Specialised Property


Specialised Property
• Special characteristics of the property are central to the business’
ability to generate profit
• ‘Trading’ properties might be regarded as specialised because they are
– purpose built
– owner-occupied
– have some monopoly value due to their
• unique location
• legal status (planning permission or license to trade)
• Attributes of the property with regard to the business operating
therein are more important than the flexibility of the property for
change of use
Specialised Properties
• Specialised trading properties are not usually held on a leasehold basis
because of the significant investment in fixtures, fitting, furniture and
• Consequently there is not much rental evidence
• Where let, leases tend to be longer and user clauses more restrictive
• Improvements and fit-outs are often more expensive and more
frequently undertaken than on standard commercial premises
– check the handling of tenants’ improvements at rent review
• Some small businesses might attract purchasers willing to pay a price
that includes a non-pecuniary return
Why value specialised properties?
• Loan security
• Stock market listing
• Mergers and acquisitions
• Securitisation
• Agency
• Consultancy
Restricted Valuations:
• Market Value
• Market Value subject to special assumptions
• 180/90 days in which to complete a sale
• Accounts or records of trade not available
• Business open and licences/registration
• Business closed and licences/registration
lost or in jeopardy
Proposal for Travelodge on Slough Trading Estate:
• 22,000 sq ft equates to 70 bedrooms
• Pay max of £3,800 per room
• 25 Year lease. No breaks.
• Reviews every 5 years at RPI
• 6 months rent free
• Yield 6.25%
• £120 psf Build Cost (excluding fees, demo and planning)
• Marginal returns and we needed to get to £4,300 per room and let a
restaurant of 3,500 sq ft on the ground floor at £22.50 psf to hit profits
of 20%+
• That’s why I recommended we did the deal with 99p stores instead,
which is now on site
Majority of trading potential conferred by licence
Therefore included in sale price (not separate)
Investment market firmly established
Large numbers of tenanted places on market with commercial leases
Likened (in the main) to secondary retail
Freehold managed houses (Plc as employer) - likened to good
secondary / prime retail
• Tied house profit derived from 3 sources:
– Wholesale (beer, liquor, some food)
– Retail (beer, liquor, some food)
– Tied rent
• Free house profit derived from 2 sources
– Retail profit / discount (beer , liquor, food)
– Machine income
Pub Valuation Methods
1. The Kennedy Method
(Profits on beer supply + rent) x YP
This was a Lands Tribunal method looking directly at wholesale profit and Tied
Rental Income. It is still an interesting method to be applied to the New Pub
Estate Companies, whose income streams are very similar.
2. Investment Method
Rack-rented: rent payable under commercially acceptable lease x YP
Reversionary: term and reversion approach
3. Profits Method
Freehold: ANP (EBITDA) x YP (5-8)
Leasehold: ANP (EBITDA) x YP (1-2)
4. Rental Comparison
Comparable (perhaps secondary retail) rent per square foot, or
% of turnover rent
Pub Valuation Example (1)
Valuation of the freehold interest in an attractive country freehouse of
appeal to owner-occupier
£ 3,000
Net profit to proprietor @ 24%
x 0.24
Beer Discount 60 barrels x £20
£ 1,200
x YP perp at 14% (based on comps)
Pub Valuation Example (2)
Valuation of a town pub, recently let on a 15 year FRI lease with a beer tie of
interest to a regional brewer / multiple operator
Rent calculation
Rent agreed @ 14% t/o
£ 10,000
x 0.14
Wholesale profit
200 barrels - 45 barrels (guest):
= 155 barrels x £47.50
x YP perp @ 15%
£ 7,362
Pubs often valued by reference to “barrelage” - enables valuer to estimate likely turnover and
profit - a short cut comparison approach
Petrol Stations
Focusing on self-contained main road /motorway facilities (as opposed to
These facilities can be broadly classified as
– Those with large "throughput" - worth Oil Companies acquiring
– Those with lesser "throughput" -worth supplying
Outlets operated either through:
– Direct Purchase of existing facilities - operated by "Majors“ (refiners/wholesalers)Esso, Gulf, Shell, Gulf, etc.)
– Direct Purchase of Site and Development - operated by Majors
– Purchase and Leaseback - supplied by Majors as wholesaler and operated by dealer /
retailer paying a "tied" or low rent
The market is dominated by the Majors who own and operate only where a
"threshold" throughput can be achieved. Below a certain figure, Majors will
become suppliers.
Therefore a valuer must be able to classify the facility (according to
throughput) and understand the tenure arrangements
On the petrol sales, must determine source of income:
– Wholesale profit only?
– Wholesale profit and tied rental?
– Rebate arrangement?
Petrol Station Investigations
Relevant factors
• Facility
Age, depreciation, obsolescence
Layout, forecourt size, pump arrangement, canopy
dealer management standards
pricing policy
type / grade of fuel sold (branding)
opening hours
category of road: (M’way, arterial, secondary etc..)
diversions (temporary and permanent)
traffic volume
Speed limits - fast roads reduce “turn -in” especially where visibility and signage are
– Crossing Factor (% offside traffic turn-ins)
– from new stations (type of competition)
– expansion or closure of existing stations and other facilities
– Local population size
– car ownership percentages
Petrol Station Valuation
Estimate Throughput
Classify facility in terms of likely trading potential and trading structure
Examine factors currently influencing ability to trade
– Average turn-in (DoT)
• Busy Trunk road = 3 to 4%
• Motorway = 12 to 15%
– Average petrol purchase = 5 gallons / customer (DoT / Commercial)
– Self-service and use of credit cards increase 25% (DoT / Commercial)
Dual carriageway; 17,500 vehicles per day; stations on both sides over 120 mile
stretch @ 4 mile intervals = choice of 30 stations without crossing. Assume
average turn-in to a particular station of 3.33%
– 17,500 vehicles / day x 3.5% turn-in: 612.5 vehicles x 5 galls = 3,063 galls / day
(approx 955,500 galls pa (6 days))
Where the facility is worth acquiring/operating, the valuer will capitalise
throughput at a standard rate and capitalise remaining facilities (e.g. shop, carwash)
Where worth supplying, then tied rent arrangement might operate
Golf Club Valuation
Golf club valuation by profits method
Variety of methods used - Profits most reliable indicator
Cost approach provides useful check
Never employ profits approach in isolation “stand back and look”
Imperative to classify facility to enable estimate of reasonable
maintainable turnover
Classification (municipal, daily fee, resort, semi-private, private)
Check list (tees, fairways, greens, roughs, bunkers, practice facilities,
watering systems, clubhouse facilities, parking, maintenance of
buildings, fairways, greens, buildings & equipment)
Sources of income and expenditure (estimate where necessary)
Capitalisation rate? combination of mortgage and equity rates
(effectively opportunity cost or weighted average cost of capital)
Limited alternative use
Golf club profits method valuation
Assume net adjusted net profit after allowing for expenditure on
ASF to replace tenant's capital and interest is £475,000 p.a.
Capitalisation rate comprises a mortgage and an equity
For the mortgage element, assume
o 20 year term
Rate of 9%
Therefore, annuity £1 w.p. = 0.1095
For the equity element, assume
Target return of 20%
Golf club profits method valuation
Now need to weight the mortgage and equity
Assume 75% LTV
Mortgage (annuity) = 0.1095 x 0.75 = 0.0821
Equity return
= 0.20 x 0.25
= 0.0500
Weighted average cap rate
= 0.1322
Say, 13.22%
Net adjusted profit
cap rate
Say, £3.6m
Valuation by sales comparison
• Trading information can be difficult to obtain
• Use comparison method as an alternative
• Obtain number of rounds played per annum and level of
green fees
• From comparable(s) determine:
– Price per round (PPR);
Capital Value
number of members x ave number of round per player
– Green fee multiplier (GFM);
PPR / average green fee
• Apply to subject property
Valuation by sales comparison
Analysis of comparable facilities has been performed for
facilities of the appropriate class (say semi-private)
1500 members @ average of 22 rounds per annum per
member (market average)
Average green fees @ £15.00 per round
Comparable recently sold for £5m
Valuation by sales comparison
Analysis of comparable evidence:
= £5m / 22 x 1500 = £151.51 / round p.a.
= £151.51 / £15 = 10.10
Valuation of subject:
 1,400 members with average green fees of £13.00 per round
= £13.00 x GFM
= £13.00 x 10.10
= £131.30 / round p.a.
 Valuation
= £131.30 x 1,400 x 22
= £4,044,040
Say, £4m