Exercise 1 Local shopping centre

You have been asked to assess the current market value of a local shopping centre. Some of the key details are as follows:

Physical details

4,600 sq. m. site with abt. 1,300 sq m. n.l.a.; 600 sq. m. IGS supermarket, 8 speciality shops on average 65 sq. m., 62 open car parks, approx. 20 years old. Condition fair but some maintenance and refurbishment now required, in part to enhance overall condition but also to address certain compliance issues (anticipated cost : $800,000).

Current financial performance

Fully leased, the property could expect to return about 5.4% net, which, all things considered and, with an appreciation of the market overall, might seem somewhat high. Outgoings overall (at $115/n.l.a.) are about at industry standard for that type of asset.

Current tenancies and management

Two of the specialty shops are currently vacant one for the last 2 months, a second (which is in a quite difficult location) within the centre has been vacant for 5 months. The losses for these vacancies are net $3000 per month and $4400 per month respectively. The leasing market for such shops in that area is sound. Incentives to secure a suitable tenant could be anticipated at about 4 months rent free on a 5 year lease. Leasing up commission (one month) would also be required.

The current tenancy mix is appropriate all offering retail, consumer goods and services. Trade figures are not available for the specialist shops but, except for the two vacancies, tenant turnover has been quite low and consumer traffic is stable, though not substantially improving.

Market conditions and comparisons/competition

These types of centres are currently attracting strong market sales demand with capitalisation rates ranging between of 4.75% and 7% identified across a range of comparable properties.

The centre has good location, exposure and access. However the surrounding area is mature and there is little catchment growth likely and new centres in the wide location may well provide further competition into the future.

Current rentals and trading conditions

The major trader has a 15 year lease on a percentage turnover rent which is on a net basis. The other speciality shops are on monthly rents and on leases ranging from 3 to 7 years. WALE across the speciality shops is 3 years (not accounting for current vacancies).

Current rents achieved are close to market and rent review mechanisms in place are comparable to similar properties in the region. The exception here relates to two of the occupied shops where, because of existing lease arrangements provide a profit rental to the tenants amounting to $15,000 per annum per tenant, a situation which will continue until those leases expire in 3 years time.

Exercise 1 Question

Based only on the information provided, list out and briefly elaborate on key observations, regarding this sub-sector and, this property in particular, which are going to influence/ help determine your final valuation.

Include in your answer how you plan to recognise / adapt your assessment to reflect immediate and longer term challenges/issues facing this property viz vacancies, profit rents, immediate maintenance and required upgrades and other matters.(For each, briefly describe the impact qualitatively and, where relevant and possible, quantitatively on capital value).

[Note: about 600 words should be taken as a word guide here. To keep to that limit, the use of headings, subheadings and short explanatory statements are appropriate.]