A branch portfolio across several cities: consistency before value

1. The context (anonymised)

The client occupied almost all of the premises it owned. The portfolio had built up by sedimentation, across successive openings, with no estate-acquisition logic: property had been bought where the network needed to be present. The result is a deeply heterogeneous whole.

• Three families of asset: town-centre units at the foot of buildings on trading streets, neighbourhood units in residential fabric, and a few entire buildings where the branch occupies the ground floor and the upper floors house offices.
• A contrasting geography: locations in large metropolitan areas, where the market for commercial premises is deep and documented, and sites in mid-sized cities where transactional evidence is scarce and the letting market lightly structured.
• Occupation by the operator: most of the portfolio is owner-occupied, with no lease binding on a third party; a few sites sit under internal leases between group entities, and a partial sale and leaseback was under study on the best locations.
• Purpose of the assignment: to feed the group's financial reporting and to provide a basis for arbitrage — which assets to keep, sell or convert.

2. The brief and its constraints

• A valuation for the financial statements — framed by VPGA 1 of the Red Book, with the requirements of independence, traceability and disclosure that follow. The basis of value and how it articulates with the accounting framework — fair value within the meaning of IFRS 13 and its input hierarchy — had to be set out explicitly, the choice of accounting treatment remaining that of the client and its auditor.
• A single valuation date for the whole portfolio — a non-negotiable condition of a readable consolidation: values established at different dates cannot be added up and passed off as a total.
• Reporting at two levels — a self-contained sheet per asset, for site-by-site arbitrage; a portfolio synthesis for the committee and the auditor.
• A report meeting the requirements of VPS 3 — the same headings, the same declared assumptions, the same limitations from one asset to the next: the internal comparability of the report was itself a deliverable.
• A constrained timetable — the portfolio had to be covered within the closing window, which called for declared sampling rather than exhaustive inspection.

3. The challenges specific to the portfolio

• Heterogeneity makes averages misleading — a unit on a metropolitan trading street and a neighbourhood unit in a mid-sized city share neither the same letting market, nor the same risk profile, nor the same buyers. Any grid applied mechanically produces aberrations at both ends of the portfolio.
• Owner-occupation removes any observable rent — with no real lease, a market rental value has to be reconstructed for each site: the difficulty shifts to the quality of local evidence, and that is where the gap opens between a solid valuation and an approximate one.
• Value in continued occupation against a vacant-possession assumption — the value of a unit occupied by its owner in the continuity of its operation is not the same as its market value assuming vacant possession. On this portfolio the gap is structural: specific fit-out — security lobby, strongroom, branded frontage — has almost no value to a buyer from another sector, and removing it costs money.
• Prime locations depend on footfall — the value of a unit on a trading street rests on passing trade, on the continuity of the retail frontage and on the quality of neighbouring occupiers. A break in footfall shows up in the value before it shows up in the accounts.
• Functional obsolescence tied to digitalisation — fewer counter visits weigh on demand for this type of floorspace. The question becomes: what is this unit worth for another use — retail, food and beverage, offices, local services? The subject is no longer the value of a branch, but that of a unit for which the current use is one occupation among several.
• Internal leases are not market evidence — a rent fixed between entities of one group reflects an internal policy, not a meeting of supply and demand: capitalising it without adjustment would validate a circular value.
• The sum of the parts is not the block value — a portfolio sold as a single lot does not trade at the total of unit values: effects of size, liquidity and composition play out according to the quality of the lot.

4. The method, step by step

The answer to heterogeneity is not to standardise the values, but to standardise the path that leads to them. The whole assignment was built around that principle.

• Step 1 — segmenting the portfolio and a common analytical grid: classifying each asset by family (trading-street unit, neighbourhood unit, mixed building), by local market type and by occupation status. A single collection grid was settled up front — floor areas and measurement basis, configuration, apparent condition, quality of location, retail environment, specific fit-out — so that every site is described under the same headings.
• Step 2 — a planned inspection campaign with declared sampling: assets carrying the stakes — prime locations, entire buildings, sites earmarked for arbitrage — were inspected systematically. The rest of the portfolio was covered by a representative sample of each family, supplemented by technical files, with inspections rotating from one year to the next. The report states which sites were inspected and which were treated on documents: a declared limitation, not a grey area.
• Step 3 — studying the local markets, market by market: assembling, for each city, a base of letting and transaction evidence on retail and office premises. The metropolitan areas offered usable series; the mid-sized cities called for fieldwork and heightened caution, stated as such.
• Step 4 — reconstructing market rental value: by comparison, applying the adjustment grid from step 1 — position, frontage, floor area, condition, configuration — then testing the alternative use. Where the current use is no longer the most probable in the long run, rental value was assessed on the best-suited and reasonably achievable use. Internal leases were neutralised in favour of that reconstructed value.
• Step 5 — moving to value on homogeneous assumptions: conversion by capitalising income, with yields built by asset family and by local market, derived from observed transactions and adjusted for the risk specific to each site — depth of market, dependence on footfall, ease of conversion, cost of reinstatement. Two sets of values were produced: continued occupation by the occupier, and a vacant-possession assumption. For the locations targeted by the sale and leaseback, the effect of a lease to be concluded with the seller, whose terms were not settled, was treated as a special assumption.
• Step 6 — consolidation and reconciliation: aggregating the unit values at a common valuation date, then analysing the structure of the portfolio by family, by city and by conversion risk. The sum of the parts was set against a block reading: a buyer taking the whole is not buying the same thing as a series of local buyers each taking one unit. The gaps and their causes were made explicit rather than smoothed away.
• Step 7 — cross-cutting consistency check and report: a cross review of the sheets — two comparable assets on comparable markets must be treated the same way, and any divergence must be explained by a fact, not by an implicit judgement. The final report, structured to VPS 3, sets out the terms of engagement, the basis of value, the assumptions and special assumptions, the limitations on investigation, the sheet for each asset and the portfolio synthesis.

5. The outcome (qualitative)

The deliverable served its double purpose. For financial reporting, the client had a homogeneous report at a single valuation date, every assumption of which is traceable and whose limitations are declared — which smoothed the exchanges with the auditor, who could check the method rather than argue asset by asset. For arbitrage, the segmentation revealed a structure the client had not been reading until then: a core of first-quality locations, liquid and readily convertible, stood apart from a body of neighbourhood assets whose value depends closely on the current use being maintained. The sale and leaseback project was refocused on the first group. Above all, the documented gap between value in continued occupation and value on a vacant-possession assumption gave the committee a clear decision grid: keep, sell or convert. No amount or yield is disclosed here — they are specific to the client and to the valuation date of the assignment.

6. What it teaches

• On a portfolio, method outranks the unit value — the credibility of a multi-site report is judged on the consistency of its assumptions and the traceability of its path, well before the precision of any single asset.
• A common grid is not a common value — standardising the collection and the reasoning is precisely what makes the real differences between local markets visible, instead of flattening them.
• The single valuation date is the condition of consolidation — adding values established at different dates does not produce a total, but the illusion of one.
• An owner-occupied asset calls for two readings — continued occupation and vacant possession: on premises with specific fit-out, the gap is management information in its own right.
• Sampling is acceptable when it is declared — coverage by rotation, set out in the report, is worth more than exhaustiveness for show.
• Obsolescence of use is handled through alternative use — when the original vocation erodes, value is read in the best-suited and reasonably achievable use.

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Note: this case study is anonymised and strictly methodological — a model case drawn from real assignments, no detail of which identifies a client, an institution, a site or a transaction. The figures of the assignment are not disclosed: rental values, capitalisation yields and allocations depend on the market cycle, the local market and the characteristics of each asset. The choice of accounting treatment belongs to the client and its auditor. The value of a real portfolio always results from a case-by-case analysis conducted on documents and on site, at a determined valuation date. To instruct us, see our contact page or the property blog.