Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2021
13. Investment properties continued The assumptions and valuation models used by the valuers, and supporting information, are reviewed by senior management and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, together with senior management, meet with the independent valuer on a quarterly basis to review the valuations and underlying assumptions, including considering current market trends and conditions, and changes from previous quarters. The Board will also consider whether circumstances at specific investment properties, such as alternative uses and issues with occupational tenants, are appropriately reflected in the valuations. The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. The outbreak of Covid-19, declared by the World Health Organization as a ‘global pandemic’ on 11 March 2020, has had a significant impact on many aspects of daily life and the global economy – with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel restrictions are in place and lockdowns have been applied both nationally and at a local level. Whilst restrictions are currently being eased in the UK, following the successful rollout of the vaccination programme local lockdowns may continue to be deployed as necessary and the emergence of significant further outbreaks or a ‘further wave’ is possible. The pandemic and the measures taken to tackle Covid-19 continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date some property markets have started to function again, with transaction volumes and properties on the market returning to levels where in general an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, and in contrast to the year ended 31 March 2020, the valuation is not reported as being subject to ‘material valuation uncertainty’ as defined by VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. As at 31 March 2021 and 31 March 2020 all of the Group’s properties, including owner-occupied property, are Level 3 in the fair value hierarchy as it involves use of significant judgement. There were no transfers between levels during the year and the prior year. Level 3 inputs used in valuing the properties are those which are unobservable, as opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs either directly, i.e. as prices, or indirectly, i.e. derived from prices). Information on these significant unobservable inputs per sector of investment properties is disclosed as follows: 2021 2020
Retail and Leisure
Retail and Leisure
Office
Industrial
Office
Industrial
245,385 360,740 76,285
Appraised value (£000) Area (sq ft, 000s)
224,620 318,330 121,665
828
2,570
706
808
2,570
829
Range of unobservable inputs: Gross ERV (sq ft per annum) – range
£11.00 to £78.05 £34.10 0.00% to 7.98%
£3.75 to £21.18 £10.39 2.79% to 7.63%
£3.46 to £29.65 £11.84 3.07% to 29.58%
£11.00 to £53.59 £27.92
£3.54 to £19.58
£3.46 to £81.77 £32.13
– weighted average Net initial yield – range – weighted average Reversionary yield – range – weighted average True equivalent yield – range
£9.79
0.00% to 7.59%
–2.54% to 8.16%
–0.18% to 25.27%
4.35% 4.38% 7.64%
4.89% 4.63% 5.25%
4.34% to 10.83%
3.68% to 8.59%
7.01% to 26.95%
5.47% to 10.80%
4.46% to 10.17%
4.36% to 11.97%
7.02% 4.97% 7.95%
7.04% 5.40% 6.63%
4.42% to 9.95%
3.73% to 8.39%
7.80% to 14.03%
5.33% to 9.80%
4.39% to 9.65%
3.97% to 11.95%
– weighted average 6.97% 5.40% 7.17% The property valuations reflect the external valuers’ assessment of the impact of Covid-19 at the valuation date. An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. We have reviewed the ranges used in assessing the impact of changes in unobservable inputs on the fair value of the Group’s property portfolio and concluded these were still reasonable. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield. Sector Movement 2021 Impact on valuation 2020 Impact on valuation Industrial Increase of 50 basis points Decrease of £36.3m Decrease of £29.3m Decrease of 50 basis points Increase of £45.4m Increase of £36.1m Office Increase of 50 basis points Decrease of £20.3m Decrease of £17.5m Decrease of 50 basis points Increase of £24.5m Increase of £20.5m Retail and Leisure Increase of 50 basis points Decrease of £5.2m Decrease of £10.9m Decrease of 50 basis points Increase of £6.7m Increase of £13.9m 6.82% 5.02% 8.99%
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