Why is there risk when gathering rent from properties?
You might have a lag in the time the tenant receives the rent from when the rent was due
What is a Risk Premium?
The rate of return you can expect from riskier assets
Why did you use Government Bond Yield for your Risk Free Rate?
They are normally issued for similar periods of time as social housing
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How did you analyze levels of demand for London?
By checking lists provided by the Office of National Statistics which gives a figure on a house hold basis
Checking Local Authority websites
What was the House Hold waiting list for Hammersmith & Fulham?
3,000 house holds
Why did you also rely on previous valuations?
There are valuation that my team has done in the local area and have a large amount of data relative to my valuation
How did you compare average rent with the current passing rent for the portfolio?
By compiling data from the office of national statistics and the regulator of social housing
What were your findings / what did they tell you?
- Average passing rent for the portfolio - £134,58
- Average sector rent - £116.16
- That rents were in line with average sector rents
- That there would be demand for the units
- Void rate would be low
- People can afford the units
What is a Rent Cap? How would you find this information?
- Is the cap on rents that the Local Housing Authority sets
- Outlines the maximum amount of benefits that can be put towards
rent in each property class (1 beds differ from 4 beds)
- Outlines the maximum amount of benefits that can be put towards
How would you check your discount rate without all your previous valuations?
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Why did you run a sensitivity analysis?
- To show my client the potential impact of a shock to the market
- Its solidifies the evidence that the portfolio provides adequate security
for the loan amount
What effect did the sensitivity analysis have on the valuation?
- Increasing the discount rate by 0.5%
- Reduced the value of the portfolio by around £150,000
Still provided adequate security for the loan
- Reduced the value of the portfolio by around £150,000
How do you establish your Risk premiums?
I attribute various increments to reflect the various risks such as;
- Security of rental stream
- Current economy
- Stewardship
- Supply & Demand
Please detail the exact factors you consider when setting up risk premiums?
Legacy approach
- traditionally discount were around 5%-6%
I can bench mark against yields from the Private rental, Primary and secondary yields
- - - I then sense check - - -
EUV-SH
- Hard evidence of EUV-SH stock transacting on the open market (gathered by our Housing Consultancy team)
MV-T
- we can look at yields our valuations are generating and compare against the Private Rental sector
How would inflation effect your discount rate today?
It has had a small effect causing them to shift out
Inflation has increased a lot, how would that only effect the GILTs in a small way?
My discount rate does not directly track GILT yields
I reflect the change in GILT yields but I don’t change them directly in line
Transactional evidence does not suggest the discount rates should increase in line, rates have increased but not as much as GILT yield
The average sector rents look lower than the average passing rents of the portfolio?
Its showing the average General Needs restricted rents for the whole of Greater London, Fulham is in a reasonably good place within the city and there for you can expect tenants here to pay slightly more
What are the average rents for properties of this type in the area?
Between £280 & £400 per week
How did you establish the 1.75% risk premium?
Through assessing the cashflows;
- Security of income
- Level of outgoing required to keep the rent in line
- Demand for the portfolio
