Yarlington Treasury Services plc - Valuation of Housing Stock Relating to the Issue of £120,000,000 3.41 Per Cent Secured Bonds Due 2057 the ...
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Yarlington Treasury Services Plc September 2017
Yarlington Treasury Services plc
Valuation of Housing Stock Relating to the
Issue of £120,000,000 3.41 Per Cent Secured
Bonds Due 2057 (the “Bonds”) by the Issuer
savills.co.ukFILE Ref: HHSH398496
14 September 2017
James Tillier FRICS
PRIVATE & CONFIDENTIAL E: jtillier@savills.com
DL: +44 (0) 1444 446031
(i) Prudential Trustee Company Limited M: +44 (0) 7812 965424
Laurence Pountney Hill
London EC4R 0HH 37-39 Perrymount Road
in its capacity as Security Trustee under the security trust deed Haywards Heath
28 July 2008 (the “Security Trust Deed”) and Bond Trustee under the West Sussex
bond trust deed dated 18 September 2017 RH16 3BN
T: +44 (0) 1444 446040
www.savills.com
(iii) TradeRisks Limited
27 Great Winchester Street
London EC2N 2JA
(as Arranger and Dealer)
(ii) Yarlington Treasury Services plc in its capacity as Issuer
Lupin Way
Alvington
Yeovil
Somerset BA22 8WN
(the “Issuer”)
(v) Yarlington Housing Group Limited
(“the “Original Borrower”)
Dear Sirs
YARLINGTON TREASURY SERVICES PLC (“the Issuer”)
REPORTING COMPANY: SAVILLS ADVISORY SERVICES LIMITED
VALUATION OF HOUSING STOCK RELATING TO THE ISSUE OF £120,000,000 3.41 PER CENT SECURED BONDS
DUE 2057 (the “BONDS”) BY THE ISSUER
In accordance with the instructions as confirmed in our letter to you dated 26 July 2017, we have inspected the property and
made such enquiries as are sufficient to provide you with our opinion of value on the bases stated below. A copy of our letter of
confirmation is attached at Appendix 6.
Offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.
Savills Advisory Services Limited. Chartered Surveyors. Regulated by RICS. A subsidiary of Savills plc. Registered in England No. 6215875.
Registered office: 33 Margaret Street, London, W1G 0JDWe draw your attention to our accompanying Report together with the General Assumptions and Conditions upon which our Valuation has been prepared, details of which are provided at the rear of our report. We trust that our report meets your requirements; however, should you have any queries, please do not hesitate to contact us. Yours faithfully James Tillier FRICS Director RICS Registered Valuer For and on behalf of Savills Advisory Services Limited
Contents
1. Instructions and Terms of Reference 1
1.1. Instructions & Terms of Reference .......................................................................................................................2
1.2. Basis of Valuation .................................................................................................................................................2
1.3. General Assumptions and Conditions ...................................................................................................................3
1.4. Valuation Date ......................................................................................................................................................3
1.5. Purpose of Valuation.............................................................................................................................................3
1.6. Conflicts of Interest ...............................................................................................................................................4
1.7. Valuer Details and Inspection ...............................................................................................................................4
1.8. Extent of Due Diligence Enquiries and Information Sources .................................................................................4
1.9. RICS Compliance .................................................................................................................................................5
2. The Properties 6
2.1. The Properties ......................................................................................................................................................7
2.2. Environmental Considerations ..............................................................................................................................8
2.3. Town Planning ......................................................................................................................................................8
2.4. Title and Tenure ....................................................................................................................................................8
2.5. Lotting ...................................................................................................................................................................9
2.6. Rental Income .......................................................................................................................................................9
3. Market Commentary 10
General Market Commentary ...........................................................................................................................................11
3.1. General Summary ...............................................................................................................................................11
3.2. Local Market Conditions .....................................................................................................................................11
3.3. Vacant Possession Values .................................................................................................................................12
3.4. Market Rents ......................................................................................................................................................12
4. Valuation Advice 13
4.1. Valuation Considerations ....................................................................................................................................14
4.2. Existing Use Value For Social Housing - Valuation Approach (For Information).................................................14
4.3. Market Value Subject to Tenancies (MV-STT) - Valuation Approach .................................................................18
5. Valuations 19
5.1. Valuations ...........................................................................................................................................................20
5.2. Additional Advice ................................................................................................................................................20
5.3. Indicative Aggregate Market Value assuming Vacant Possession (For Information) ..........................................20
5.4. Lotting and Value Disaggregation .......................................................................................................................21
6. Suitability, Liability & Confidentiality 22
6.1. Suitability as Loan Security .................................................................................................................................23
Appendix 1 Schedule of Properties
Appendix 2 Photographs
Appendix 3 Map of Stock
Appendix 4 Market Commentary
Appendix 5 Savills’ UK Housing Market Update
Appendix 6 Confirmation of Instructions
Appendix 7 General Assumptions1. Instructions and Terms of Reference
1
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset1.1. Instructions & Terms of Reference
Further to instructions received from the Original Borrower (confirmed by us by letter dated 26 July 2017) to value the Properties
in order to assess its level of security, we now have pleasure in reporting to the above addressees.
In completing this exercise, we have: a) agreed a full set of property schedule data with the Original Borrower; b) discussed
details as to our approach and methodology; and c) completed our own inspections, research and analysis.
The above has enabled us to arrive at the valuation assumptions which we have adopted in the valuations and final reported
figures herein. This Report has been prepared in accordance with the RICS Red Book (as defined herein). The valuations are
prepared on this basis so that we can determine the value recoverable if the charges over the properties which are the subject
of this Report (the “Properties”) were enforced as at the date of this Report.
We have reviewed the Certificate of Title prepared in respect of the Properties and has been taken into account in preparing the
Valuation.
The values for residential properties reported in the Borrower’s accounts are prepared for that purpose on the basis of Existing
Use Value for Social Housing by reference to the entire stock of the organisation’s dwellings valued as a single lot, in contrast
with the valuation in respect of this Report which only represents the value to a funder-in-possession of a portion of the stock on
the basis of Market Value Subject to Tenancies.
As such different assumptions would be applied. Disaggregated shares for individual dwellings derived from differently sized
portfolios, and valued for different purposes, may vary, resulting in any comparisons being inaccurate.
1.2. Basis of Valuation
In relation to Properties which may be disposed of by a mortgagee-in-possession on an unfettered basis (meaning subject to
tenancies but otherwise vacant possession and not subject to any security interest option or other encumbrance or to any
restriction preventing its sale to, or use by, any person for residential use):-
(i) the Market Value of such properties for loan security purposes firstly reflecting the fact or (where not the case)
making an assumption as to the fact that the properties are subject to existing tenancies that grant security of
tenure to the occupational tenant. Our valuation will refer to this basis of value as “MV–STT" or “market value,
subject to tenancies”; and
In relation to Properties other than those specified in paragraph 1.2.(i) above:-
(ii) The Existing Use Value for Social Housing (“EUV-SH”) of such properties for loan security purposes.
In accordance with your instructions, we have provided an assessment of the Market Value (“MV”) of the Properties subject to
the Tenancies and the Existing Use Value for Social Housing (“EUV-SH”) of the tenanted properties.
Market Value is defined by the Royal Institution of Chartered Surveyors (“RICS”) at VPS4 1.2 as:-
“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a
willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably,
prudently and without compulsion.”
2
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetExisting Use Value for Social Housing is defined by the Royal Institution of Chartered Surveyors (“RICS”) at UKVS1.12 as:-
“Existing use value for social housing (EUV-SH) is an opinion of the best price at which the sale of an interest in a property
would have been completed unconditionally for a cash consideration on the valuation date, assuming:
a) a willing seller
b) that prior to the valuation date there had been a reasonable period (having regard to the nature of the property and the
state of the market) for the property marketing of the interest for the agreement of the price in terms and for the
completion of the sale
c) that the state of the market, level of values and other circumstances were on any earlier assumed data of exchange of
contracts, the same as on the date of valuation
d) that no account is taken of any additional bid by a prospective purchaser with a special interest
e) that both parties to the transaction had acted knowledgeably, prudently and without compulsion
f) that the property will continue to be let by a body pursuant to delivery of a service for the existing use
g) that at the valuation date any regulatory body in applying its criteria for approval would not unreasonably fetter the
vendor’s ability to dispose of a property to organisations intending to manage their housing stock in accordance with
that regulatory body’s requirements
h) that properties temporarily vacant pending re-letting should be valued, if there is a letting demand, on the basis that the
prospective purchaser intends to re-let them, rather than with vacant possession and
i) that any subsequent sale would be subject to all the same assumptions above”
1.3. General Assumptions and Conditions
All our valuations have been carried out on the basis of the General Assumptions and Standard Conditions set out in Appendix
7 of this report.
1.4. Valuation Date
Our opinions of value in respect of the Properties are effective as at the date of this Report (the Effective Date), using the
property data supplied to us. The importance of the date of valuation must be stressed as property values can change over a
relatively short period of time.
1.5. Purpose of Valuation
This Valuation is required for security purposes in connection with the proposed issue by the Issuer of the Bonds.
This Report is issued for the benefit of the addressees and for the inclusion in the Prospectus for the Bonds to be issued by the
Issuer and may only be used in connection with the transaction referred to in this Report and for the purposes of the
Prospectus.
We hereby give consent to the publication of this Report within the Prospectus and accept responsibility for the information
contained in this Report. To the best of our knowledge and belief (having taken all reasonable care to ensure that such is the
case) the information given in this report is in accordance with the facts and does not omit anything likely to affect the import of
such information.
3
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset1.6. Conflicts of Interest
We are external valuers and not aware of any conflict of interest in respect of the Properties or the Issuer preventing us from
providing you with an independent valuation of the Properties in accordance with the RICS Red Book.
1.7. Valuer Details and Inspection
The due diligence enquiries referred to below were undertaken by James Tillier FRICS. The valuations have also been
reviewed by Matthew Sale BSc (Hons) MRICS.
In accordance with the requirements of the RICS Red Book, we confirm that this Report has been prepared by James Tillier
FRICS and countersigned by Matthew Sale BSc (Hons) MRICS (RICS Registered Valuers) who have relevant experience to
report on this property type. Savills Advisory Services Ltd carried out inspections of the stock on 29 June 2017.
Following inspection, market research and comparable sales and lettings evidence was compiled enabling us to build up a
detailed knowledge of the situation of the housing stock and marketability. We have considered the general condition of the
stock, the level of fixtures and fittings and have derived our assumptions accordingly.
All those above with MRICS or FRICS qualifications are also RICS Registered Valuers. Furthermore, in accordance with VPS
3.7, we confirm that the aforementioned individuals have sufficient current local and national knowledge of the particular market
and the skills and understanding to undertake the valuation competently.
1.8. Extent of Due Diligence Enquiries and Information Sources
The extent of the due diligence enquiries we have undertaken and the sources of the information we have relied upon for the
purpose of our valuation are stated in the relevant sections of our report below.
We have been provided by the Original Borrower with a schedule of the Properties detailing the addresses and current rents as
set out in the property schedule incorporated in Appendix 1. The extent of the enquiries we have undertaken and the sources
of the information we have relied upon for purposes of our valuation are stated in the relevant sections of our report below.
Savills Advisory Services Limited accepts responsibility for the information contained in this Report and, to the best of its
knowledge (having taken all reasonable care to ensure that such is the case), such information is in accordance with the facts
and does not omit anything likely to affect the import of such information. The figures and data relating to:
(a) Gilt and Bond yields referred to in paragraph 4.2.3 of the Report were obtained from the publication “Social Housing”
Volume 29, No. 7, July 2017.
We have also reviewed the final form certificate of title (the “Certificate of Title”) for the Properties issued by Trowers and
Hamlins LLP dated on or about the date of this valuation report and can confirm that our valuations fully reflect the disclosures
contained therein.
In particular, in respect of each unit which we have valued on the basis on MV-STT, we confirm that (based on our review of the
Certificate of Title) such units may be disposed of by a mortgagee-in-possession on an unfettered basis (meaning subject to
existing tenancies but otherwise with vacant possession and not subject to any security interest, option or other encumbrance or
to any restriction preventing its sale to, or use by, any person for residential use).
4
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset1.9. RICS Compliance
This report has been prepared in accordance with Royal Institution of Chartered Surveyors’ (“RICS”) Valuation – Global
Standards 2017 incorporating the IVSC International Valuation Standards issued June 2017 and effective from 1 July 2017 (the
“Red Book”). In particular, where relevant, in accordance with the requirements of Valuation Professional Standards VPS1:
Terms of Engagement, VPS3: Valuation Reports, UKVS1: Valuations for financial statements, UKVS1.13: Valuations for
Registered Social Landlords, UKVS3: Valuations for Residential Property, UKVS3.11 Affordable Rent and Market Rent, UK
Appendix 1: Accounting concepts and terms used in FRS 15 and SSAP 19 and UK Appendix 13: Valuation of registered social
housing providers' stock for secured lending purposes.
This report also complies with the International Valuation Standards where applicable.
5
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset2. The Properties
6
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset2.1. The Properties
2.1.1. Location and Description
In total there are 48 properties comprised in the instruction which are situated in the village of Winsham, Somerset in the
locations detailed in Table 1 below.
Table 1: Stock Location by Road
Type Houses & Bungalows Total
Bakersfield, Winsham 5 5
Davies Close, Winsham 36 36
Western Way, Winsham 7 7
Total 48 48
Source: The Original Borrower
The portfolio is located in an area of established traditional ex-Local Authority housing on the edge of a small village in south-
west Somerset. It is approximately 4 miles south-east of the nearest town, Chard.
The properties are in an estate of similar houses of typical style and on the north-west corner of an otherwise very traditional
style Somerset village. The properties in the immediate area fall within an age group of circa 1950 – 60s, the majority being
circa 1965 - 70. Generally, the units have garden areas and on-street parking.
Two-thirds of the stock is identified and designated by the Original Borrower as sheltered or Independent Living accommodation
and available for occupation by those aged 50 and over. There are no communal facilities on site and no resident manager.
None the less, the bungalows are of a design, layout and size particularly suited to sheltered/Independent Living
accommodation and we have assumed in our valuation that this use is likely to be continued in the event of a disposal.
A selection of photographs is at Appendix 2.
The location of the stock is shown by the map at Appendix 3.
2.1.2. Property Types
The properties can be summarised by type and tenure as follows:
Table 2: Property Types and Tenure
Type Houses & Bungalows Total
General Needs – Rented 16 16
Sheltered – Rented 32 32
Total 48 48
Source: The Original Borrower
Please refer to Appendix 1 for a full list of the properties including property types and rental data.
7
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset2.1.3. Condition
As instructed, we have not carried out a structural survey. However, we can comment, without liability, that during the course of
our inspections for valuation purposes, we observed that the Properties appear to be generally in fair condition.
Apart from any matters specifically referred to in this report, we have assumed that the Properties are free from structural faults,
or other defects and are in a good and lettable condition internally. The report is prepared on this assumption.
2.1.4. Services
No detailed inspections or tests have been carried out by us on any of the services or items of equipment, therefore no warranty
can be given with regard to their purpose. We have valued the Properties on the assumption that all services are in full working
order and comply with all statutory requirements and standards.
2.2. Environmental Considerations
We have valued the Properties on the assumption that they have not suffered any land contamination in the past, nor are they
likely to become so contaminated in the foreseeable future. However, should it subsequently be established that contamination
exists at the Properties, or on any neighbouring land, then we may wish to review our valuation advice.
We have assumed there to be no adverse ground or soil conditions and that the load bearing qualities of the site are sufficient to
support the buildings constructed thereon.
2.3. Town Planning
From our review of the final form certificate of title (the “Certificate of Title”) for the Properties issued by Trowers and Hamlins
LLP we can confirm that there are no pending planning applications or other planning issues or conditions that would adversely
affect the valuation of the Properties.
The existence of all necessary Town Planning and Building Regulation approvals and any remaining NHBC cover or similar
building warranty, where appropriate, have also been confirmed in respect of the Properties, with insurances put in place where
required.
2.4. Title and Tenure
2.4.1. Title
We have been provided with the details of Title, sent to us by Trowers & Hamlins LLP dated on or around the date of this
report. We can confirm that based on the information provided to us that each property has good and marketable title and that
there are no restrictions or covenants that would adversely affect our opinion of value.
Our valuation reflects our opinion of value in aggregate of the freehold interests (in each case) of the Properties owned by the
Issuer and identified as the subject of this Report and scheduled at Appendix 1.
The Certificate of Title discloses that no Properties are held leasehold.
All stock is unrestricted and has therefore been valued at Market Value Subject to Tenancies. We provide a valuation on the
basis of Existing Use Value - Social Housing for information purposes only.
8
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset2.4.2. Tenancies
The Original Borrower’s standard tenancy agreements are all assumed to be in a standard format. Under the assured tenancy
agreement rent can be reviewed once a year to an open market level. The tenant has the usual rights of appeal to the local
Rent Assessment Committee.
Under the secure tenancy agreement rent is reviewed every two years with reference to the local Rent Officer.
2.5. Lotting
We have valued the Properties as a portfolio assuming disposal as a single lot.
2.6. Rental Income
The gross rental income currently produced by the Properties, before deductions, is shown in the following table, broken down
by tenure.
Table 3: Gross Rental Income (correct as at July 2017)
Tenure Type Gross Rent £ pa
Social Rent 227,760
Total 227,760
Source: The Original Borrower
Average net rent levels, on a 52-week-year basis, are shown below, as derived from the property schedule sent to us by the
Original Borrower:
Table 4: Rent Levels 2017/18 £ per week net
Property Type Current Rent £ Formula Rent £
General Needs Houses 96.09 96.09
Sheltered Houses 88.82 88.82
Social Rented Average 91.24 91.24
Source: The Original Borrower
9
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset3. Market Commentary
10
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetGeneral Market Commentary
3.1. General Summary
After steady house price growth in 2015/16, Savills’ most recent house price forecasts show broadly static house prices in 2017,
picking up again from 2018. The forecast for the South-West is shown in the table below.
Table 5: Nominal House Price Forecasts – Mainstream Markets
Region 2017 2018 2019 2020 2021
UK 0.0% 2.0% 5.5% 3.0% 2.0%
South-West 1.0% 2.0% 6.0% 3.0% 1.5%
Please refer to Appendix 4 for a full, detailed market commentary.
3.2. Local Market Conditions
The tables below show the change in average prices recorded by the Land Registry for the last five calendar years looking at
“all property” and “combined terraced and semi-detached houses”. The first table shows a rise in values of under 1.5% for 2016
and the second a rise of 5.6%. The second table also shows there has been around a 5.5% fall in transactions in 2016 in the
terraced and semi-detached market. This demonstrates a reasonably strong market although with reducing sales and relatively
modest recent price growth.
Table 6: Sales Volume and Average Property Price – South Somerset
Year Average Price Sales Volume Price Change Year on Year
2012 £206,133 2,197 -0.68%
2013 £209,058 2,558 1.42%
2014 £218,090 3,086 4.32%
2015 £219,644 3,084 0.71%
2016 £222,704 3,073 1.39%
Source: Land Registry
Table 7: Sales Volume and Average Property Price – South Somerset
Average Price Terrace
Year Sales Volume Annual Change Annual Change
& Semi detached
2012 1,261 -1.71% £167,886 -0.27%
2013 1,481 17.45% £166,058 -0.78%
2014 1,703 14.99% £177,433 7.13%
2015 1,759 3.29% £182,253 2.38%
2016 1,663 -5.46% £192,349 5.61%
Source: Land Registry
The Land Registry data suggests that while values continue to grow, although at a more conservative level than in recent years,
sales volumes have declined as affordability and investor appetite has settled which could be a sign of falling confidence in the
market. Turnover dipped markedly in 2016 primarily as a result of uncertainty over Brexit.
Discussions with local agents suggests that stock of properties on their books is low and supply is a problem, with vendors
holding out until there is more certainty in the market; there does, however, still seem to be buyer appetite.
11
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetIn the lettings market a shortage of supply means that prices continue to rise across the board. This is an issue that could
worsen over the medium term - as landlords are expected to decrease their portfolios over the next three years.
We consider that there would be satisfactory demand for the properties for both sale and rental.
A detailed Market Commentary and Housing Market Up-date are attached at Appendices 4 and 5.
3.3. Vacant Possession Values
Table 8 below shows our assessment of the average vacant possession values for the properties included within the valuation
summarised by type and bedroom number:
Table 8: Vacant Possession Values
Savills Property Type Bedrooms Average VP Value
1 £105,000
Houses and Bungalows 2 £130,000
3 £175,000
Average VP value of all Houses & Bungalows £121,875
Source: Savills
3.4. Market Rents
Table 9 below shows our assessment of the average rental values for the properties included within the valuation summarised
by type and bedroom number:
Table 9: Average Market Rents (pw)
Savills Property Type Bedrooms Average Market Rent (pw)
1 £127
Houses and Bungalows 2 £144
3 £162
Average Market Rent of all Houses & Bungalows £136
Source: Savills
12
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset4. Valuation Advice
13
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset4.1. Valuation Considerations
4.1.1. Welfare Reform and Work Act 2016
Under the Welfare Reform and Work Act 2016 rents across the sector are reducing by 1% each year for four years from 2016.
These rent reduction provisions came into effect on 22 March 2016.
We have considered the impact when preparing our valuation but in summary we do not believe that as they stand they have a
significant effect on current levels of loan security value on EUV-SH.
Although current levels of loan security valuation are broadly unaffected, valuations in future years will reduce relative to where
they would have been without these proposals. This is because starting rent levels will be lower.
Valuations on MV-STT are unaffected by the rent reductions.
4.1.2. Housing and Planning Act 2016
Under the provisions of the Housing and Planning Act 2016 deregulation of the housing sector gives greater freedom to housing
providers to dispose of and manage their property assets. The deregulation provisions came into effect on 6 April 2017. As a
result S133 of the Housing Act 1988, which required consent to be obtained prior to disposal of transferred property, is no
longer effective. At the date of this valuation – as a result of the Housing & Planning Act – transferred property may be valued
on the basis of Market Value Subject to Tenancies (MV-STT) where lenders requirements and legal title permit.
The deregulation provisions contained in the Act could potentially also affect the value of social housing assets where valuations
are undertaken on the basis of Existing Use Value for Social Housing – a valuation basis which seeks to reflect the value of the
properties if sold within the sector. At present it is too early to tell how and if values will be affected. Whether or not valuations
on EUV-SH will change will depend on how housing providers respond to the changes and whether or not their behaviour, in
relation to the management and disposal of their housing stock, alters. However if behaviour does change the impact on levels
of EUV-SH is likely to be positive.
4.2. Existing Use Value For Social Housing - Valuation Approach (For Information)
4.2.1. Approach to EUV-SH
EUV-SH for loan security assumes the property will be disposed of by a mortgagee-in-possession to another Registered
Provider (“RP”) which will continue the use of the properties for social housing. These organisations will calculate their bid
according to their projected income and outgoings profile which they would estimate the properties would produce under their
management. This basis assumes rents will remain affordable to those in low paid employment and that all vacant units will be
re-let on the same basis.
We consider that the appropriate method of valuation is to use a discounted cash flow (“DCF”). The DCF allows us to project
rental income and expenditure over the term of the cash flow to arrive at an annual surplus or deficit, which is then discounted to
a net present value.
However it is also necessary to consider comparable transactional evidence where available.
14
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset4.2.2. Principal DCF Variables
The DCF assumptions are derived from information received from the RP and economic data. The table below sets out our
principal assumptions. More detailed discussion on discount rate, adopted rent levels and rental growth is contained in the
following sections.
Table 10: DCF Assumptions
DCF Assumption Amount Year Unit Source
Current rent 91.24 Current £ per week RP
Maximum affordable “convergence” rent 95.91 Current £ per week Savills
Voids and bad debts 2.5 All Years % of Debit RP / Savills
Management costs 200 – 250 All Years £ pu pa Savills
Cyclical & Responsive maintenance. costs 800 – 875 All Years £ pu pa Savills
Programmed Maintenance costs 750 – 850 All Years £ pu pa Savills
2.50 Yrs 1-2
CPI Inflation 2.25 Yr 3 % real pa Savills
2.00 Yr 4+
Programmed cost inflation (nominal) 0.50 % real pa Savills
Responsive cost inflation (nominal) 1.00 % real pa Savills
Maintenance cost inflation (nominal) 1.00 % real pa Savills
Discount Rate 5.25 – 5.75 All Years % real pa Savills
Source: Savills
4.2.3. Discount Rate
There is no hard-and-fast rule for determining the most appropriate rate to be adopted in a discounted cash flow. The discount
rate is probably the most important variable in the model since it determines the net present value of future predicted income
and expenditure flows for the property in question. Our role as valuers is to interpret the way in which potential purchasers of
the stock would assess their bids. The market for this stock will be within the RP sector.
Effectively, the discount rate is representative of both the long-term cost of borrowing for an acquiring organisation and the risks
implicit in the property portfolio concerned. The current level of long-term interest rates and the overall cost of funds must be
reflected in our valuation. In addition to considering the cost of funds, we also need to make an allowance for the risk which
attaches to our cash flow assumptions – some of which may be subject to a higher degree of risk than those generally made in
the business plans. The margin for risk needs to be considered on a case-by-case basis, having regard to the nature of the
stock.
Currently the yield on 30-year Gilts is around 1.88%. This is, in effect, the risk-free discount rate. Yields on Housing
Association long-dated, rated and un-rated bonds are typically around 2.00% to 3.00% (Source: Social Housing, July 2017).
Since the July 2015 Budget there has been limited activity in the Bond market with public-rated issues only from Metropolitan
Funding plc (4.125%, September 2015) and London & Quadrant Housing Trust (3.75%, October 2015 and 2.625% May 2016).
The spreads above their reference gilts ranged from 1.67% to 1.35% respectively. More recently retained bonds were sold by
Hyde Martlet Homes in April 2017 at an all-in cost of 3.05% and Pennaf Group in June 2017.
15
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetThe supply of traditional long-term (25- or 30-year) funding has diminished and is only available from a handful of lenders.
Shorter-term traditional funding (5 – 7 years) and funding with in-built options to re-price margins at a future date are
commonplace, introducing a new level of re-financing risk to business plans.
Notwithstanding this, new business plans are typically being run at nominal interest rates at ‘all-in’ long-term cost of funds
including margin of around 5%, reflecting the availability of long-term finance from the capital markets but also future refinancing
risk.
Given the sustained reduction in funding costs our view is that for good quality, generally non-problematical stock, a discount
rate between 4.75% and 5.5% real is appropriate (over a long-term CPI inflation rate of 2%). A greater margin for risk will be
appropriate in some cases. We would expect to value poorer stock at rates around 5.5% to 6.25% real. On the other hand,
exceptional stock could be valued at rates around 4.25% to 4.75% real. We would stress our cash flows are run in perpetuity
and not over 30 yrs.
We have adopted discount rates of 5.25% real for the General Needs rented stock and 5.75% for the Sheltered stock, over an
assumed CPI inflation rate of 2.0%. These rates are applied over the cash flow run in perpetuity.
For your information our valuation implies a real discount rate over a 30-year cash flow ranging between 3.47% and 3.8%.
4.2.4. Social Rents - Savills “Convergence” Rents and Rental Growth
Registered Providers are required to set their Social Rents in accordance with the current Rent Standard issued by the Homes
and Communities Agency (‘HCA’) and revised in 2015, as amended by The Social Housing Rents Regulations 2016. The
Guidance and the Regulations set out a formula for calculating Social rents. Service charges are charged over and above the
rents and should reflect the services being provided to tenants.
Provisions introduced by the Welfare Reform and Work Act 2016 have modified the original rent increase provisions of the Rent
Standard Guidance. Instead of increasing at CPI plus 1% per annum, rents for general needs properties will have to reduce by
1% each year from 2016 to 2019.
Mortgagees-in-possession and their successors-in-title are exempted from the rent setting and increase/reduction provisions of
the Rent Standard and the Welfare Reform and Work Act. In theory, therefore, a purchaser could base a bid for the properties
on rents up to open market levels as permitted under the terms of the tenancy agreements. However any RP purchaser would
need to set rents that are consistent with its objectives as a social housing provider.
We therefore believe that a purchaser in a competitive transaction is likely to set rents at a level which they consider are the
maximum affordable to those in low paid employment locally. We assume they would intend to charge such rents for new
tenants and increase existing rents to a sustainable and affordable rent over a reasonable period.
The average rents across the charged stock are set out below, along with the current formula rents and our assessed
sustainable affordable rent or “convergence” rent. We have adopted the convergence rent in our valuation.
16
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetTable 11: Current, Formula and Convergence Rents (£ pw – 52 Weeks)
Estimated Savills
Savills
Tenant Formula Convergence Rent Market Rent
Type Net Rent 2017/18 Convergence Rent
Household Rent 2017/18 Afford. Ratio 2017/18
2017/18
Incomes 2017/18 %
House £334.07 £91.24 £91.24 £95.91 28.71% £136.38
Grand Total £334.07 £91.24 £91.24 £95.91 28.71% £136.38
Source: The Original Borrower & Savills
We have assumed all rents will converge to our convergence rent in 3 - 4 years time. The annual rent increases have been
limited to a maximum of 5% per annum nominal.
In the long term, in order to maintain consistent levels of rent affordability, the maximum possible rate of rent growth will be
growth in local household incomes which is currently predicted to be 2.95% pa over the next 10 years in this area. We have
therefore assumed that after they have converged rents will increase at CPI + 1% per annum.
We have relied on the current and formula rents supplied by the Original Borrower in carrying out this valuation. We have not
carried out any validation of or research into the rents supplied.
4.2.5. Sales Between Registered Providers – Transactional Evidence
Until recently, evidence of sales between RPs was extremely limited – most transactions were simple transfers of engagements.
However in recent years there has been a growing body of transactional evidence from competitive sales between RPs of
tenanted stock. The evidence confirms RPs have a consistent tendency to pay a higher sums for some social housing portfolios
than would be suggested by traditional, purely cash flow driven, EUV-SH valuations. We have been heavily involved in this
emerging market and have a database of transactions covering circa 50,000 units.
Although the body of evidence is relatively small compared to the total RP stock in the UK and the market is still immature, we
are able to derive a view of the prices achieved for certain kinds of stock and lot sizes. Assuming a sensible lotting of units in
smaller batches of circa 100 units, bids between 5% to 30% above traditional EUV-SH levels are common for more modern
stock in reasonable proximity to amenities.
In contrast, it is apparent that for lots exceeding around 200 properties the prices achieved appear to be in line with the
traditional, cash flow approach to EUV-SH.
In this case, given the relatively small number of units in a single location we have valued the properties assuming a sale as a
single lot and to reflect the higher bids that we consider would be achieved for a portfolio of this size.
We have looked at the sales evidence in the South-West region, with particular regard to sales within the last five years. It is
apparent that there is an active market of sales in Somerset achieving average gross yields of between 6.08% and 11.61% and
an average price of between 113.78% and 123.24% of the “base” EUV-SH.
We have considered the available evidence and have reflected it in our valuation.
17
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset4.3. Market Value Subject to Tenancies (MV-STT) - Valuation Approach
4.3.1. Valuation Methodology - MV-STT
We assess the MV-STT in two ways; firstly by applying a discount to Market Value with Vacant Possession (“MV-VP”) and
secondly by applying a yield to rental income.
The valuation of properties and portfolios subject to Assured and Secure tenancies is carried out with reference to comparable
evidence from the sales of similar tenanted portfolios and individual units, and sold subject to Protected Tenancies or Assured
Shorthold Tenancies. There is an established body of evidence from portfolios traded on the open market to which we can
refer.
Investors tend to base their bid on their ability to “trade out” individual units at Market Value assuming vacant possession over
time. In locations where there is a limited market or where a property is difficult to trade, owing to style or market conditions,
investors will base their bid on rental return compared to capital cost.
The discount to MV-VP ranges from 10% for prime property to 50% where market conditions are difficult. Typical rates are
around a 20% to 30% discount to MV-VP for properties subject to AST tenancies.
The yield applied to net income varies from 5% or less for prime property, to 7% or more for poorer locations. This equates to a
yield on gross income (before deductions for management, maintenance & voids) of between 7% to 10% and possibly higher for
sheltered accommodation.
The Residential Investment market is currently reasonably active and having discussed the portfolio with agents active in the
market, we expect that in general, the properties would attract good demand if brought to the market.
There is little directly comparable evidence of residential investment sales in the South-West region although a portfolio of 23
units in Gloucestershire sold in July 2016, achieving a net initial yield of 3%.
The discount and yield applied in our valuations has been adjusted to reflect the additional security of tenure from which RP
tenants benefit.
4.3.2. Principal Assumptions – MV-STT
We have considered the above in arriving at our valuation. The yield and other principal assumptions adopted are set out
below.
Table 12: MV-STT Assumptions
Variable Variable Year Amount
Voids and bad debts % of Rent Debit p.a. All years 5.00
Management % of market rent All years 8 - 10
Maintenance % of market rent. All Years 15 - 20
Net Yield Applied % All Years 5.8 – 7.1
Source: Savills
18
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset5. Valuations
19
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset5.1. Valuations
Our valuations are as follows. Please note that this summary must only be read in conjunction with the rest of this report and all
Appendices.
5.1.1. Market Value Subject to Tenancies (MV-STT)
The aggregate MV-STT of the freehold or Long Leasehold interest in the 48 units for loan security purposes is:
£3,763,500 (Three million, seven hundred and sixty-three thousand, five hundred pounds)
5.1.2. Existing Use Value – Social Housing (EUV-SH) (For Information)
The aggregate EUV-SH of the freehold or Long Leasehold interest in the 48 units for loan security purposes is:
£2,806,500 (Two million, eight hundred and six thousand, five hundred pounds)
5.2. Additional Advice
5.2.1. Lending Against MV-STT
With reference to section 2.4 on Tenure, it is essential that before lending on MV-STT confirmation be obtained that the
properties are capable of being let at a Market Rent, or disposed of free from restrictions (as to which we refer you to the final
paragraph of section 1.8). If there are enforceable “Housing Restrictions” in title, planning approval, s.106 agreements or by
separate Nomination agreements, that, for example, limit disposal only to Registered Providers or contain binding contractual
nominations, then the correct valuation basis is EUV-SH and not MV-STT.
Current rental income (as advised by the Original Borrower and subject to comments above) is set out at Appendix 1 but we
make no warranty that the current income is sufficient to support lending against an MV-STT basis either on individual valuation
groups or against all the Properties.
5.3. Indicative Aggregate Market Value assuming Vacant Possession (For Information)
The aggregate Market Value of 48 units is £5,850,000. This assumes the Properties are available with vacant possession, but
in fact, the Properties are subject to tenancies. This figure cannot therefore be regarded as a valuation suitable for lending. It is
thus provided for illustrative purposes only and given with nil reliance.
Please note that the inclusion of the MV-VP valuation figures in this Report is purely for information purposes only (and
specifically not to be relied on or represented for any purpose connected with loan security or similar purposes), being an
estimate of the aggregate Market Value, of the Properties (as defined below), making assumptions:
• that the Properties are available for sale at the date of valuation with full vacant possession (notwithstanding that the
Properties are in reality occupied by tenants with probable security of tenure);
• that the Properties would be free from any encumbrances that limit their use to affordable housing as mentioned
above.
20
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, SomersetGiven these assumptions, the MV-VP valuation figures are significantly higher than the EUV-SH and MV-STT valuation figures
and hence the MV-VP figures provide, for information, a broad reference point for contrast to the EUV-SH and MV-STT
valuation figures.
5.4. Lotting and Value Disaggregation
We have valued the properties as a single lot. As a result we have not assessed individual valuations for each property.
We have, however, provided a disaggregation of the overall valuation figures by reference to our assessment of the vacant
possession value and these figures are shown on the property schedule at Appendix 1.
It is very important to note that the per unit figures shown in the schedule should not be regarded as individual valuations of the
properties. They are provided as indicative figures for administrative purposes only. They should not be used for any other
purpose, including disposals or re-assessment of security, without our prior written approval.
21
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset6. Suitability, Liability & Confidentiality Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset 22
6.1. Suitability as Loan Security
6.1.1. Suitability as Security
We have considered each of the principal risks associated with these Properties within the context of the wider property market
and these risks are reflected in our valuation calculations and reported figures as appropriate.
Overall, we consider that the Properties provide good security for a loan secured upon them, which reflects the nature of the
Properties, our reported opinions of value and the risks involved.
~~~~~~~~~~~~~~~~~~~~
We trust the above report is acceptable for your purposes, should you have any queries, please do not hesitate to contact us.
Yours faithfully
James Tillier FRICS Matthew Sale BSc (Hons) MRICS
Director Associate Director
RICS Registered Valuer RICS Registered Valuer
For and on behalf of Savills Advisory Services Limited For and on behalf of Savills Advisory Services Limited
Yarlington Treasury Services Plc – Valuation of 48 properties in Winsham, Somerset 23Yarlington Treasury Services Plc Valuation of Housing Stock for Loan Security Purposes Appendices Yarlington Treasury Services Plc September 2017
Yarlington Treasury Services Plc Valuation of Housing Stock for Loan Security Purposes Appendix 1 Property Schedule Yarlington Treasury Services Plc September 2017
YARLINGTON TREASURY SERVICES PLC
VALUATION OF HOUSING STOCK FOR LOAN SECURITY PURPOSES
PROPERTY SCHEDULE - SEPTEMBER 2017
Aggregate Aggregate EUV-
Property No. of Aggregate MV-
Address 1 Address 2 Address 3 Postcode Activity Type Bedrooms Current Rent SH (For
Type Properties STT
pw 2017/18 Information)
Western Way Winsham Somerset TA20 4JH General Needs H 2 5 £459.57 £423,850 £299,700
Western Way Winsham Somerset TA20 4JH General Needs H 3 2 £198.07 £228,220 £129,170
Bakersfield Winsham Somerset TA20 4JN General Needs H 3 3 £299.03 £342,330 £195,010
Bakersfield Winsham Somerset TA20 4JN Sheltered H 1 2 £176.44 £133,780 £111,980
Davies Close Winsham Somerset TA20 4JL General Needs H 2 3 £278.77 £254,310 £181,780
Davies Close Winsham Somerset TA20 4JL General Needs H 3 3 £301.92 £342,330 £196,890
Davies Close Winsham Somerset TA20 4JL Sheltered H 1 28 £2,471.08 £1,872,920 £1,568,310
Davies Close Winsham Somerset TA20 4JL Sheltered H 2 2 £194.66 £165,620 £123,560Yarlington Treasury Services Plc Valuation of Housing Stock for Loan Security Purposes Appendix 2 Photographs Yarlington Treasury Services Plc September 2017
Yarlington Treasury Services Plc
48 units in Winsham, Somerset
Bakersfield, Winsham Bakersfield, Winsham
Bakersfield, Winsham Bakersfield, Winsham
Davies Close, Winsham Davies Close, Winsham
Yarlington Treasury Services Plc – Valuation of 48 units in Winsham, Somerset
Page 1 of 3Davies Close, Winsham Davies Close, Winsham
Davies Close, Winsham Davies Close, Winsham
Davies Close, Winsham Davies Close, Winsham
Yarlington Treasury Services Plc – Valuation of 48 units in Winsham, Somerset
Page 2 of 3Davies Close, Winsham Western Way, Winsham
Western Way, Winsham Western Way, Winsham
Western Way, Winsham Western Way, Winsham
Yarlington Treasury Services Plc – Valuation of 48 units in Winsham, Somerset
Page 3 of 3Yarlington Treasury Services Plc Valuation of Housing Stock for Loan Security Purposes Appendix 3 Map of Stock Yarlington Treasury Services Plc September 2017
YARLINGTON TREASURY SERVICES PLC MAP OF THE STOCK – 48 UNITS IN WINSHAM, SOMERSET
Yarlington Treasury Services Plc Valuation of Housing Stock for Loan Security Purposes Appendix 4 Market Commentary Yarlington Treasury Services Plc September 2017
Market Bulletin July 2017
Housing Market Bulletin July 2017
National Overview
House prices: UK annual house price growth rose to 3.1%, slightly higher than the 2.1% recorded in May
and is a sign that the housing market is regaining momentum. After two sluggish months,
annual price growth has returned to the 3-6% range that had been prevailing since early
2015.
Source: http://www.nationwide.co.uk/about/house-price-index/headlines
Mortgage Market: The Council of Mortgage Lenders estimates that gross mortgage lending reached £20.1
billion in May. This is a 12% increase on both April last month and on May last year, in which
£17.9 billion was advanced.
Source: https://www.cml.org.uk/news/press-releases/
Construction: The IHS Markit/CIPS UK Construction PMI fell to 54.8 in June of 2017 from 56 in May, which
was the highest since December of 2015. Figures came slightly below market estimates of
55 as business activity, new work and employment expanded less amid renewed risk
aversion among clients, reflecting concerns about the economic outlook and political
uncertainty. In addition, construction companies were the least optimistic about their near-
term growth prospects since December 2016. Construction Pmi in the United Kingdom is
reported by Markit Economics.
Source: http://www.tradingeconomics.com/united-kingdom/construction-pmi
Economy: Change in gross domestic product (GDP) is the main indicator of economic growth. In
Quarter 1 (Jan to Mar) 2017, UK GDP was estimated to have increased by 0.3%. The
services aggregate was the main driver to the slower growth in GDP, contributing 0.23
percentage points. Production, construction and agriculture contributed 0.04, 0.01 and 0.00
percentage points to the headline figure respectively. The main contributor to the slowdown
in services was the distribution, hotels and restaurants sector, which decreased by 0.5%,
contributing negative 0.07 percentage points to quarter-on-quarter GDP growth. Retail trade
and accommodation services were the main contributors to the negative growth in this
sector. These falls were partially offset by an increase in food and beverage service
activities, which grew by 2.7%. Government and other services grew by 0.5%, with human
health activities and education being significant contributors, reflecting their large weights
within GDP. Business services and finance grew by 0.7%, with accounting activities and
travel agency activities both performing strongly in this quarter.
https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/gdpandthelabourmarket/previousReleases
savills.co.uk 1Market Bulletin July 2017
Gilt Rates:
th
UK gilt yields at 11 July 2017
Maturity Current Yield 1 month ago
10 year 1.28% 1.01%
20 year 1.81% 1.59%
30 year 1.91% 1.68%
* Source: http://markets.ft.com/Research/Markets/Bonds
Residential Sales Market
The Nationwide House Price Index June 2017 reported;
§ Prices rose 1.1% month-on-month in June, reversing the previous three months’ falls.
§ Annual house price growth rises to 3.1%
§ Gap in house price growth between strongest and weakest performing regions in Q2 is the smallest on
record
Headlines Jun-17 May-17
Monthly Index* 417.5 412.4
Monthly Change* 1.1% -0.2%
Annual Change 3.1% 2.1%
Average Price £211,301 £208,711
Seasonally Adjusted*
Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said:
“UK house prices rebounded in June, with prices rising by 1.1% during the month, erasing the decline recorded
over the previous three months. However, monthly growth rates can be volatile, even after accounting for seasonal
effects.
“The annual rate of house price growth, which gives a better sense of the underlying trend, continues to point to
modest price gains. Annual house price growth edged up to 3.1% from 2.1% in May. In effect, after two sluggish
months, annual price growth has returned to the 3-6% range that had been prevailing since early 2015.
“There has been a shift in regional house price trends. Price growth in the South of England has moderated,
converging with the rates prevailing in the rest of the country. In Q2 the gap between the strongest performing
region (East Anglia, which saw 5% annual growth) and the weakest (the North, with 1% growth) was the smallest
savills.co.uk 2Market Bulletin July 2017
on record, based on data going back to 1974. Nevertheless, when viewed in levels, the price gap between regions
remains extremely wide.
“London saw a particularly marked slowdown, with annual price growth moderating to just 1.2% - the second
slowest pace of the 13 UK regions and the weakest pace of growth in the capital since 2012.
Graph: Long Term House Price Trends
Rightmove Market Review June 2017:
Sales still strong, but prices fall in June for first time since 2009
§ The number of sales agreed at this time of year is the second highest for ten years, only slightly lower than
the high of May 2014
§ However, spring price momentum stalls as price of property coming to market drops by 0.4% (-£1,172), the
first fall in June since 2009 at the height of the credit crunch, and the first fall this year
§ Some markets struggling against headwinds, whilst others still have following wind despite uncertainty:
o Northern markets motoring ahead with an 11% increase in sales agreed year-on-year, compared
to only a 3% increase in the South
o First-time buyer sector sees newly-listed prices surge 3.5% month-on-month and 5.5% year-on-
year
Month Avg. asking price Monthly change Annual change Index
June – 17 £316,109 -0.4% +1.8% 260.2
May – 17 £317,281 +1.2% +3.0% 261.2
* Source: Rightmove
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