SCHOOL OF BUSINESS AND ECONOMICS 2016/2017

CASE STUDY
REAL ESTATE INVESTMENT AND VALUATION

© 2017 Maastricht University

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 1. Introduction
It is the year 2017 and you just started your new job at ML Real Estate Investments, a private
real estate investment fund with approximately €190 million of assets under management in
the European property market. Since interest rates are low, ML constantly seeks for new
investment opportunities. Your new boss, Mr. Smith, is not sure whether the current portfolio
of ML is still profitable enough. He tells you: “We bought most of the properties around the
financial crisis and did not change our portfolio much since then. However, now it is time to
revalue our properties!”
In addition, ML considers changing the strategy, since the current portfolio consist mostly of
office buildings in the Netherlands. “We could spread our risk better and make use of more
profitable real estate classes, either by adding new property types or by exploring new
markets”, Mr. Smith argues. However, the general focus should remain in the commercial
sector in Europe, since investors prefer it. For this strategy change, it would be possible for
ML to raise around €20 million in equity from investors. However, there are some conditions
for new acquisitions. ML seeks for leveraged returns of 7 – 10 % and wants to keep the
overall Loan-to-Cost Ratio (LTC) below 70 %, since this is an agreement in some of the loan
contracts.
Mr. Smith wants your team to revalue ML´s portfolio for the board meeting on June
30th. In addition, he got hold on some interesting investment opportunities, which you should
consider investing in. Since the list of new opportunities seems quite long, Mr. Smith has an
idea: “I think you should start with valuing our portfolio. Then you should reconsider our
strategy. Based on your argumentation, you should pick a property type strategy and/or a
market strategy. Next, you should value the buildings that fit the new strategy and optimize
the portfolio. Otherwise, you will not make it in time!” Your team is a bit lost, since the
combinations seem endless. Where should you start? Which combination is the best? Mr.
Smith argues: “To come up with a new strategy, I think it might be wise to analyse future
demand for individual property classes. You will have to rely on forecasts and assumptions,
but if you back them up properly, it will be accepted. Also, try to split up the work in the team
based on your skills” Since you all have different backgrounds and the devil is in the detail,
especially the last recommendation seems a good idea.

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 2. Goal /Rules
Mr. Smith gave you two weeks to come up with a (new) strategy and optimal portfolio choice
in line with it. Since some properties do not provide as many information as others, you must
rely on assumptions in some cases. It is crucial that you always back up your assumptions,
since Mr. Smith is very critical and you are new to the company.
- Define a new strategy based on macroeconomic indicators or/and real estate indices.
You can use all information available, if you back them up!
- Revalue the current portfolio
- Value the properties that fit into your strategy and give an indication for every
property in the portfolio (Hold/Sell) and the new options Walk away/Buy)
- Present the new strategy and portfolio to Mr. Smit in a presentation and written report.
- Think outside the box and use as many information as you can!
- When certain data are not available, you need to find a proxy or estimation for them.
- All assumptions need to be backed up by at least 1 source!
- Use a period of up to 8 – 10 years in your valuation
(be consistent and do not hide major events!)
- All numbers are in local currency!
- BONUS:
If you are keen enough, you can suggest the acquisition of 1 building not mentioned in
the suggestions (if it fits the strategy and requirements). For financing, you can assume
similar conditions as with the buildings in the case. However, it won’t be easy to find
all necessary data of an actual building!

3. Assumptions
- LIBOR rates are updated quarterly (use yearly average)
- Based on your strategy you can think about synergies
- You are free to think about renovations that add value to the building, but back up
your cost estimations.

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4. The Portfolio

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 The Portfolio
Total Size Price per
Property Date City Type Debt Equity Total Value LTC%
(m2) m2
The Golden Edge Jun-12 Amsterdam Office €66,562,560 €22,306,011 €88,868,571 74.9% 22,000 €4,039
Coast Twins Jun-05 The Hague Office/Retail €15,044,180 €3,999,086 €19,043,265 79.0% 12,000 €1,587
The Lion Jun-09 Brussels Office €24,042,857 €16,028,571 €40,071,429 60.0% 17,000 €2,357
Building 10 Jun-07 Rotterdam Office €25,134,545 €10,771,948 €35,906,494 70.0% 10,000 €3,591
Total €130,784,142 €53,105,617 €183,889,759 71%* 61,000 €2,894*
* average

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 The Golden Age
The Golden Age is a new Class A office building located in the prestigious Zuidas in
Amsterdam. It is considered as a cutting-edge building with a BREEAM score of 90%. Due to
its size, the building is especially attractive for bigger companies, such as insurances or banks.
ML is proud of the building, since it was built in cooperation with a major developer
exclusively for ML. The local market conditions for the Zuidas look great and due to its
energy efficient design, costs are low. Therefore, the building seems to be a cash cow.
However, the financing needs some considerations, since the current loan is expiring in
around 2 years from now. In addition, the big size could be a problem, since there is still some
vacancy and the current tenants do not use the full space potential. Accenture, is probably
consolidating its departments across different Zuidas buildings and therefore not renewing the
tenant contract, unless ML could convince them to stay. ML would prefer to rent out the
remaining space capacity to one tenant, providing secured cash-flows for the future.
Summary Information Financial Information
Property Name: The Golden Edge Total Capitalization €88,868,571
Status: In Portfolio Debt: €66,562,560
Investment Date Jun-12 Lender: Deutsche Bank
Owner Interest 100% Interest Rate: LIBOR + 400 bps
Property Usage: Office Final maturity 2Q2019
Building Class A Equity: €22,306,011
Building Period 2012 LTC% 74.9%
City Amsterdam
Submarket Zuidas New Financing Offers
Size (m2) 22,000 Lender: ING
Rentable 18,000 Maximum amount €43,265,664
Parking 3,000 Interest Rate: LIBOR + 500 bps
Lobby 1,000 Commitment Term 4Q2022

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 Tenant Information
Gross Rent PSM Contract until Comments
Among first tenants, therefore reduced
Accenture 320 01/06/2020
rent over lease contract period
Roland Berger 350 01/06/2022 -
Among first tenants, therefore reduced
Norges Bank 320 01/06/2019
rent over lease contract period
Among first tenants, therefore reduced
Starbucks NL HQ 320 01/06/2020
rent over lease contract period

In-Place Performance
2013 2014 2015 2016
Occupancy % 70% 70% 87% 87%
Tenants (and occupied space)
Accenture 4,500 4,500 4,500 4,500
Roland Berger 3,000 3,000
Norges Bank 7,200 7,200 7,200 7,200
Starbucks NL HQ 900 900 900 900
Gross Rent (in Euro)
Accenture €1,440,000 €1,440,000 €1,440,000 €1,440,000
Roland Berger €- €- €1,050,000 €1,050,000
Norges Bank €2,304,000 €2,304,000 €2,304,000 €2,304,000
Starbucks NL HQ €288,000 €288,000 €288,000 €288,000
Parking Revenue €600,000 €600,000 €600,000 €600,000
Operating Expenses 15% 15% 15% 15%
CAPEX 0 0 100,000 0

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 The Coast Twins
The Coast Twins is a Class B office and retail building in the centre of The Hague. It got its
name from the significant double peak tower. The building is not state of the art anymore, but
located in a very good area. In addition, the ministry of education is a stable tenant. Compared
to the market, the building has a relatively low vacancy. However, the rent contract of Post
NL expires soon. As the biggest tenant, Post NL uses its power and the vacancy conditions in
the The Hague office market to push for better terms in a potential contract extension.
Considering the overall portfolio performance, the building increases the average LTC ratio.
This is because of a special deal, ensuring low interest rate spreads, which lead ML to
increase the debt ratio. In 2013, ML ensured the renovate the floors in the AH super store and
the common areas, leading to CAPEX agreements. It might be that other /new tenants, will
push for similar renovations during contract negotiations.
Summary Information Financial Information
Total
€19,043,265
Property Name: Coast Twins Capitalization
Status: In Portfolio Debt: €15,044,180
Investment Date Jun-05 Lender: Deutsche Bank
LIBOR + 250
Owner Interest 100% Interest Rate: bps
Property Usage: Office/Retail Final maturity 2Q2020
Building Class B Equity: €3,999,086
Building Period 2002 LTC% 79.0%
City The Hague
Submarket Center New Financing Offers
Size (m2) 12,000 Lender: ING
Office 9,000 Maximum amount €14,893,738
Retail 3,000 Interest Rate: LIBOR + 500 bps
- - Commitment Term 4Q2028

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 Tenant Information
Gross Rent PSM Contract until Comments
Stable tenant, paying premium
Ministry of Education 165 01/09/2021
rents
Contract expires soon. PostNL
PostNL 150 01/01/2018
pushes for better rent conditions
Uses the retail area. Due to the
Albert Heijn Super Store 130 01/07/2020 market power, AH was granted
with lower rent

In-Place Performance
2013 2014 2015 2016
Occupancy % 90% 90% 90% 90%
Tenants (and occupied space)
Ministry of Education 3,600 3,600 3,600 3,600
PostNL 4,500 4,500 4,500 4,500
Albert Heijn Super
2,700 2,700 2,700 2,700
Store
Gross Rent (in Euro)
Ministry of Education €594,000 €594,000 €594,000 €594,000
PostNL €675,000 €675,000 €675,000 €675,000
Albert Heijn Super
€351,000 €351,000 €351,000 €351,000
Store
Parking Revenue
Operating Expenses 30% 30% 30% 30%
CAPEX 50,000 300,000 50,000 0

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 The Lion
ML invested into this class B building right in the financial crisis, since the old owner got into
financial problems. After a long period of problems, the investment finally seems to pay off.
Despite its age, the building is quite new for the district and offers access to the nearby
European institutions. Due to mismanagement, there was only one tenant in 2013, leading to a
high vacancy. However, the embassy of Croatia needed a short-term office solution, leading
to a contract with short duration, but premium rents. ML is quite happy with the current
tenants, since they are both expected to deliver stable rents. In 2015, a major renovation was
implemented, lowering energy cost substantially. It can be expected that Shearman & Sterling
will renew their contract. However, it is important to keep the embassy of Croatia or find a
suitable successor.

Summary Information Financial Information

Property Name: The Lion Total Capitalization €40,071,429
Status: In Portfolio Debt: €24,042,857
Investment Date Jun-09 Lender: ING
Owner Interest 100% Interest Rate: 3.5 percent
Property Usage: Office Final maturity 3Q2019
Building Class B Equity: €16,028,571
Building Period 1990 LTC% 60.0%
City Brussels
Submarket Leopold district New Financing Offers
Size (m2) 17,000 Lender: ING
Office 16,500 Maximum amount €25,245,000
- - Interest Rate: 5.5 percent
- - Commitment Term 4Q2029

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 Tenant Information
Gross Rent PSM Contract until Comments
The embassy is planning to expand
Embassy of Croatia 140 01/09/2019
and maybe move
A law firm working in the
Shearman & Sterling LLP 130 01/07/2020 environment of the European
institutions.

In-Place Performance
2013 2014 2015 2016
Occupancy % 58% 83% 83% 83%
Tenants (and occupied space)
Embassy of Croatia - 4,125 4,125 4,125
Shearman & Sterling LLP 9,900 9,900 9,900 9,900
Gross Rent (in Euro)
Embassy of Croatia - €577,500 €577,500 €577,500
Shearman & Sterling LLP €1,287,000 €1,287,000 €1,287,000 €1,287,000
Operating Expenses 26% 28% 30% 20%
CAPEX 0 0 500,000 0

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 Building 10
This rather small building in the centre of Rotterdam is rather old and occupied by rather
small, non-public tenants. The building was acquired right before the housing crisis and
therefore a premium price was paid. ML decided to wait until the crisis is over, to potentially
sell the building again. Now, Mr. Smith wants to find out whether there is still potential. Even
though the main tenant, PostNL, left in 2014, a new law firm and a fintech company was
found as new tenants recently. However, CashTech preferred a short-term contract, paying
premium rents as a compensation. To potentially keep CashTech or attract new tech
companies, ML invested in new fibre cables in 2016. In addition, a new loan with a time to
maturity of 10 years was taken.

Summary Information Financial Information

Total
€35,906,494
Property Name: Building 10 Capitalization
Status: In Portfolio Debt: €25,134,545
Investment Date Jun-07 Lender: Deutsche Bank
LIBOR + 350
Owner Interest 100% Interest Rate: bps
Property Usage: Office Final maturity 3Q2027
Building Class B Equity: €10,771,948
Building Period 1980 LTC% 70.0%
City Rotterdam
Submarket Centre New Financing Offers
Size (m2) 10,000
recently refinanced
Office 10,000

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 Tenant Information
Gross Rent PSM Contract until Comments
Small legal company, which moved in
Law Brothers 140 01/09/2021
2015. Focusing on M&A support
CashTech 155 01/01/2021 FinTech that just moved in.
Tax Corporation 125 01/07/2023 Oldest tenant in the building
merged with another branch and
PostNL 170 20/06/2014
moved into another building

In-Place Performance
2013 2014 2015 2016
Occupancy % 95% 95% 55% 90%
Tenants (and occupied space)
Law Brothers 3,500 3,500

CashTech 3,500
Tax Corporation 2,000 2,000 2,000 2,000
PostNL 7,500 7,500 - -
Gross Rent (in Euro)
Law Brothers €- €- €490,000 €490,000
CashTech €- €- €- €542,500
Tax Corporation €250,000 €250,000 €250,000 €250,000
PostNL €1,275,000 €1,275,000 €- €-
Operating Expenses 31% 31% 31% 31%
CAPEX 20,000 0 0 250,000

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5. The Options

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 Rue la Paris
This property is located in Paris. EMI, a French real estate fund, wants to sell this prestigious
build out of their CBD portfolio. Located in the prestigious 8th Arrondisement of Paris, the
building is a sizeable asset at a good price for the Paris market and could be used to get some
easy exposure to a new country. The total acquisition cost excluding debt service and taxes,
would be around €30 million. The property is currently under leased, but the mixed-use of the
building including office, some residential, the potential for a hotel and retail space makes the
property flexible. The office tenant is willing to renegotiate their lease and potentially pay
€730 per square meter per annum as of January 1st, 2018 and take on some more space. A
potential problem is that ING is not very convinced of a mixed-use building, offering only a
bit more than 50% of the price value as a loan.

Summary Information Financial Information

Property Name: Rue la Paris Price €58,740,000
Status: Option to buy
Available share 100%
Property Usage: Mixed-Use Available Financing
Building Class A Loan: €32,307,000
Building Period 2000 Lender: ING
City Paris Interest Rate: 5%
Submarket 8th Arrondisement Commitment Term 3Q2027
Size (m2) 3,000
Office 3,000
- -

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 Tenant Information
Contract
Gross Rent PSM Comments
until
The tenant is willing to stay
Paris Consulting Company 700 01/09/2020 and therefore renew the
existing contract

In-Place Performance
2013 2014 2015 2016
Occupancy % 85% 85% 85% 85%
Tenants (and occupied space)
Paris Consulting Company 2,550 2,550 2,550 2,550
Gross Rent (in Euro)
Paris Consulting Company - €1,785,000 €1,785,000 €1,785,000
Operating Expenses 15% 16% 15% 16%
CAPEX 0 0 0 0

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 The Warehouse
Mr. Smith read that ecommerce is getting bigger and bigger and contacted a friend in Venlo,
running the Greenport. The friend told Mr. Smith that Under Armour, a US sportswear
company, asked to rent a warehouse in the Greenport for their European distribution centre.
Since Under Armour does not want to buy a warehouse yet, but Greenport only provides land
for developers, ML could work as an intermediate together with a developing partner. The
project would be a bit risky, but it would enable ML to move into the warehouse sector with
low initial effort to find a tenant. Since the Greenport requires strict building standards in
terms of sustainability, the building seems quite expensive for a warehouse. However, Under
Armour agreed to pay a little premium in return. The developer estimates that the operation
expenses will be around 10 % and the construction period will be 1.5 years.

Summary Information Financial Information

Property Name: The Warehouse Development Cost €30,000,000
Status: Option to develop
Available share 100%
Property Usage: Warehouse Available Financing
Building Class - Loan: €21,000,000
Building Period 2017 Lender: ING
City Venlo Interest Rate: 5%
Submarket Greenport Commitment Term 1Q2022
Size (m2) 50,000
Rentable 50,000
- -

Tenant Information
Gross Rent PSM Contract until Comments
After the initial rent period, Under
Under Armour 60 01/09/2025 Armour considers to renew the contract
(if operations run well)

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 The Mall
Atrium, a big retail investor, offered you exclusively to take over one of their malls. The
Atrium Copernicus is located in the city of Toruń in Poland and seems to be a promising step
into the retail sector. Most information is publicly available at the Atrium website. The only
potential problem is that ML has no experience in the retail sector, no experience in central
Europe and the property is quite expensive, given ML’s portfolio size. It will require good
arguments to convince the board of this idea…

Summary Information Financial Information

Property Name: The Mall Price €134,935,500
Status: Option to buy
Available share 100%
Property Usage: Retail Available Financing
Building Class A Loan: €66,118,395
Building Period 2005 Lender: ING
City Torun Interest Rate: 5%
Submarket - Commitment Term 3Q2027
Size (m2) 47,500
Retail 44,600
Parking lots 1,470

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 Tenant Information
Gross Rent PSM Contract until Comments
Auchan 214.00 01/09/2020

Media Markt 220.00 01/09/2021

Decathlon 225.00 01/10/2019

Reserved 210.00 01/11/2020

average gross rent PSM, shops have
different contracts, but are quite small,
Other 215.00
so replacement should be available
easily

In-Place Performance
2013 2014 2015 2016
Occupancy % 97% 97% 97% 97%
Tenants (and occupied space)
Auchan 11,150 11,150 11,150 11,150
Media Markt 8,920 8,920 8,920 8,920
Decathlon 11,150 11,150 11,150 11,150
Reserved 4,460 4,460 4,460 4,460
Other 7,582 7,582 7,582 7,582
Gross Rent (in Euro)
Auchan €2,386,100 €2,386,100 €2,386,100 €2,386,100
Media Markt €1,962,400 €1,962,400 €1,962,400 €1,962,400
Decathlon €2,508,750 €2,508,750 €2,508,750 €2,508,750
Reserved €936,600 €936,600 €936,600 €936,600
Other €1,630,130 €1,630,130 €1,630,130 €1,630,130
Operating Expenses 25% 25% 25% 25%
CAPEX 0 0 0 0

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 The Tower
Mr. Smith got a call from one of his developer friends in Germany, asking whether ML wants
to invest in a brand-new office building in Frankfurt, in the banking district! The building
would not be significantly large, but be state of the art in terms of energy consumption. Mr.
Smith is praising a new “The Edge”. The building would be quite expensive, but it would be a
JV, lowering the costs and the risk for ML. The JV partner, UniPension is a pension fund of
significant size, which does not want to miss out on high potential returns in case Frankfurt
will be hosting London’s finance industry soon! The only problem is that there are no tenants,
yet. UniPension asks ML to take care of this problem and come up with potential tenants. In
return UniPension vouches for potential distresses, convincing ING to lower the cost of debt
for this project. UniPension believes that the building will be a success and it can be assumed
that occupancy rates will by high from the start. Due to the energy efficiency, operation
expenses should be in the range of 5%
Summary Information Financial Information
Property Name: The Tower Estimated Cost €160,000,000
Status: Option to develop ML share €80,000,000
Available share 50%
Property Usage: Office Available Financing
Building Class A Loan: €45,600,000
Building Period 2017 Lender: ING
City Frankfurt Interest Rate: 2.5%
Submarket Banking district Commitment Term 3Q2027
Size (m2) 30,000
Office 29,000

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