RESIDENTIALlettings
Cut price property?
Jonathan Godfrey discusses valuing residential portfolios.
H
ave long-term low prevailing interest rates caused a shift in the way that residential investment portfolios are valued by investors? In the Sixth Edition of Valuation: Principals into Practice, the view of Eric Shapiro is that
“the maximum value which can be placed on a property let on an Assured Shorthold Tenancy should be 90-95 per cent of its vacant possession value.” However it goes on to say that, “if it is the buyer’s intention to continue letting the property, 100 per cent of the VP value will be achievable.” Residential investment portfolios are evidently being bought for continued letting so why do valuers, myself included, feel it appropriate to apply a discount from aggregate vacant possession value?
NEW BUILD DISCOUNTS
It is standard practice for investor purchasers to seek a discount for bulk purchases of new build stock. From the developer/ vendor’s point of view they are able to sell a number of units in one transaction, saving on time and holding costs whilst still presumably making a decent margin on the development. From the buyer’s point of view, given their bulk buying purchasing power, they expect to pay less than the aggregate of the individual Market Values of the units.
PORTFOLIOS -v- PIECEMEAL
There are many advantages for an investor buying a let portfolio of properties. Most obviously on the date of purchase the portfolio is income producing, there are no initial void periods and assuming that the properties are let to good professional covenants there should be few issues with rent collection. Also, buying a portfolio of properties is less time intensive and difficult than building a portfolio; there is no need to go through numerous negotiations in purchasing each unit individually. More than likely this single negotiation will be with another investor who is likely to be easier and more rational to deal with than a single owner-occupier. There are also savings on the professional fees associated with buying a portfolio rather than individual units; legal and valuation fees will be significantly reduced for example. So is it still appropriate to apply a discount for a portfolio of let
properties being purchased as an ongoing investment? Should this differ from the usual ‘bulk buying’ scenario? Eric Shapiro’s view is that if it is the buyer’s intention to continue
to let the property then no discount should be applied to the vacant possession value. I would agree with this, so there is no discount to be made in this regard because the properties are evidently being bought for continued letting. Therefore, the only
52 FEBRUARY 2012 PROPERTYdrum NEW HOUSES
reason to apply a discount would be because of the ‘bulk buy’ nature of the purchase, and most valuers when looking at such a portfolio would see fit to apply a discount. However as stated there are significant advantages to buying a bulk, already let, portfolio rather than building a portfolio on a piecemeal basis. Where a well managed portfolio of say 14 units in a ‘new build’
5-year-old block let to professional covenants is sold, at the current time investors might not consider paying 100 per cent of aggregate Market Value a bad deal. There will be no initial void periods and given the low prevailing interest rates and potential also for capital growth, on the surface it appears like a reasonable investment.
CASE STUDY
Hamptons recently valued such a residential investment portfolio of 14 units in a good north London location close to the Emirates Stadium. The units were within a development completed around three years ago, a mixture of new build and units within the conversion of a period building. The units were completed to a good specification and strongly appeal to professional tenants given the proximity to the London Underground station. The gross rental income showed a yield across the portfolio of
4.8 per cent against the aggregate Market Values of the units, assessed by Hamptons from analysing comparable sales within the same development and other similar such developments. Even if you allow a gross to net adjustment of 75 per cent, this still gives a net yield of 3.6 per cent. This return is better than one would
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