REAL ESTATE INVESTMENT
COURSEWORK
DUE 5pm, 31st May 2023
MSc elective : BUSI97064
Imperial College Business School
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COURSEWORK – OVERVIEW OF ASSIGNMENT
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You are being asked to prepare a preliminary investment committee presentation on a transaction for which I will provide you data and
context in the following slides.
The assessment will test you in the following ways:
1. Understanding of the material covered in the lectures, especially Sessions 2 and 3
2. Understanding of the Excel models provided in the course and ability to work with and extend the One Reversion Model
3. Financial and business analysis of a real estate investment opportunity and of different financing alternatives
4. Ability to carry out basic market research regarding a transaction
5. Ability to prepare a high-quality, researched and well thought through presentation and to present your arguments, findings and
conclusion clearly and concisely
6. Ability to answer questions concisely, whilst referencing sources, your own financial analysis or by developing new arguments
7. Ability to produce a presentation of professional quality
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COURSEWORK – REQUIRED SECTIONS OF THE PRESENTATION
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1. Cover Page (state your group number)
2. Executive Summary (ca. 1-2 pages)
1. Investment description
2. Investment theme and rationale for carrying out investment
3. Key return parameters for the suggested base case
4. Sources and uses
3. Description of Investment/Property (ca 2-3 slides)
1. Macro market (Country and economic context) description and analysis with reference to your property type
2. Submarket analysis (1-slide) with reference to your property (quote at least 2 sources)
3. Property description (including tenancies) and ESG/EPC strategy
4. Financial Analysis (ca. 4-7 pages)
1. Key assumptions and their detailed justification (you need to justify/rationalise each key assumption as far as this is
possible)
2. Key outputs for all financing alternatives and the recommended alternative (justify your choice of financing and choice of
price). Explain your results and choice of financing
3. Sources and uses – state these for all financing alternatives
4. ‘Break Even Case’ and ‘Upside Case’ and all sensitivities you think are relevant or particularly important
5. Next Steps and Timing (1 page)
1. Due Diligence – what type of due diligence do you suggest carrying out before submitting a binding bid
2. Key concerns you want to address in the next phase of the deal
Appendix (ca 4-7 pages)
1. Answer the questions on the following slide (use the questions as headings when answering)
Sources: Harvard referencing – please make sure that all key information shown is properly referenced
Maximum page limit of presentation is 20 pages (Cover and Appendix included) – overstepping limit may be penalised
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COURSEWORK – REQUIRED APPENDIX – ANSWERS TO FOLLOWING QUESTIONS
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Please answer each of the following questions in your appendix. These questions were submitted by IC members ahead of your
investment committee call on this transaction and you will have to give concise, well-structured answers backed by analysis and
research, where necessary:
1. Please show the effect on IRR, multiple and peak equity when selling 1 and 2 years earlier and 1 and 2 years later. Briefly explain
your results and issues that may arise. Based on your analysis, would you choose to sell earlier or later than your base case?
2. What do you believe will be the major factors impacting rental growth for offices in the City of London and why. What future rental
growth (or decline) do you expect in the London market over the next 5 years. How have you used this information/analysis in
your pricing?
3. What are potential sustainability approaches for this investment, and can these be implemented? How does ‘sustainability’ differ
from EPC measures? – Be specific and give examples . How have you reflected sustainability in your investment analysis?
4. You colleague has provided you with a model for this coursework that reflects indexation and reversion mechanisms that apply to
continental European markets. However, your case is taking place in the UK, where you would typically see upwards only rent
reviews, as discussed in class. What rent does the model choose when a tenant stays (please explain in detail) and do your
specific rental assumptions capture what you would like to model?
5. Justify you pricing recommendation. In your answer, please address the following sub-questions:
i. How does your pricing relate to replacement cost and is replacement cost relevant for your analysis
ii. Does your pricing imply that the deal is expensive? How does your pricing relate to historical and current yields and rents?
Throughout, try to be concise and analytical and to the point. Back any key statements with reference or analysis and clearly state any
assumptions you make.
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COURSEWORK – REQUIREMENTS/FINAL COMMENTS
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Excel File: Required Modelling Procedure
• Any cells or lines you add or where you change formulae need to be highlighted in yellow (no cells with formula, lines or columns
are to be deleted).
• All formula changes or additions need to be described on the ‘Track Changes’ sheet in detail: description/purpose of change or
addition, affected sheets/cells – name the cell range and sheet, who executed change (person), name of person who confirmed
that change is correctly modelled
• “Hard-coding” will be penalised, unless hard-coding reflects particular assumptions in the tenancy schedule or in the assumption
sheet
• All changes and modelling need to be clearly explained and should be easy to follow
• Failure to follow this procedure will be penalised
• The password for the Model: 2023_ORM v_UKprovided for this coursework is ‘ORM23UK’
Excel File: Tip
• Make sure that any change/addition you make to a specific element of the model flow through all relevant elements of the model so
that the solution and output is correct and fully reflects this change
• The ORM model still contains the data from Session 2 and 3. You need to make the changes to the inputs (e.g. change rent roll,
capex assumptions, and all assumptions in the Assumption sheet) that you feel are necessary to properly answer the questions
and produce the output as required
PowerPoint Presentation
Your presentation should have:
• Professional look & consistent formatting
• No spelling mistakes
• Clear and concise language and explanation
• Type/Font: Arial or Times Roman, size 12 or 14 (one or the other but consistently used)
• Clearly referenced sources of your research
• The answers in the Appendix need to clearly referenced and if applicable state where exactly I can find the analysis in the ORM
model (Sheet/Lines)
The quality, clarity, look and feel of your presentation, including these factors, will be awarded marks
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COURSEWORK – REQUIREMENTS/FINAL COMMENTS
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Submission Deadline
• Submit your work on the Hub by 5pm, 31st May 2023
What needs to be submitted
• Presentation in Power point and pdf
• The model: “2023_ORM v_UK” amended/adjusted as necessary, by you to comply with this assignment. All tables and financial
outputs and results used/quoted in the Power point presentation need to be in the model and their derivation should be
understandable and easy to find and follow by me (and others). The relevant sections in the presentation should say where
exactly results can be found.
Please remember:
If I cannot follow or find your work then I cannot assign marks to it! This means, for example, if you state an ERV or exit assumption
and I do not know why or if I cannot find or follow your rationale, then I cannot assign marks. The same applies if there are outputs in
your presentation that I cannot find in your model or if the analysis is hardcoded.
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COURSEWORK: INVESTMENT DESCRIPTION
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Background
• It is April 2023. You just started working at a Value Add fund with a cost of capital (in this context this means ‘equity IRR’)
requirement of at least 15% and a maximum leverage restriction of 65% LTC.
• This fund is normally active in continental Europe, but wants to explore investing in London. After visiting several advisors and
brokers in London the fund came across the investment opportunity below. One of your colleagues has quickly adapted your normal
Euro/sqm model (that you encountered in Session 2 and 3) to £/sqf. But there may be more changes or specific assumptions you
need to make to adapt it to a UK context, in particular regarding how the exit is calculated, i.e. regarding the exit cap convention in
London, and how you approach tenant reversions and the UK leasing structure (no indexation of rent but rather upwards only rent
reviews). You can ignore UK income and capital gains taxation and, for simplicity, simply use the tax structure and specific
assumption provided in the model (you will still need to make acquisition tax assumptions).
COURSEWORK: INVESTMENT DESCRIPTION
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Investment Opportunity
• You are offered an investment in the City of London, on Fleet Place street, through a broker, who you will need to pay 1% of the
acquisition price for advice and transaction support.
• The property is from the 1980s and was renovated in the 2020s. The floor plans and some pictures are provided on the following
pages.
• The property currently has an EPC rating of C for all floors. Try to find the report, which is public, for more information. You may be
aware that from 2030 all commercial properties require a minimum EPC rating of B to allow renting to third parties (unless the
property is listed). This will require capital expenditure and upgrades that should to be reflected in your analysis.
• Tenancy schedule is provided separately. Here additional context:
1) Tenant 1 is a book publisher and book retailer. It rents two top floors and the retail unit on the Ground Floor. However, it has
been struggling financially due to increased online competition, and as a result, Tenant 1 will exercise the break option by
12/12/2023. If tenant 1 does not exercise the break option then there will be an open market, upwards only rent review.
2) Tenant 2, a grocery delivery start-up, has rented two floors when business was booming during Covid-19 period. Tenant 2
has a prolongation option, which, when exercised, will prolong the lease by 5 years at the maximum of the market rent and
in place rent (i.e. if the tenant exercises the prolongation option, then there will be an open market, upwards-only rent
review). Your colleague just shared with you the news that Tenant 2 was acquired by a rival firm in April 2023.
3) Tenant 3 is a data analytics and (recently) AI company that provides solutions for a range of businesses, and has a culture
of innovation, collaboration, and growth. Tenant 3 showed a willingness to return its current space and take over the top
floors currently rented by Tenant 1, but only after the space is upgraded. The tenant also has an open market, upwards-
only rent review in 2027.
Please note that all leases are “outside the 1954 Act”. Please be careful to reflect the specific comments in the tenancy
schedule.
• Vacant Space: Check the state of repair during the inspection and then make appropriate assumptions to make sure the space is
lettable (e.g. CAT A or CAT A plus, EPC and associated costs)
COURSEWORK: INVESTMENT DESCRIPTION
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Investment Opportunity cont.
• The seller disclosed that immediate costs of ca. £ 500,000 are required to repair the roof. There is no vendor due diligence and you
have not yet commissioned your own technical due diligence.
• You are however aware that you will need to reflect any works and costs that you feel are required for you sustainability/EPC
business plan strategy. You may receive relevant information during the property inspection and pls ask relevant questions
• You need to do your own work to find investment and leasing comparables or sources. However, the advisor gave you the following
3 investment comparables
• Building A transacted in Q3 2022 in Holborn, fully refurbished and fully leased to multiple top tenants with a WAULT of ca.
10years, at a Net initial yield of 4.00%
• Building B transacted in Q1 2022 in Moorgate, 100% occupied (tenant leaving in less than a year) and in need of significant
refurbishment at a Net initial yield of 4.8% on income and at a sqf price of £850/sqf
• Building C transacted in Q1 2023, close to St Paul’s cathedral, 80% occupied, multi-tenanted in a good state of repair even
if the empty space needs to be refurbished, WAULT of ca. 4 years and acquisition at Net Initial Yield of 6.7% on in place
income
• Please find your own rental comps through research and inspection. Please clearly state your comps and their relevance and show
how they link into your assumptions
• Realistically, if things go to plan, you will only be able to complete the acquisition and take possession end of 30/06/2023. Make
sure that your overall underwriting/assumptions are realistic and plausible versus the information provided as well as in relation to
your market research and comps.
• If the IC approves your preliminary Investment Memo, then it is likely to allow you to proceed and will provide funds for further due
diligence.
COURSEWORK: INVESTMENT DESCRIPTION
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As part of your analysis, you need to consider (and fully model) the following two financing alternatives and you will also need to create
a ‘switch’ between the alternatives. Make a recommendation which financing alternative you prefer and explain why:
Alternative A: Senior Facility plus Capex/Leasing Facility
• Senior Facility: 50% LTV (V here is assumed to be the acquisition price), at 250 bps margin p.a., 1% arrangement fee. 1.5%
amortisation p.a. of the outstanding senior loan balance.
• Capex and Leasing facility to support your leasing effort and expenditure to a maximum 60% of all Tis, LCs and Capex as and
when they are incurred can be drawn under the facility, but not more than £7 million drawdown in total and amounts can only be
drawn down for the first 36 months. The margin on drawn amounts is 300 bps and the commitment fee on undrawn amounts is 150
bps. Quarterly Amortisation of 3% on the outstanding drawn amount starting in Month 37.
• The Capex and Leasing facility should be fully modelled (e.g. not hard coded)
• Your bank proposes 5-year Euribor facilities for the Senior and Leasing facility, but you may negotiate or choose a different term,
depending on the length of your business plan. Both the Senior and Capex/Leasing Facilities will incur pre-payment penalties of
150bps in year 4, 200bps in year 3, and 300 bps in years 0-2, always on drawn capital. Pre-payment penalties are not incurred on
regular amortisation after year 3.
COURSEWORK: INVESTMENT DESCRIPTION
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Alternative B: Senior Facility plus Cash Trap & Injection
• Senior Facility of 65% LTV (where V is assumed to be price at acquisition) financing, at 350 bps margin. This is a bullet loan (i.e. no
amortisation)
• As part of granting this loan the bank requires a cash trap that works as follows: No distributions during the first 36 months, and
thereafter only the amount above a minimum cash balance of £4 million can be distributed. If the cash balance falls below this
minimum requirement, then any excess cash flow will be used to replenish the cash balance and only the excess can be
distributed after 36 months.
• Moreover, the bank is worried about the risk and asks to fund £4 million into the deal at the time of closing the transaction/i.e. at
acquisition, which will be trapped and count towards your cash trap.
General
In both financing Alternative A above and Alternative B you will be required to swap all your facilities. For this you need to state your
swap assumption (and state your source). Simplify swap by assuming that there will be a simple 5-year term (or however long your
financing runs), thus ignoring amortisation, staged drawdown on a capex line, or swap breakage costs (should you sell early), etc.
For all cases show your Excel modelling and explain approach + record track changes.
Create a switch and adjust the model so that one can see the full effect of Alternatives A and B (and if you accept the Challenge of
modelling Alternative C (below) then also C) by just switching this switch/toggle. It is important that you test properly that the switch
works, as it is easy to introduce mistakes.
Alternative C: Not required/slightly more difficult – additional points given to those enjoying a challenge
Alternative B with additional constraint: one can only distribute above the minimum cash balance if the WAULT is at least 3 years at the
time of distribution. For this exercise, assume that your average lease is 5 years long to a tenant break and what counts are secured
leases until the first break. Fully integrate this case into the ‘Switch’ and into the model (e.g. sources and uses, etc.) and analysis
COURSEWORK: FLOOR PLAN – FLOOR PLANS
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Ground Floor
Typical Floor
COURSEWORK: FLOOR PLAN – OUTSIDE VIEW
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COURSEWORK: INTERIOR AND LOBBY
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• Take your own photos during the inspection
COURSEWORK: PROCESS
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Q&A
I will aim to answer relevant questions either in live sessions, when everybody will be able to hear the answers or in a Q&A file. The
Q&A file will be regularly updated in the respective Coursework DROPBOX folder. This should hopefully ensure that everybody has the
same information.
Issues with your group
If there are issues with your group, for example because some group members are unresponsive or do not participate, please alert the
course team early. If you raise this issue only 1-2 days before submission, then this is likely to be too late and your presentation may be
of lower quality than necessary. Raising an issue after submission will not help raise your grade.
Deal with any group issues you have early! When marking I will only look at the output (presentation and model) – it is for you to sort
out your group and to alert the course team early, if issues arise!
Working in groups and delivering output in time (even if group composition is not perfect) is an important part of the assignment. In a
job you may also not have ideal circumstances and will nonetheless have to deliver on time. You need to be proactive about your group
and deal with any issues early, otherwise you are likely to underperform in the assignment.