rush of sales as Nama tries to keep borrowers afloat


DEPARTMENT OF



DEPARTMENT OF



DEPARTMENT OF


FINANCIAL RISKS

1. Discounted Cash Flow (development risk assessment)

Indicele de Discount (financial risk)

Costul Mediu al capitalului investit (financial risk)

Yields (project risk)

DEPARTMENT OF


2. Gearing Ratio (investment lending risk assessment)

Indicele de indatorare

3. Securitization (investment risk assessment)

Valoarea certificatelor de securitizare


11/15

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The most common approach to evaluating a project

is to use a discounted cash flow analysis.

A project is a series of cash flows inflows and

outflows.

DEPARTMENT OF


The worth of the cash flows is derived by discounting

them back to the present day by using a suitablediscount rate.

The discount rate should reflect the riskiness of thecash flows.

Discount rate 7.0

Income growth rate 2.0

Exit yield 6.5 NPV 1,737,426

Rent per annum 100000 IY 5.76%

Period ERV Rent Exit value Net flow PV NPV

0 100000 100000 100000 1.00000 100000

1 102000 100000 100000 0.93458 93458

2 104040 100000 100000 0.87344 87344

3 106121 100000 100000 0.81630 81630

4 108243 100000 100000 0.76290 76290

DISCOUNTED CASH FLOW

DEPARTMENT OF


.

5 110408 110408 110408 0.71299 78719

6 112616 110408 110408 0.66634 73570

7 114869 110408 110408 0.62275 68757

8 117166 110408 110408 0.58201 64259

9 119509 110408 110408 0.54393 60055

10 121899 1875376 1875376 0.50835 953346

1737426

NPV rental income 784080 45.1%

NPV exit value 953346 54.9%


How do we know what discount rate to use?

Experience from previous projects

Weighted average cost of capital

Modigliani & Miller

DEPARTMENT OF


Yield= annual rate of return on an investment (i.e.

real estate) expressed as a percentage

Net Income / Capital value x 100/1 = Yield

High Yields = Low Capital values

Low Yields = High Capital values

Weighted Average Cost of Capital

Cost of Debt Capital

DEPARTMENT OF


Cost of Equity Capital

COST OF DEBT CAPITAL

Base rate 5.0% (2008)Short-term Long term

Libor 5.15% 20 year Gilt 4.60%Risk premium 0.75% 20 year Swap 4.90%

5.90% Risk premium 1.00%

5.90%

The above figures reflect an expectation that base rate will becut.

DEPARTMENT OF


Normally the longer the term the higher the rate to reflectmore risk.

Base rate 0.5% (2009)Short-term Long term

Libor 0.61% 20 year Gilt 4.60%

Risk premium 3.75% 20 year Swap 4.90%4.36% Risk premium 1.00%

5.90%

COST OF EQUITY CAPITAL

Risk Free Rate + Risk Premium

RFR usually taken as GRY on Government Gilts

say 4.60%

Risk Premium = Equity Risk Premium * Beta Coefficient

DEPARTMENT OF


ERP = 4.0% (long run average)

Beta = how risky is company compared to the market

Blue chip property companies = 0.8

CoE = 4.60 + (4.0*0.8) = 7.8%


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12

WEIGHTED AVERAGE COST OF CAPITAL

Assume a capital structure of 40% equity and 60%

debt.

2008

* *

DEPARTMENT OF


= . . . . = .

2009

WACC = (0.4 * 7.8) + (0.6 * 4.3) = 5.7%

THE MAGIC OF GEARING

Scenario 1: Capital values fall 25%

Scenario 2: Capital values fall a further 20%

Scenario 3: Capital values fall a further 20% but 25 worth ofproperty is sold first and used to repay debt

Scenario 1 2 3

DEPARTMENT OF


Year 1 2 3 3

Assets 100 75 60 40

Debt 50 50 50 25

Equity 50 25 10 15

Gearing 100% 200% 500% 167%

LTV 50% 67% 83.3% 62.5%

6 THE GHERKIN

(30 Mary St Axe /SwissRE)

DEPARTMENT OF


Primary Use:

OfficeFloorspace (sq m):

76,641.00Car Parking Spaces

5Land Costs

90,600,000.00Date of Purchase

DEPARTMENT OF


1998

Construction Cost

138,000,000.00Last Sale Value (2006)

595,000,000.00

Developer:

Swiss ReArchitect:

Foster + PartnersCost Consultant:

Gardiner & Theobald MainContractor:

SkanskaPlanning Consultant:

DEPARTMENT OF


ontague vansQuantity Surveyor:

Gardiner & TheobaldServices Engineer:

Hilson Moran PartnershipStructural Engineer:

Arup Group

Public / Investors Surveyfinds Gherkin is ugly !?

2007

IVG Asticus (AssetManagement) buys TheGherkin at top price (almost600,000,000.00)2006

DEPARTMENT OF


Why would Swiss RE sellThe Gherkin? 27,000,000.00 rent / year

top commercial propertyprices in 2006 (property

cycles)

4.5 yield


13/15

13

7 PLANTATION PLACE

DEPARTMENT OF


Primary Use:

Office

Floorspace (sq m):50,170.00

DEPARTMENT OF


Construction Cost:134,000,000.00

Budget Date:2004

Developer:British Land

Architect:Arup Group

Main Contractor:Bovis Lend Lease

DEPARTMENT OF


Gardiner & Theobald

Services Engineer:Hayden Young

Structural Engineer:Arup Group

DEPARTMENT OF


Plantation Place occupies almost an entire block ofapproximately 1.02 hectares bounded by Fenchurch St,Mincing Lane, Eastcheap and Rood Lane

Plantation Place is built on on the remains of the old

Roman colony of Londonium burned down by Boadicea inAD 60. A hoard of gold coins from the 2nd century was found

DEPARTMENT OF


on site.

The complex contains almost three quarters of an acre of

roof gardens.

The central focal point of the development is a 43 metre tallsouth facing main atrium.

DEPARTMENT OF



14/15

14

DEPARTMENT OF


PLANTATION PLACE

Completed in 2004 by British Land.

545,000 sqft of Grade A office space. Net rental income of 27,084,070 (49.50 psf).

72% of rent covered by Accenture Ltd on 25 year

lease.

DEPARTMENT OF


,

Insurance and Royal & Sun Alliance.

Bought in March 2006 for 527m by joint venturebetween Invista fund management, Stobart Group

and consortium of private investors.

Valued in June 2006 at 560m by CBRE.

PLANTATION PLACE - SECURITIZATION

Securitisation

435m of Secured Floating Rate Notes due 2016.

Loan to Value ratio 77.68%

Interest Cover ratio 120%

Remaining Term 6.94 years

DEPARTMENT OF


21 years unexpired on Accenture lease

Average weighted unexpired lease length 17.5 years

PLANTATION PLACE

Class Amount Libor + S&P rating

A 295m 0.23% AAA

B 40m 0.32% AA

C 45m 0.55% A

D 40m 0.90% BBB

DEPARTMENT OF


m . -

Expected maturity July 2013Legal Final maturity July 2016

Interest Rate Swap

PLANTATION PLACE

In 2007 value rises over 600m and owners consider

selling.

By June 2008 value has fallen to 477m.

In September 2008 Invista writes off equity.

In January 2009 value has fallen to 385m (Knight

Frank

DEPARTMENT OF


.

CBRE asked to report on likely sale:

Amount Net IY Likelihood

368m 7.25% 25%

356m 7.50% 40%

345m 7.75% 60%

332m 8.00% 80%

PLANTATION PLACE

If building sold with loan of around 300m, chances

of achieving a higher consideration much better.

In all scenarios a sale would result in a loss to some

note holders.

Loss compounded by need to sever existing interest

rate swap. Break cost estimated at 34m.

DEPARTMENT OF


Small chance even AAA note holders would seesome loss on a sale of the property.


15/15

Discussion Drivers

Questions:

Why Commercial Buildings (Offices)? What is the Value of Commercial Buildings?

What are the Financial Risks?

DEPARTMENT OF


How do these influence the value ofbuildings?

How important is the Architectural Design forthe Value of Buildings?

Landmark Design vs. Shoebox Design

COMMERCIAL PROPERTY

Question?

To answer this question we need to think about theinfluence of architectural design over:

-

DEPARTMENT OF


-

- Profile and strength of tenants

THANK YOU

QUESTIONS?

DEPARTMENT OF


Uauim Gm Ppt 13april11

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