Menu
Investment
A Refreshing Change
29/May/2014
Becoming, being a landlord will change you. In the driving seat, no longer a passenger, will shift you into a different state of mind. Investment does that to people: the feeling that others are paying you is enlightening. A business plan is rarely straightforward; at a higher more focussed level of understanding, your way forward will be clearer. What next to do for the best is less likely to be an issue.
The taking of advice and help is still necessary, but not from anyone. What’s needed is advice and practical help from people who really do know what they are doing, what is happening at a deep level of understanding. New ways of thinking are emerging, advancement in technology sees to that, but the fundamental principles are unchanged. Professional advisers have a dual-role: to act for you and guide you through the complexity of the property system, the law and valuation and to extricate you from your mistakes. Good advice will point out the pitfalls and prevent falling into them; wise advice will help prevent making mistakes in the first place.
With commercial property, mistakes are readily available. They serve as a reminder a landlord is not infallible. Anyone can buy what they fancy, but beauty is not necessarily packaged to appear obvious. There may be hidden qualities in the discarded and neglected – as anyone that paid next-to-nothing for commercial property in run-down parts of East and North London can testify now that prices have shot through the roof. Anyone can read a lease but literally is not necessarily the correct conclusion. Legislation can override, so too can case-law.
Investment may be a passive, you can buy to hold, come what may, but what to buy is a challenge. All property is owned by someone somewhere but it doesn’t have to be you. Statistics are averages. For the long term, you have to get your choice of a particular property right from the start or over time you could find yourself out of pocket.
For successful investment it pays to be pro-active. With business tenancy asset management, problems can crop up all the time, often when least expected, frequently when least convenient. A difference between a passive and pro-active investor is the ability to transform problems into opportunities.
Tenants may be corporate entities but are run by people; and people have feelings. If already in your nature then it may not hurt to be accommodating of tenant requests, but nevertheless it will pain if your approach does not lead to you becoming better off. Business tenants are very good at getting what they want at the expense of the landlord. You will have to be firm in your dealings with them, possibly tougher than you normally are with others. To call a bluff, you may have to be willing to let go of the existing tenant, no matter how tempting to hang on. You may have to leap into the unknown and risk a void to improve your prospects. Wise advice from a professional sounding-board will prove a good investment.
Property does not perform, people do. Performance is a measure of achievement. “Wealth is the product of man’s capacity to think”. How wealthy you become depends upon thinking like a wealthy person. Property is not simply a commodity, land and buildings for occupation, it can also double as a store of money. Play the property game well and substantial amounts of money can come your way. You can jump on the bandwagon whenever excitement is in the air, but the big money comes from listening. Listening to wise advisers, listening to what you don’t want to hear, listening to yourself.
When you listen, you hear timing. Successful investment and all that entails is about the art of timing. When to say yes, when to say no. Indecision and choice become things of the past. The more adept, the more you trust your intuition at all times, not just in emergencies and in crisis as do most people. Most people lurch, thinking problems are normal. Essentially, a problem is about direction, a helpful signal in a tangible form. Letting go of wanting to be like other people will result in being yourself. Being yourself is the first step in knowing what to do, to whom to turn for help and guidance.
Anyone can become a property investor by putting their money and mind to it, but there’s a cut-off point, a limit after which things start to go downhill. The point of no return is to warn you. To change your approach to investment. When something comes naturally, you are made for each other, well-suited. All property belongs to someone somewhere but not all property comes onto the market. At any time, the selection of property for sale may not be the property for you. You may have to bide your time, to be patient, perhaps extremely, until the right moment arrives for you to strike while the iron is hot.
People generally are impatient. Most people are scared of going it alone because they are inhibited by a desire to be popular. Lacking emotional self-confidence, they follow the crowd. As Warren Buffett said of equities, “you pay a very high price in the stock market for a cheery consensus.”
To swim against the current of common opinion is contrarian, but to succeed in commercial property investment requires a different mindset. Serious research and a thorough understanding of the principles and forces at work to ensure the crowd is wrong or else the signs can be misinterpreted. The market is so distorted by sentiment and eagerness that long-gone are the days when low yield could be interpreted as certain growth or high yield meaning trouble ahead. Impatience will cause you to become involved regardless. Impatience is an addiction, it takes hold of you and habitually destroys your capacity to think.
Be yourself and you will have one strategy in common with successful investors – let the market bring the deals to you, rather than you chasing after them.
The taking of advice and help is still necessary, but not from anyone. What’s needed is advice and practical help from people who really do know what they are doing, what is happening at a deep level of understanding. New ways of thinking are emerging, advancement in technology sees to that, but the fundamental principles are unchanged. Professional advisers have a dual-role: to act for you and guide you through the complexity of the property system, the law and valuation and to extricate you from your mistakes. Good advice will point out the pitfalls and prevent falling into them; wise advice will help prevent making mistakes in the first place.
With commercial property, mistakes are readily available. They serve as a reminder a landlord is not infallible. Anyone can buy what they fancy, but beauty is not necessarily packaged to appear obvious. There may be hidden qualities in the discarded and neglected – as anyone that paid next-to-nothing for commercial property in run-down parts of East and North London can testify now that prices have shot through the roof. Anyone can read a lease but literally is not necessarily the correct conclusion. Legislation can override, so too can case-law.
Investment may be a passive, you can buy to hold, come what may, but what to buy is a challenge. All property is owned by someone somewhere but it doesn’t have to be you. Statistics are averages. For the long term, you have to get your choice of a particular property right from the start or over time you could find yourself out of pocket.
For successful investment it pays to be pro-active. With business tenancy asset management, problems can crop up all the time, often when least expected, frequently when least convenient. A difference between a passive and pro-active investor is the ability to transform problems into opportunities.
Tenants may be corporate entities but are run by people; and people have feelings. If already in your nature then it may not hurt to be accommodating of tenant requests, but nevertheless it will pain if your approach does not lead to you becoming better off. Business tenants are very good at getting what they want at the expense of the landlord. You will have to be firm in your dealings with them, possibly tougher than you normally are with others. To call a bluff, you may have to be willing to let go of the existing tenant, no matter how tempting to hang on. You may have to leap into the unknown and risk a void to improve your prospects. Wise advice from a professional sounding-board will prove a good investment.
Property does not perform, people do. Performance is a measure of achievement. “Wealth is the product of man’s capacity to think”. How wealthy you become depends upon thinking like a wealthy person. Property is not simply a commodity, land and buildings for occupation, it can also double as a store of money. Play the property game well and substantial amounts of money can come your way. You can jump on the bandwagon whenever excitement is in the air, but the big money comes from listening. Listening to wise advisers, listening to what you don’t want to hear, listening to yourself.
When you listen, you hear timing. Successful investment and all that entails is about the art of timing. When to say yes, when to say no. Indecision and choice become things of the past. The more adept, the more you trust your intuition at all times, not just in emergencies and in crisis as do most people. Most people lurch, thinking problems are normal. Essentially, a problem is about direction, a helpful signal in a tangible form. Letting go of wanting to be like other people will result in being yourself. Being yourself is the first step in knowing what to do, to whom to turn for help and guidance.
Anyone can become a property investor by putting their money and mind to it, but there’s a cut-off point, a limit after which things start to go downhill. The point of no return is to warn you. To change your approach to investment. When something comes naturally, you are made for each other, well-suited. All property belongs to someone somewhere but not all property comes onto the market. At any time, the selection of property for sale may not be the property for you. You may have to bide your time, to be patient, perhaps extremely, until the right moment arrives for you to strike while the iron is hot.
People generally are impatient. Most people are scared of going it alone because they are inhibited by a desire to be popular. Lacking emotional self-confidence, they follow the crowd. As Warren Buffett said of equities, “you pay a very high price in the stock market for a cheery consensus.”
To swim against the current of common opinion is contrarian, but to succeed in commercial property investment requires a different mindset. Serious research and a thorough understanding of the principles and forces at work to ensure the crowd is wrong or else the signs can be misinterpreted. The market is so distorted by sentiment and eagerness that long-gone are the days when low yield could be interpreted as certain growth or high yield meaning trouble ahead. Impatience will cause you to become involved regardless. Impatience is an addiction, it takes hold of you and habitually destroys your capacity to think.
Be yourself and you will have one strategy in common with successful investors – let the market bring the deals to you, rather than you chasing after them.
Safety in Numbers
02/May/2014
Physically outwardly people are different and different nationalities each have their own cultures but, other than gender, human beings are basically inwardly the same. When for whatever reason we are emotionally upset at some level, whether consciously or subconsciously, we become psychologically off-balance so will have a propensity that steers us in one direction more than another. It is inclination, a ‘position of comfort’, that is, for example, why people generally only listen to what they want to hear, or don’t take any notice of anything that doesn’t make sense to them. In such a state, warning signals, often subtle, can go unheeded. Often it is only after a tangible symptom is experienced that we take action to remedy the situation in the hope it is not too late to do anything about the underlying problem.
Many people think problems of any sort are normal, but I do not. In my philosophy, a problem is a fault in direction so, essentially, it is not possible to have more than one problem at a time. In reality, having more than one problem at any time is simply fragments of the same underlying problem. Delve and you’ll find a common thread. A problem will not go away of its own accord: it may be swept under the metaphorical carpet, put to the back of your mind, but inevitably it will find a way to attract your attention. You will have to do something about it. The longer the delay, the harder it can get, the more expensive it can become to remedy. The reason problems are direction-related is to enable us and the reality we can create for ourselves to remain in sync with the ups-and-downs of life generally. About how you respond and react to whatever is happening right now, including what you are reading now and thinking about as you go. A problem must be transformed into an opportunity and the more adept you are at doing that as you go the less likely you’ll come unstuck in times of change. As I say, everything in life hinges upon the consequences of two words ‘yes’ and ‘no’. Which means problems can be avoided by taking preventative action. (Word of warning: trying to think of every possibility in advance is likely to leads to nervous breakdown.)
Applied self-development is integral to investment success. When you know yourself inside out, you’ll naturally know whatever you need to say and do and if you want to help make a difference to the lives of others what needs saying and doing. (Caution: don’t try this at home unless you feel confident enough)
In a balanced frame of mind and in the context of property investment, essentially, there is no difference between residential and commercial, or any other type of property for that matter. Both have the potential for investment, of enabling you to become better off than you are now. The only differences that can affect your prospects of success are in how the property is bought, managed, and sold. Any other differences are by-products of bias and prejudice. Both have their share of success stories, of the property that spectacularly outperforms, or the tenant whose improved covenant and financial standing enhances capital value. And both have their share of horror stories, of the tenant that goes broke or trashes the place before leaving.
Demand and supply provide the fuel for short-term action and whether change is seen as for the better or worse depends upon your ability to capitalise on opportunity. The long-term driving force is the socio-political economy and how the property market relates to what will happen in future.
At macro-level, residential property is subject to political ideology, a continual cry to build more new homes suggests shortage to the opportunist but can put a damper on prices for existing properties in the locality. Rents for residential property can increase as mortgage criteria for would-be buyers tightens, but lending relaxation can remove the froth. Commercial property can be affected by new development, changes in the law, and tenants rethinking their business priorities. Ultimately investment value of all property depends upon someone else paying more than you; and the profitability of the particular property to you depends upon how much you pay when you buy, what return you get during the period of ownership, and what you get when you sell.
For peak performance, the goal for human beings is perfect balance and harmony. Extremely challenging self-discipline to always be spot-on, second-best is to have emotional flexibility and financial agility, to be able to adjust your attitude and consequently your thinking at a moment’s notice. But most people are not as fit as that: instead they are set in their ways, do not have what it takes, and most investments prove second-rate. Hence, the property is held beyond its shelf -life as an investment and gradually becomes a problem, where the tenant’s conduct and requests are accommodated regardless.
A common reason for not wanting to sell is tax. Private investors particularly dislike paying tax even though the net proceeds from selling at peak will often be more than after management problems have set in. Another reason is what to do with the money which considering many private investors do depend upon the income from their property might in principle make one think they would be more canny at maximising were it not for a laziness that comes from being an armchair investor. The question is not what to do with the money but whether it would pay to re-invest in a prevailing market when prices are out of sync with property fundamentals. But that is also symptomatic of impatience. It doesn’t follow that one should immediately reinvest the proceeds for the sake of it: what should follow is to hold the cash until the right investment opportunity comes along whereupon it can be bought at a moment’s notice: an investment approach which held in good stead many investors during the immediate aftermath of the 2008 financial crisis. The best time to buy is when the world and his wife cannot. A contrarian approach that calls for deep thinking of a special kind.
Investment is about liquidity, about being able to at least get your money back at short notice. Inflation is present by default so can be ignored in the calculation. In the pecking order, cash on deposit is the purist form of investment, closely followed by equities (stocks and shares) which provide the most opportunity to pit your wits and skills, the sheer volume of transactions assists market liquidity and keeps costs to a minimum. Then there are alternative forms of investment of which property is especially attractive for its unique attribute: the legally-binding payment of rent and in the case of commercial property the ‘upward-only’ rent review whereby at the least the same rent as passing will endure for the contractual term.
Measuring return on investment can be benchmark-related, such as an index, or absolute. In my opinion, absolute, cash performance net of tax, is the better approach. Generally, the financial services industry thinks in headlines. Being told an investment has grown by 10% is more impressive than the true figure after adjusting for inflation and the costs of realising that gain.
Unlike shares in a property company that is quoted on the stock market, where share-price performance is subject to stock market psychology as well as the skill of the company’s managers, direct ownership of property is an illiquid investment, whose costs are hefty which means the risk of loss is greater so the need for rewarding performance to counteract has to be certain. There are however no guarantees, no reason other than emotional and intellectual know-how for your choice of particular property to succeed as an investment. Therefore, because know- how is the test that most investors fail to pass, to overcome the uncertainty and to prevent demand from becoming static, property has developed a reputation as a hedge against inflation. Consequently, people generally buy into the idea that the property market must be viewed as a long-term investment.
Long-term investment in the property market is a source of rich pickings for banks and advisers. Regardless of whether or not your choice of property performs, whether or not you do in fact become better off, a substantial percentage of financial resources is extracted from you, being one of the multitude, into lining the pockets of the few. That is why, all other factors remaining equal, the ease of management in the choice of property medium is critical. And that is why the cost of borrowing and the cost of advice in themselves will make a difference to your return on capital.
Psychological imbalance is caused by adverse influence in early upbringing, social conditioning, and peer pressure. Instead of equal measures of yes and no, a combination of positive support and constructive criticism, the cumulative affect of an overly negatively or underly-enthusiastic here and there can as the years pass make all the difference. I believe that in our heart of hearts, we are all purists. It is at the more mundane superficial levels where the impurities have crept in and toxins allowed to fester and run riot that psychological damage occurs. Naturally geared to balance and harmony, we can counter-act any deficiencies but what sort of adjustments and how much fine-tuning depends upon each individual. Only you know what you need.
It is natural to want to be better off, so choice of investment ought not be a hit and miss affair, but frequently it is. Indeed, choice, a psychological device for ensuring we are on track for our own individual aspirations rather than those of others, ought not to enter our thinking at all, but it does. Decisions, decisions. Bombarded by attention-seekers and half-baked ideas, we can, unless we learn to be ruthless become confused, thought and feeling in a state of uncertainty. (If the idea of becoming ‘ruthless’ bothers then define it as being friendly to everyone but saying no to most of them.) Living in fear, to protect ourselves from repeating mistakes, evidence is preferred to instinct. Rather than unreservedly trust intuition, gut-feeling is analysed and doubted. Instead of formulating a strategy, we disconnect from our metaphorical true path and end up buying whatever takes the fancy, the mood of the moment. The property investment portfolio is a hotchpotch which we might justify as diversification for spreading the risk but really it’s just safety in numbers.
Many people think problems of any sort are normal, but I do not. In my philosophy, a problem is a fault in direction so, essentially, it is not possible to have more than one problem at a time. In reality, having more than one problem at any time is simply fragments of the same underlying problem. Delve and you’ll find a common thread. A problem will not go away of its own accord: it may be swept under the metaphorical carpet, put to the back of your mind, but inevitably it will find a way to attract your attention. You will have to do something about it. The longer the delay, the harder it can get, the more expensive it can become to remedy. The reason problems are direction-related is to enable us and the reality we can create for ourselves to remain in sync with the ups-and-downs of life generally. About how you respond and react to whatever is happening right now, including what you are reading now and thinking about as you go. A problem must be transformed into an opportunity and the more adept you are at doing that as you go the less likely you’ll come unstuck in times of change. As I say, everything in life hinges upon the consequences of two words ‘yes’ and ‘no’. Which means problems can be avoided by taking preventative action. (Word of warning: trying to think of every possibility in advance is likely to leads to nervous breakdown.)
Applied self-development is integral to investment success. When you know yourself inside out, you’ll naturally know whatever you need to say and do and if you want to help make a difference to the lives of others what needs saying and doing. (Caution: don’t try this at home unless you feel confident enough)
In a balanced frame of mind and in the context of property investment, essentially, there is no difference between residential and commercial, or any other type of property for that matter. Both have the potential for investment, of enabling you to become better off than you are now. The only differences that can affect your prospects of success are in how the property is bought, managed, and sold. Any other differences are by-products of bias and prejudice. Both have their share of success stories, of the property that spectacularly outperforms, or the tenant whose improved covenant and financial standing enhances capital value. And both have their share of horror stories, of the tenant that goes broke or trashes the place before leaving.
Demand and supply provide the fuel for short-term action and whether change is seen as for the better or worse depends upon your ability to capitalise on opportunity. The long-term driving force is the socio-political economy and how the property market relates to what will happen in future.
At macro-level, residential property is subject to political ideology, a continual cry to build more new homes suggests shortage to the opportunist but can put a damper on prices for existing properties in the locality. Rents for residential property can increase as mortgage criteria for would-be buyers tightens, but lending relaxation can remove the froth. Commercial property can be affected by new development, changes in the law, and tenants rethinking their business priorities. Ultimately investment value of all property depends upon someone else paying more than you; and the profitability of the particular property to you depends upon how much you pay when you buy, what return you get during the period of ownership, and what you get when you sell.
For peak performance, the goal for human beings is perfect balance and harmony. Extremely challenging self-discipline to always be spot-on, second-best is to have emotional flexibility and financial agility, to be able to adjust your attitude and consequently your thinking at a moment’s notice. But most people are not as fit as that: instead they are set in their ways, do not have what it takes, and most investments prove second-rate. Hence, the property is held beyond its shelf -life as an investment and gradually becomes a problem, where the tenant’s conduct and requests are accommodated regardless.
A common reason for not wanting to sell is tax. Private investors particularly dislike paying tax even though the net proceeds from selling at peak will often be more than after management problems have set in. Another reason is what to do with the money which considering many private investors do depend upon the income from their property might in principle make one think they would be more canny at maximising were it not for a laziness that comes from being an armchair investor. The question is not what to do with the money but whether it would pay to re-invest in a prevailing market when prices are out of sync with property fundamentals. But that is also symptomatic of impatience. It doesn’t follow that one should immediately reinvest the proceeds for the sake of it: what should follow is to hold the cash until the right investment opportunity comes along whereupon it can be bought at a moment’s notice: an investment approach which held in good stead many investors during the immediate aftermath of the 2008 financial crisis. The best time to buy is when the world and his wife cannot. A contrarian approach that calls for deep thinking of a special kind.
Investment is about liquidity, about being able to at least get your money back at short notice. Inflation is present by default so can be ignored in the calculation. In the pecking order, cash on deposit is the purist form of investment, closely followed by equities (stocks and shares) which provide the most opportunity to pit your wits and skills, the sheer volume of transactions assists market liquidity and keeps costs to a minimum. Then there are alternative forms of investment of which property is especially attractive for its unique attribute: the legally-binding payment of rent and in the case of commercial property the ‘upward-only’ rent review whereby at the least the same rent as passing will endure for the contractual term.
Measuring return on investment can be benchmark-related, such as an index, or absolute. In my opinion, absolute, cash performance net of tax, is the better approach. Generally, the financial services industry thinks in headlines. Being told an investment has grown by 10% is more impressive than the true figure after adjusting for inflation and the costs of realising that gain.
Unlike shares in a property company that is quoted on the stock market, where share-price performance is subject to stock market psychology as well as the skill of the company’s managers, direct ownership of property is an illiquid investment, whose costs are hefty which means the risk of loss is greater so the need for rewarding performance to counteract has to be certain. There are however no guarantees, no reason other than emotional and intellectual know-how for your choice of particular property to succeed as an investment. Therefore, because know- how is the test that most investors fail to pass, to overcome the uncertainty and to prevent demand from becoming static, property has developed a reputation as a hedge against inflation. Consequently, people generally buy into the idea that the property market must be viewed as a long-term investment.
Long-term investment in the property market is a source of rich pickings for banks and advisers. Regardless of whether or not your choice of property performs, whether or not you do in fact become better off, a substantial percentage of financial resources is extracted from you, being one of the multitude, into lining the pockets of the few. That is why, all other factors remaining equal, the ease of management in the choice of property medium is critical. And that is why the cost of borrowing and the cost of advice in themselves will make a difference to your return on capital.
Psychological imbalance is caused by adverse influence in early upbringing, social conditioning, and peer pressure. Instead of equal measures of yes and no, a combination of positive support and constructive criticism, the cumulative affect of an overly negatively or underly-enthusiastic here and there can as the years pass make all the difference. I believe that in our heart of hearts, we are all purists. It is at the more mundane superficial levels where the impurities have crept in and toxins allowed to fester and run riot that psychological damage occurs. Naturally geared to balance and harmony, we can counter-act any deficiencies but what sort of adjustments and how much fine-tuning depends upon each individual. Only you know what you need.
It is natural to want to be better off, so choice of investment ought not be a hit and miss affair, but frequently it is. Indeed, choice, a psychological device for ensuring we are on track for our own individual aspirations rather than those of others, ought not to enter our thinking at all, but it does. Decisions, decisions. Bombarded by attention-seekers and half-baked ideas, we can, unless we learn to be ruthless become confused, thought and feeling in a state of uncertainty. (If the idea of becoming ‘ruthless’ bothers then define it as being friendly to everyone but saying no to most of them.) Living in fear, to protect ourselves from repeating mistakes, evidence is preferred to instinct. Rather than unreservedly trust intuition, gut-feeling is analysed and doubted. Instead of formulating a strategy, we disconnect from our metaphorical true path and end up buying whatever takes the fancy, the mood of the moment. The property investment portfolio is a hotchpotch which we might justify as diversification for spreading the risk but really it’s just safety in numbers.
Sentiment v Technicalities
23/April/2014
With commercial property rent review and lease renewal when practical help from a surveyor is sought, as distinct from seeking advice, there are two types of client: those that are only interested in the end-result, and those that want to have the process explained at every step of the way.
I used to think the types were age-related, but I have come to realise it is more about the degree of faith and level of trust that the client has in the surveyor’s overall ability. A youngster surveyor with only a few years’ experience under their belt may have the technical competence that comes from text-book thinking, but is less likely to have anything like the amount of wisdom that stems from dealing with situations over many economic cycles. Any lack of experience is normally reflected in demeanour and conversational style.
To be required to provide explanation at every step of the way can be very tiring and frustrating for the surveyor. It is one thing keeping an experienced knowledgeable client informed because the terminology and subtleties won’t need spelling out, but you try telling someone whose knowledge of the subject is obviously lacking, even if they don’t think it is, and immediately you’re into having to manage the client’s expectations.
When you trust a surveyor that knows what they are doing, amongst the benefits you get is the one thing that micro-managing a surveyor will stifle: creativity. A surveyor left to their own devices without being influenced by the client does not necessarily mean that the surveyor will automatically think of everything, but it should at least avoid the pressure that can be imposed by limitation. In my opinion, there is no point in wanting a surveyor to provide practical help only to insist upon how that help is performed.
Surveyors do not make the market, we merely interpret it for the benefit of our clients. The market is indifferent, it does not care about what happens to participants, but surveyors are concerned (a cynic might say for their own livelihoods if nothing else) so have developed a methodology that may be summed up as a combination of opinion and evidence.
Even though valuation is an art just as much as a science, the evidential approach tends to be preferred because that enables surveyors to be able to justify opinions. To be able to satisfy the assertion to prove it. Our ways of interpretation presuppose sufficient experience to cover every eventuality, but whether there is no difference between theory and practice depends upon remembering that people have feelings, as I keep being reminded, when I venture into sensitive territory, because our ways of interpreting can be stuck in the past or subject to ideology.
Interpretation of the market as a whole comes from a combination of practical experience, industry comment and informed anecdotes. The market as a whole is diverse with a myriad of interests and whether surveyors get a look in to the entire gamut depends upon how much of the market a surveyor is exposed to. Anything unusual or out of line with orthodox ways of interpreting can tend to be dismissed as an aberration.
It is not compulsory for a tenant to take advice from a surveyor, but that doesn’t prevent surveyors from rejecting evidence involving an unrepresented tenant as unrepresentative of the market. In my opinion, it is surveyor-snobbery to think that unrepresented tenants cannot possibly know what they are doing even though it is the tenant that commits to the lease, not the surveyor. A lease of commercial property is a commercial contract which means the parties are deemed to know what they are doing. For a surveyor to override that built-in assumption is tantamount to asserting that only surveyors have the right to decide what is and what is not evidence.
Even so, there is some truth in that, to be precise in deciding the weight that should be attached to the evidence. Evidence is proof but the evidence should also be able to show on the balance of probabilities that the source is au fait with the technicalities. Weight is not the same as admissible: weight is how much notice ought be taken of the evidence for purpose of being influenced by that evidence.
Nor is it compulsory for a landlord to take advice from a surveyor and many landlords do not. Many landlords see no point in incurring the extra expense when as the decision-makers themselves they are perfectly capable of making up their own mind whether to accept the tenant’s offer. Hence, the evidence unrepresented landlords create is as far as such landlords are concerned beyond reproach. It can come as a surprise therefore to be told by a surveyor that evidence provided by an unrepresented landlord is just as likely to be questionable as that of an unrepresented tenant.
The sector of the market involving surveyors tends to be more sophisticated and in the upper reaches where rent level are at least £15,000 pa, but there are pockets amongst the lower echelons where surveyors are involved because what starts as an unrepresented scenario can becomes so frustrating for the parties concerned that surveyors are brought in to sort things out.
A sizeable sector of the market is unrepresented and in a world of its own. In this sector, it is common for rents either to be significantly less or substantially more than if surveyors were involved. Less is when the landlord’s investment policy is to want full occupancy regardless. More is when the business philosophy of the landlord and tenant is contrary to the surveyor-system.
Client-expectations are sentiment-oriented, never mind the small print of business tenancy law and valuation; instead, the landlord believes a right to expect a proper return on the investment, the tenant is doing well so should pay more; while the tenant may not be able to afford so much but doesn’t want to upset the landlord. Surveyor-thinking is technicalities regardless of affordability. Different sectors of the market have their own ways of reaching agreement. It is only when the lines of communication cross between the unrepresented and surveyor-methodology that the attitudinal fireworks begin.
I used to think the types were age-related, but I have come to realise it is more about the degree of faith and level of trust that the client has in the surveyor’s overall ability. A youngster surveyor with only a few years’ experience under their belt may have the technical competence that comes from text-book thinking, but is less likely to have anything like the amount of wisdom that stems from dealing with situations over many economic cycles. Any lack of experience is normally reflected in demeanour and conversational style.
To be required to provide explanation at every step of the way can be very tiring and frustrating for the surveyor. It is one thing keeping an experienced knowledgeable client informed because the terminology and subtleties won’t need spelling out, but you try telling someone whose knowledge of the subject is obviously lacking, even if they don’t think it is, and immediately you’re into having to manage the client’s expectations.
When you trust a surveyor that knows what they are doing, amongst the benefits you get is the one thing that micro-managing a surveyor will stifle: creativity. A surveyor left to their own devices without being influenced by the client does not necessarily mean that the surveyor will automatically think of everything, but it should at least avoid the pressure that can be imposed by limitation. In my opinion, there is no point in wanting a surveyor to provide practical help only to insist upon how that help is performed.
Surveyors do not make the market, we merely interpret it for the benefit of our clients. The market is indifferent, it does not care about what happens to participants, but surveyors are concerned (a cynic might say for their own livelihoods if nothing else) so have developed a methodology that may be summed up as a combination of opinion and evidence.
Even though valuation is an art just as much as a science, the evidential approach tends to be preferred because that enables surveyors to be able to justify opinions. To be able to satisfy the assertion to prove it. Our ways of interpretation presuppose sufficient experience to cover every eventuality, but whether there is no difference between theory and practice depends upon remembering that people have feelings, as I keep being reminded, when I venture into sensitive territory, because our ways of interpreting can be stuck in the past or subject to ideology.
Interpretation of the market as a whole comes from a combination of practical experience, industry comment and informed anecdotes. The market as a whole is diverse with a myriad of interests and whether surveyors get a look in to the entire gamut depends upon how much of the market a surveyor is exposed to. Anything unusual or out of line with orthodox ways of interpreting can tend to be dismissed as an aberration.
It is not compulsory for a tenant to take advice from a surveyor, but that doesn’t prevent surveyors from rejecting evidence involving an unrepresented tenant as unrepresentative of the market. In my opinion, it is surveyor-snobbery to think that unrepresented tenants cannot possibly know what they are doing even though it is the tenant that commits to the lease, not the surveyor. A lease of commercial property is a commercial contract which means the parties are deemed to know what they are doing. For a surveyor to override that built-in assumption is tantamount to asserting that only surveyors have the right to decide what is and what is not evidence.
Even so, there is some truth in that, to be precise in deciding the weight that should be attached to the evidence. Evidence is proof but the evidence should also be able to show on the balance of probabilities that the source is au fait with the technicalities. Weight is not the same as admissible: weight is how much notice ought be taken of the evidence for purpose of being influenced by that evidence.
Nor is it compulsory for a landlord to take advice from a surveyor and many landlords do not. Many landlords see no point in incurring the extra expense when as the decision-makers themselves they are perfectly capable of making up their own mind whether to accept the tenant’s offer. Hence, the evidence unrepresented landlords create is as far as such landlords are concerned beyond reproach. It can come as a surprise therefore to be told by a surveyor that evidence provided by an unrepresented landlord is just as likely to be questionable as that of an unrepresented tenant.
The sector of the market involving surveyors tends to be more sophisticated and in the upper reaches where rent level are at least £15,000 pa, but there are pockets amongst the lower echelons where surveyors are involved because what starts as an unrepresented scenario can becomes so frustrating for the parties concerned that surveyors are brought in to sort things out.
A sizeable sector of the market is unrepresented and in a world of its own. In this sector, it is common for rents either to be significantly less or substantially more than if surveyors were involved. Less is when the landlord’s investment policy is to want full occupancy regardless. More is when the business philosophy of the landlord and tenant is contrary to the surveyor-system.
Client-expectations are sentiment-oriented, never mind the small print of business tenancy law and valuation; instead, the landlord believes a right to expect a proper return on the investment, the tenant is doing well so should pay more; while the tenant may not be able to afford so much but doesn’t want to upset the landlord. Surveyor-thinking is technicalities regardless of affordability. Different sectors of the market have their own ways of reaching agreement. It is only when the lines of communication cross between the unrepresented and surveyor-methodology that the attitudinal fireworks begin.
Location, location, location
12/April/2014
In the last blog (April Fool or Successful Investor, 01 April 2014), I said “successful investment in commercial property includes the ability to be discerning, the more adept you become, the more you can gauge at a glance whether the proposition is likely to perform. Performance despite any resistance by the tenant. Why would the tenant resist?”
Apart from vacant property that might go up in value of its own accord, an occurrence that can reflect change of use for planning permission, development potential, and demand from owner-occupiers, the investment potential in commercial property depends upon tenants.
Tenants are the customers for investors in commercial property.
The property-relationship between landlord and tenant hinges on the terms and conditions of the tenancy; in popular parlance, the lease. Generally, investors prefer what is known as a ‘clean’ lease: an institutional standard whereby most if not all the responsibilities for the use of the premises fall on the tenant, and with no ambiguity in the interpretation of the contract.
Leases in the commercial property market are a challenge for investors, because there is no standard form of lease in common usage. Many landlords and tenants and lawyers have their own standard leases that incorporate specific requirements, but all are subjective. To assume the terms and conditions in each lease would be the same in every other is a mistake.
Drafting a lease is about recording the agreement in writing, the choice of words and phrases that spell out the responsibilities between landlord and tenant. On grant of a new lease, the onus is on the landlord’s side to draft and on the tenant’s side to approve. Sometimes, where the tenant has specific requirements, the tenant’s lawyer will offer to draft the lease but that is usually only to save time. Better for the tenant to provide the wording required rather than the landlord have to guess. Unfortunately, whether through drafting inexperience or error, and because many landlords and tenants can’t be bothered to read the ‘small print’ before signing the document, the wording of a lease will often differ from what the parties intended, so ambiguities in interpretation can arise.
Disputes involving differences in interpretation that are taken to court constitute the body of case-law. The drafting of leases is also fashionable. The widespread use of precedents, often followed slavishly, can result in little or no thought being given to ensuring the performance of the investment.
The duration of a lease, the term of the tenancy, is often for years. Leases may be shorter now, 10 years perhaps with a break clause at the 5th year, but 15-25 years remain popular, not least because bank criteria for lending to tenants requires a secure term of at least 8 years.
Leases are fixed documents whose terms and conditions can only be varied by mutual agreement, or rectification usually only by the original parties. The market, however, is not fixed: it is continually changing. What is a market? A market is anywhere business is done. Transactions are usually for money, but may involve bartering goods and are conducted between sellers and buyers, or through agents, wholesalers, manufacturers, brokers, etc. Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business, the transaction is reciprocal. Business is about helping people in exchange for money.
Markets exist to serve the needs of participants and for identification have classifications and categories: for example, the property market, whose categories include residential property, commercial property, and so on. Naturally inactive, markets become active when fuelled and driven by a range of different influences, all of which originate in how the participants in the particular market respond to whatever is or perceived to be happening in the reality that the market exists to serve.
With commercial property, the ups-and-downs of the market are not necessarily dependent upon whatever is happening in the economy at large so the line of reasoning may be hard to follow, but that doesn’t mean we cannot remain in sync with any changes: all that’s needed is flexibility. Leases, however, are inflexible: what was agreed years ago may not be relevant now.
Where the landlord and tenant are the same parties throughout the term, it is probably less likely for either or both to want to interpret the terms and conditions of the lease in a way that differed from their original intention, unless to material advantage and being unconcerned about the risk of falling out over a dispute. Where one or both of the original parties have changed, and since leases are themselves assets that can be bought and sold (subject to any restrictions), a successor-landlord or successor-tenant might have a different view of the intention of the original parties.
Buying an existing investment means taking over a lease that may be outmoded or badly drafted, whose terms and conditions may work against the investment objective. Conversely, leases may contain words and phrases that serve the landlord more than the tenant. It is a question of finding. As I say, anyone can read a lease, it’s knowing what to look for that really counts.
Once upon a time, it would have been unusual for tenants to take professional advice from surveyors. Surveyors acted for landlords and tenants generally did as they were told. Tenants were subservient. For many years, on the RICS application form for dispute resolution procedure, under the heading ‘tenant representative’ were the words, in parentheses, “if any”.
Life was never the same again for landlords following the House of Lords ruling in United Scientific Holdings v Burnley Borough Council [1978]. Briefly, the landlord had missed the date for the rent review notice, so the tenant argued the landlord had lost the right to review the rent.
As I said, (01 April 2014) “We (surveyors) know that landlords become successful when their investments perform. We also know that tenants become successful not just when their businesses are performing well but also when the total property cost commitment is kept to a minimum.” Reducing property costs and minimising tenancy liabilities makes sense for tenants but is unlikely to make any sense for landlords. The idea that provided the premises are economical, tenants more likely to stay the course, is defeated because tenants want to have it both ways. They want the lowest rents and the least liabilities together with the most flexibility. Scrutinising the wording and phrasing of the terms and conditions of leases in the hope of scoring points either for landlord or tenant is big business for surveyors and lawyers. It works both ways: landlords can benefit enormously from a different interpretation; for tenants, a single word, a turn of phrase, can often result in a substantial reduction in rent or relief from liability.
Apart from whether the landlord is legally entitled to more (as distinct from having the right to expect more) and whether the tenant is legally entitled to less (as distinct from thinking the world owes it a living), landlord and tenant each in their own ways want to maintain a profitable relationship with the location of the property. The adage “location, location, location” is a fundamental ingredient for successful investment which might be thought ‘old school’ compared with the relatively recent popular demand for tenant-covenant, but the adage remains nevertheless the more important. Unlike covenant which depends upon the tenant wanting to remain in occupation, the property is fixed and immoveable. In other words, if you buy a property let, for example, to a bank which, as a blue-chip covenant, would normally fetch a higher price in the investment market, but the bank does not renew its lease or exercises a break clause then you’d no longer have the bank as a tenant but you still have the property.
Subject to compliance with the lease, how the tenant chooses to run its business is nothing to do with the landlord, but it is to do with the customers whom the tenant’s business serves. Why those customers and/or type of customers choose to have their needs satisfied by one particular business over another is a function of marketing, and of location. Therefore, the challenge for any tenant that is doing well is whether the success of the business venture is more a reflection of the tenant’s modus operandi or mostly a spin-off from the popularity of the location. For example, acting for a landlord, I let a shop to a business specialising in sale and hire of videos (DVDs, etc) of old movies. The tenant needed to relocate from nearby because its premises there were going to be redeveloped. The tenant was convinced he was doing well because of the specialised nature of his business but as he soon discovered it was more to do with where he was based before. My Client’s shop was not in such a good position and the passing trade was not enough to support the tenant’s business at rent the tenant had agreed. That didn’t make the rent wrong in itself; but just for that type of business.
Appraising the merits of location has become more difficult now that on-line commerce is accepted generally amongst customers. There are many tenants that have downsized to improve efficiency and consolidated premises in order to reduce costs. Many retailers have closed their bricks-and-mortar presence on the high street because the cost of providing a physical place for doing business is considerably more expensive than trading on-line. A virtual presence on-line is akin to mail order but with trimmings.
For multiple retailers, it used to be that to have branches in 200 towns (and cities) would provide almost 100% geographical catchment. Now it’s 50 or so and in future a few stores in top centres might be all that is needed. Whenever locations become centres of attention, the benchmark changes for everyone else. Hence, the ongoing and potentially improving popularity of the location, attractiveness and so on, is important for a landlord. A location that doesn’t have what it takes to attract the calibre of tenant that would contribute to the appeal of the location is unlikely to be able to compete successfully with those locations that do. Since the location is where the property is, the potential for the property should be considered by reference to the factors that obviously contribute now and those in the offing.
Factors in the offing may not be apparent, or rather not so acceptable to the majority: what is clear to some or a few may be laughable to others, but location is not about personal resistance to change, but swirling undercurrents gathering steam, the groundswell of powerful feelings. For example, in the June 1989 issue of my newsletter for clients and contacts, I said that the emergence of the ‘Green’ consumer marked the onset of a major shift in attitude that would have repercussions for all aspects of future retailing. Nowadays, ‘Green’ issues and all that they have spawned such as sustainability, Energy Performance Certificates, and such like, are taken for granted but in the same way the world-wide-web has only been with us for 25 years yet seems like forever so ‘Green’ is a relatively new entrant to mainstream thinking.
Essentially, the direction of a market is geared to progress, which, in the context of personal and business development, may be inwards or outwards depending upon priorities and aspirations. The challenge for all business tenants is to synchronise with customers, and for all landlords to synchronise with tenants, but that does not have to mean the actual tenant. Whether a landlord wants to hang on the actual tenant, rather than take its chances in the market, is a matter of investment policy. And whether a tenant wants to become a tenant of a particular landlord depends upon what that landlord has to offer in the way of property. Similarly, whether a tenant wants to continue catering for a particular type of customer is a matter for that particular tenant. Not so much an instability as the desire to remain in sync, the constant re-aligning, rejigging, pruning and fine-tuning of freehold and leasehold interests by thousands of landlords and tenants is the reason for the number of commercial properties in the market at any time.
For retailers, for example, trading positions change according to the influences on (potential) trade. A prime position today could be become secondary in future, and vice versa. The identity of multiple retailers is not in itself a reliable indicator of a good location: the question is whether most if not all of those particular multiple retailers would jump at the chance of getting a shop in that location if they were not already there. Or would they leap at the first opportunity to get out? When you buy a property, you are not buying the whole of the market, you are buying a particular property. Assessing tenant-covenant is not just about appraising the financial standing of the tenant as a whole, but also identifying the tenant’s intention for that particular property. What you have to ask is if the tenant vacates on break clause or end of the lease, whether the property would relet to a tenant whose covenant would at least be on a par with the outgoing tenant and the rent, the terms and conditions of the new lease at least maintain the investment value.
Since properties worth keeping through thick and thin are rarely offered for sale, which means 99% of propositions in any auction catalogue are probably not worth buying, anyone following my advice might think they’d never buy anything! But why buy for the sake of it? Why invest in buying and owning a commercial property if there’s little or no likelihood of it performing? Of you being better off than you were? One answer, of course, is that I could be wrong. In a market whose prices are mostly driven by sentiment, rather than technicalities, surely any property acquired at the right price will perform over the long term at least? Therefore, it may be not that you shouldn’t buy anything that takes your fancy, but just a question of price. The answer to whether the price is right can only be subjective. The intrinsic value of an asset, over and above its scrap value is largely based on sentiment. [Talking of scrap value, just because the property could cost more to build than the asking price for the end-product does not make the property worth buying. All property has a shelf-life in the demand-market, regardless of any potential for change of planning use.]
Sentiment can get in the way of appraisal by scoffing at technicalities as surmountable. In other words, if all else fails then buy yourself out of trouble. If I were an investor in property then frankly I’d rather not waste time on what is likely to prove a non-performing investment based on technicalities, but since I don’t invest in property (other than a home) the only way I can emphasise with sentiment-investment is in the context of trading: buy to resell on the momentum. Otherwise all I can do is point out the pitfalls and what can go wrong by ignoring the technicalities. What can wrong because the tenant resists resolutely. Hence, my contribution to the success of the landlord’s choice of commercial property is to use my know-how to either at least maintain or better still improve the investment performance. And for that one needs an in-depth knowledge of the technicalities and negotiating psychology, because it is through the use of the technicalities and ploys that tenants can make or break the landlord’s investment.
Although the pace of change is tenant-demand geared to customers, the driving force that has transformed the commercial property landscape from a relatively level-playing field into a polarised market is the successful use of the technicalities and negotiating ploys by tenants and their advisers. Consequently, at a macro-level, some locations have what is takes and have gone for it, others are fighting for survival and in many cases dying on their feet. In the quest for solutions to the havoc wreaked on local economies and communities, one can pinpoint the more obvious macro- reasons for decline, business rates, high rents, local authority parking charges, out-of-town supermarkets, retail parks, etc, but since those factors are nationwide, it still doesn’t explain why some locations are more successful than others.
In my opinion, the underlying reason is organic: a feeling that is equivalent to the institutional property investor’s idea of a ‘clean’ lease. In its tangible form, it is a desire by profitable customers and successful and aspirational tenants to avoid mixing with all and sundry. Why lease tatty premises from a greedy amateur investor in a declining area when one can rent a gleaming building from a professional landlord in a good location, and often for not that much more, all told. The desire for organic in the sense of authenticity, open communication and transparency remains as strong as ever. In my opinion, one that seems to be shared by a good many others, most provincial towns have gone ex-growth. The core organic positions have been redeveloped, thereby acting as a magnet for the tenant-spending power, leaving the peripheral positions to fend for themselves.
The art of selling investments that in future will under-perform has succeeded in wooing hundreds of private investors into dud locations. The dumping of non-performing investments by shrewd sellers on the inexperienced is nothing new but, nowadays, with the bulk of investments offered at auction the fever has spread. There is, of course, nothing wrong with wanting to buy a property currently let to a good tenant in a nice place. But that’s not the point: it’s not whether you as the landlord would like the location, but whether the tenant would renew the lease on at least the same overall basis as now, and the premises would if vacant be lettable to a tenant whose corporate image would help enhance the location and stimulate demand from other like-minded tenants as well. If there is any doubt whatsoever about either one or both of those factors then until a change arises you are stuck with the technicalities, so you may as well use them to your advantage.
to be continued……
Apart from vacant property that might go up in value of its own accord, an occurrence that can reflect change of use for planning permission, development potential, and demand from owner-occupiers, the investment potential in commercial property depends upon tenants.
Tenants are the customers for investors in commercial property.
The property-relationship between landlord and tenant hinges on the terms and conditions of the tenancy; in popular parlance, the lease. Generally, investors prefer what is known as a ‘clean’ lease: an institutional standard whereby most if not all the responsibilities for the use of the premises fall on the tenant, and with no ambiguity in the interpretation of the contract.
Leases in the commercial property market are a challenge for investors, because there is no standard form of lease in common usage. Many landlords and tenants and lawyers have their own standard leases that incorporate specific requirements, but all are subjective. To assume the terms and conditions in each lease would be the same in every other is a mistake.
Drafting a lease is about recording the agreement in writing, the choice of words and phrases that spell out the responsibilities between landlord and tenant. On grant of a new lease, the onus is on the landlord’s side to draft and on the tenant’s side to approve. Sometimes, where the tenant has specific requirements, the tenant’s lawyer will offer to draft the lease but that is usually only to save time. Better for the tenant to provide the wording required rather than the landlord have to guess. Unfortunately, whether through drafting inexperience or error, and because many landlords and tenants can’t be bothered to read the ‘small print’ before signing the document, the wording of a lease will often differ from what the parties intended, so ambiguities in interpretation can arise.
Disputes involving differences in interpretation that are taken to court constitute the body of case-law. The drafting of leases is also fashionable. The widespread use of precedents, often followed slavishly, can result in little or no thought being given to ensuring the performance of the investment.
The duration of a lease, the term of the tenancy, is often for years. Leases may be shorter now, 10 years perhaps with a break clause at the 5th year, but 15-25 years remain popular, not least because bank criteria for lending to tenants requires a secure term of at least 8 years.
Leases are fixed documents whose terms and conditions can only be varied by mutual agreement, or rectification usually only by the original parties. The market, however, is not fixed: it is continually changing. What is a market? A market is anywhere business is done. Transactions are usually for money, but may involve bartering goods and are conducted between sellers and buyers, or through agents, wholesalers, manufacturers, brokers, etc. Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business, the transaction is reciprocal. Business is about helping people in exchange for money.
Markets exist to serve the needs of participants and for identification have classifications and categories: for example, the property market, whose categories include residential property, commercial property, and so on. Naturally inactive, markets become active when fuelled and driven by a range of different influences, all of which originate in how the participants in the particular market respond to whatever is or perceived to be happening in the reality that the market exists to serve.
With commercial property, the ups-and-downs of the market are not necessarily dependent upon whatever is happening in the economy at large so the line of reasoning may be hard to follow, but that doesn’t mean we cannot remain in sync with any changes: all that’s needed is flexibility. Leases, however, are inflexible: what was agreed years ago may not be relevant now.
Where the landlord and tenant are the same parties throughout the term, it is probably less likely for either or both to want to interpret the terms and conditions of the lease in a way that differed from their original intention, unless to material advantage and being unconcerned about the risk of falling out over a dispute. Where one or both of the original parties have changed, and since leases are themselves assets that can be bought and sold (subject to any restrictions), a successor-landlord or successor-tenant might have a different view of the intention of the original parties.
Buying an existing investment means taking over a lease that may be outmoded or badly drafted, whose terms and conditions may work against the investment objective. Conversely, leases may contain words and phrases that serve the landlord more than the tenant. It is a question of finding. As I say, anyone can read a lease, it’s knowing what to look for that really counts.
Once upon a time, it would have been unusual for tenants to take professional advice from surveyors. Surveyors acted for landlords and tenants generally did as they were told. Tenants were subservient. For many years, on the RICS application form for dispute resolution procedure, under the heading ‘tenant representative’ were the words, in parentheses, “if any”.
Life was never the same again for landlords following the House of Lords ruling in United Scientific Holdings v Burnley Borough Council [1978]. Briefly, the landlord had missed the date for the rent review notice, so the tenant argued the landlord had lost the right to review the rent.
As I said, (01 April 2014) “We (surveyors) know that landlords become successful when their investments perform. We also know that tenants become successful not just when their businesses are performing well but also when the total property cost commitment is kept to a minimum.” Reducing property costs and minimising tenancy liabilities makes sense for tenants but is unlikely to make any sense for landlords. The idea that provided the premises are economical, tenants more likely to stay the course, is defeated because tenants want to have it both ways. They want the lowest rents and the least liabilities together with the most flexibility. Scrutinising the wording and phrasing of the terms and conditions of leases in the hope of scoring points either for landlord or tenant is big business for surveyors and lawyers. It works both ways: landlords can benefit enormously from a different interpretation; for tenants, a single word, a turn of phrase, can often result in a substantial reduction in rent or relief from liability.
Apart from whether the landlord is legally entitled to more (as distinct from having the right to expect more) and whether the tenant is legally entitled to less (as distinct from thinking the world owes it a living), landlord and tenant each in their own ways want to maintain a profitable relationship with the location of the property. The adage “location, location, location” is a fundamental ingredient for successful investment which might be thought ‘old school’ compared with the relatively recent popular demand for tenant-covenant, but the adage remains nevertheless the more important. Unlike covenant which depends upon the tenant wanting to remain in occupation, the property is fixed and immoveable. In other words, if you buy a property let, for example, to a bank which, as a blue-chip covenant, would normally fetch a higher price in the investment market, but the bank does not renew its lease or exercises a break clause then you’d no longer have the bank as a tenant but you still have the property.
Subject to compliance with the lease, how the tenant chooses to run its business is nothing to do with the landlord, but it is to do with the customers whom the tenant’s business serves. Why those customers and/or type of customers choose to have their needs satisfied by one particular business over another is a function of marketing, and of location. Therefore, the challenge for any tenant that is doing well is whether the success of the business venture is more a reflection of the tenant’s modus operandi or mostly a spin-off from the popularity of the location. For example, acting for a landlord, I let a shop to a business specialising in sale and hire of videos (DVDs, etc) of old movies. The tenant needed to relocate from nearby because its premises there were going to be redeveloped. The tenant was convinced he was doing well because of the specialised nature of his business but as he soon discovered it was more to do with where he was based before. My Client’s shop was not in such a good position and the passing trade was not enough to support the tenant’s business at rent the tenant had agreed. That didn’t make the rent wrong in itself; but just for that type of business.
Appraising the merits of location has become more difficult now that on-line commerce is accepted generally amongst customers. There are many tenants that have downsized to improve efficiency and consolidated premises in order to reduce costs. Many retailers have closed their bricks-and-mortar presence on the high street because the cost of providing a physical place for doing business is considerably more expensive than trading on-line. A virtual presence on-line is akin to mail order but with trimmings.
For multiple retailers, it used to be that to have branches in 200 towns (and cities) would provide almost 100% geographical catchment. Now it’s 50 or so and in future a few stores in top centres might be all that is needed. Whenever locations become centres of attention, the benchmark changes for everyone else. Hence, the ongoing and potentially improving popularity of the location, attractiveness and so on, is important for a landlord. A location that doesn’t have what it takes to attract the calibre of tenant that would contribute to the appeal of the location is unlikely to be able to compete successfully with those locations that do. Since the location is where the property is, the potential for the property should be considered by reference to the factors that obviously contribute now and those in the offing.
Factors in the offing may not be apparent, or rather not so acceptable to the majority: what is clear to some or a few may be laughable to others, but location is not about personal resistance to change, but swirling undercurrents gathering steam, the groundswell of powerful feelings. For example, in the June 1989 issue of my newsletter for clients and contacts, I said that the emergence of the ‘Green’ consumer marked the onset of a major shift in attitude that would have repercussions for all aspects of future retailing. Nowadays, ‘Green’ issues and all that they have spawned such as sustainability, Energy Performance Certificates, and such like, are taken for granted but in the same way the world-wide-web has only been with us for 25 years yet seems like forever so ‘Green’ is a relatively new entrant to mainstream thinking.
Essentially, the direction of a market is geared to progress, which, in the context of personal and business development, may be inwards or outwards depending upon priorities and aspirations. The challenge for all business tenants is to synchronise with customers, and for all landlords to synchronise with tenants, but that does not have to mean the actual tenant. Whether a landlord wants to hang on the actual tenant, rather than take its chances in the market, is a matter of investment policy. And whether a tenant wants to become a tenant of a particular landlord depends upon what that landlord has to offer in the way of property. Similarly, whether a tenant wants to continue catering for a particular type of customer is a matter for that particular tenant. Not so much an instability as the desire to remain in sync, the constant re-aligning, rejigging, pruning and fine-tuning of freehold and leasehold interests by thousands of landlords and tenants is the reason for the number of commercial properties in the market at any time.
For retailers, for example, trading positions change according to the influences on (potential) trade. A prime position today could be become secondary in future, and vice versa. The identity of multiple retailers is not in itself a reliable indicator of a good location: the question is whether most if not all of those particular multiple retailers would jump at the chance of getting a shop in that location if they were not already there. Or would they leap at the first opportunity to get out? When you buy a property, you are not buying the whole of the market, you are buying a particular property. Assessing tenant-covenant is not just about appraising the financial standing of the tenant as a whole, but also identifying the tenant’s intention for that particular property. What you have to ask is if the tenant vacates on break clause or end of the lease, whether the property would relet to a tenant whose covenant would at least be on a par with the outgoing tenant and the rent, the terms and conditions of the new lease at least maintain the investment value.
Since properties worth keeping through thick and thin are rarely offered for sale, which means 99% of propositions in any auction catalogue are probably not worth buying, anyone following my advice might think they’d never buy anything! But why buy for the sake of it? Why invest in buying and owning a commercial property if there’s little or no likelihood of it performing? Of you being better off than you were? One answer, of course, is that I could be wrong. In a market whose prices are mostly driven by sentiment, rather than technicalities, surely any property acquired at the right price will perform over the long term at least? Therefore, it may be not that you shouldn’t buy anything that takes your fancy, but just a question of price. The answer to whether the price is right can only be subjective. The intrinsic value of an asset, over and above its scrap value is largely based on sentiment. [Talking of scrap value, just because the property could cost more to build than the asking price for the end-product does not make the property worth buying. All property has a shelf-life in the demand-market, regardless of any potential for change of planning use.]
Sentiment can get in the way of appraisal by scoffing at technicalities as surmountable. In other words, if all else fails then buy yourself out of trouble. If I were an investor in property then frankly I’d rather not waste time on what is likely to prove a non-performing investment based on technicalities, but since I don’t invest in property (other than a home) the only way I can emphasise with sentiment-investment is in the context of trading: buy to resell on the momentum. Otherwise all I can do is point out the pitfalls and what can go wrong by ignoring the technicalities. What can wrong because the tenant resists resolutely. Hence, my contribution to the success of the landlord’s choice of commercial property is to use my know-how to either at least maintain or better still improve the investment performance. And for that one needs an in-depth knowledge of the technicalities and negotiating psychology, because it is through the use of the technicalities and ploys that tenants can make or break the landlord’s investment.
Although the pace of change is tenant-demand geared to customers, the driving force that has transformed the commercial property landscape from a relatively level-playing field into a polarised market is the successful use of the technicalities and negotiating ploys by tenants and their advisers. Consequently, at a macro-level, some locations have what is takes and have gone for it, others are fighting for survival and in many cases dying on their feet. In the quest for solutions to the havoc wreaked on local economies and communities, one can pinpoint the more obvious macro- reasons for decline, business rates, high rents, local authority parking charges, out-of-town supermarkets, retail parks, etc, but since those factors are nationwide, it still doesn’t explain why some locations are more successful than others.
In my opinion, the underlying reason is organic: a feeling that is equivalent to the institutional property investor’s idea of a ‘clean’ lease. In its tangible form, it is a desire by profitable customers and successful and aspirational tenants to avoid mixing with all and sundry. Why lease tatty premises from a greedy amateur investor in a declining area when one can rent a gleaming building from a professional landlord in a good location, and often for not that much more, all told. The desire for organic in the sense of authenticity, open communication and transparency remains as strong as ever. In my opinion, one that seems to be shared by a good many others, most provincial towns have gone ex-growth. The core organic positions have been redeveloped, thereby acting as a magnet for the tenant-spending power, leaving the peripheral positions to fend for themselves.
The art of selling investments that in future will under-perform has succeeded in wooing hundreds of private investors into dud locations. The dumping of non-performing investments by shrewd sellers on the inexperienced is nothing new but, nowadays, with the bulk of investments offered at auction the fever has spread. There is, of course, nothing wrong with wanting to buy a property currently let to a good tenant in a nice place. But that’s not the point: it’s not whether you as the landlord would like the location, but whether the tenant would renew the lease on at least the same overall basis as now, and the premises would if vacant be lettable to a tenant whose corporate image would help enhance the location and stimulate demand from other like-minded tenants as well. If there is any doubt whatsoever about either one or both of those factors then until a change arises you are stuck with the technicalities, so you may as well use them to your advantage.
to be continued……
April Fool or Successful Investor
01/April/2014
Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell.
Most or all of which may be easier said than done, because investors generally are far more influenced towards poor judgement than they might realise. In this scientific world we have created for ourselves, opinions that are not evidence-based don’t seem to count for much. Yet successful investment is not only about considering the evidence, but also the art of knowing.
Knowing is awareness, about being informed. Knowing is different from knowledge. Facts, information and skills can all be learned and from experience relied upon. But experience may be out-of-date, limited, or not suited to different ways of thinking. Knowledge provides a basis for logic. People are comfortable with logic: it is reasoned so it follows. But, logical thinking is based on past experience, whereas the future is uncertain. Life changes, attitudes shift, people change. That’s why past performance is no guide to the future. No one knows for sure, but that doesn’t mean we can’t predict with a fair degree of accuracy, especially when you know what you’re about. Which brings me to asking you to ask yourself: what are you about? What is it about you that would enable you to appraise an investment with sufficient confidence to be certain of your conclusion. How come you can pick winners?
Successful investment in commercial property includes the ability to be discerning, the more adept you become, the more you can gauge at a glance whether the proposition is likely to perform. Performance despite any resistance by the tenant. Why would the tenant resist?
The answer is that you understand the market in which you’re investing. You understand what makes it tick and where it’s heading.
It’s when you don’t understand the fundamental principles that you are likely to come unstuck somewhere along the way. With commercial property, coming unstuck is what plenty of investors do do through fault of their own.
It doesn’t have to be like that.
If through my explaining the principles, you say to yourself, ‘yes, I know all that’ then fair enough. At least we’ve started with the basics rather than charged straight into the deep-end. Jumping to conclusions is what investors in commercial property generally do, only to discover that finding out the hard way can prove an expensive mistake.
Once upon a time, commercial property could be relied upon to adjust to its owner’s mistakes. Never mind if you got it wrong, somehow the market would find a way to bail you out. It’s different now. here have you heard that before? But it is. The commercial property market is polarising, it has been for years. Every so often another gap appears in the level of understanding whereupon another load of investors falls by the wayside. The credit-crunch, the recession, merely brought it to the surface. Take away the money-supply and the commercial property market is exposed for what it is. Overnight, yields soared, prices fell, loan covenants breached, the banks repossessed. An aberration in an otherwise long-term hedge that is generally interpreted a consequence of the state of the economy, but it wasn’t; at least not in my opinion, it wasn’t. I should know, I act for and against more than enough different landlords to know whose investments have powered ahead despite the downturn, and whose haven’t.
The experts tell us the property market is cyclical, but is it? Perhaps it’s steady all the way. Naturally, life has ups-and-downs, but attitudes are flexible, we can remain in sync. We’re not supposed to come unstuck in times of change. Thinking problems are normal is where people go wrong.
In my philosophy, a problem is symptomatic of a fault in direction: either you are thinking the wrong way for you, or the wrong way for the property, or a combination of both. The wrong way for you could be that you’re not cut out for commercial property, you don’t have what it takes to manage the investment as it should be done. The wrong way for the property is that it is no longer fit for purpose, it has outlived its usefulness.
A cyclical market can become a roller-coaster, bliss “if you like that sort of thing” (to quote the comic actor Tim Brooke-Taylor), but perhaps the norm is when yield is high, commensurate with the risk? After all, when you assess a commercial property investment based upon property fundamentals, as distinct from comparing returns with what you get from cash on deposit, it is unlikely there’ll be that many places where growth would be expected.
Performance is the measure of growth. Whether after allowing for all the costs, and adjusting for inflation, and net of tax you are actually that much better off – and not just in the long-run, but from day one.
The ‘day one’ test is that if you were to sell the property on the day immediately following exchange of contracts or completion then you’d get your money back and more. Even if ‘day one’ is too much like wishful thinking for your taste, whatever longer period of time you’d prefer, the test is whether at any point in time your investment would pass the test of getting your money back and more, regardless of the state of the market.
———————————–
The property market is composed of owner-occupiers, developers, landlords (also known as investors) and tenants (also known as occupiers).
There are two ways to participate in the commercial property investment market: each has its advantages and disadvantages.
You can invest in commercial property indirectly, buying shares in a quoted property company on the stock-market, or a property investment trust, or real estate investment trust (REIT), or property unit trust (PUT), or property fund or a property bond. With indirect investment, you are entrusting the success of your investment to the skills and judgement of the directors and managers of the company, and your interpretation of the company’s accounts. A key indicator is the net asset value, so why pay more for a share than the NAV. Share prices at a premium to NAV are an expectancy that the NAV will continue to rise, but it may not. The stock may be in short-supply so you may be competing with demand or market-makers flexing their muscles. In any event, NAV is not enough by itself: it’s also a question of who provided the valuation: surveyors vary in their opinions and estimates from the cautious to the optimistic. It’s also a question of the quality of the company’s existing properties and whether if in the market to sell they’d then fetch at least the same as the value in the company’s books. Where’s the money coming from to pay dividends and how come the directors and staff get pay rises and issue themselves with stock options, but the shareholders can’t count on getting higher dividends. Then there’s the ultimate challenge for anyone investing in equities: timing the volatility of the stock market.
You can invest directly in commercial property, either buying an empty property and letting it from scratch and/or developing the property into something more valuable or buying an existing investment; in doing so you are exposed to an unregulated market. To give the impression that the risk of loss would be minimised, the market is dominated by professional advisers: surveyors, lawyers, and accountants, many of whom also advise the banks and other lenders on the value of property.
(Another way, which is nearly the same as buying directly, is to be a tenant, buy the freehold (assuming the owner would sell) and then when you sell your business as a going-concern, keep the property and grant a new lease to the buyer of your business. )
The volume of information on-line and in the media has exacerbated the mass-market influences for how to appraise commercial property for investment but rarely are the reasons for under-and non-performance of commercial property investments highlighted. The reason I suspect is that the emphasis is on getting you to invest and thereafter using the advisers’ services to maximise performance.
Advisers have a duty of care but the duty doesn’t always extend beyond the adviser’s client. For the most part, it’s caveat emptor (“let the buyer beware”). Therefore, if you choose to be on your own, left to your own devices, and take the view that the people who run the market presumably know what they’re doing, then don’t complain when the experts tell you that the state of the market is the reason your investment isn’t performing as well as you expected when you bought it.
For successful investment in commercial property, there are three levels of understanding, all inter-dependent, and none of which should be considered in isolation:
Generally, property fundamentals are easily identifiable. Technical analysis is experience of business tenancy law and valuation. Sentiment is when investors get carried away.
Market activity and momentum conveys feelings of comfort and reassurance but, when you go along with what you think others know, all you’re doing is following: buying into investor confidence, what is known as market sentiment. Fair enough if you’re going to cash in and sell as prices rise further, but not if you’re planning to hold long-term for a pension plan. Property dealers trade but, generally, investors buy to hold for at the least the duration of the mortgage.
Wealth warning: sentiment is mostly hot air which makes the market hot and inflates bubbles.
A bubble is a situation where market prices are unsustainable. The life-cycle of a bubble starts with the stealth phase, the smart money. As the market takes off, and institutional investors become interested, the first sell off occurs. With the media attention, that grabs the enthusiasm of public, the mania phase fuels greed and delusion. At the peak is the new paradigm, the shift in thinking. Demand wobbles. A sell off occurs. Rebound. Fear and collapse set in. Despair arrives. As the dust settles, demand slowly picks up and return to the mean average.
At present, the market is booming, apparently it’s a no-brainer not to get involved. Low interest rates, awash with cash from overseas investors, émigrés fleeing equities and bonds, and anticipation of a wall of money from cashed-in pension pots. A leading auctioneer tells me demand for commercial property investment is outstripping supply, especially in London and the South-East. The state of the market is bound to be different this time. It always is, that’s the nature of sentiment, very persuasive.
Having set your sights on what you want to buy, a great deal of time, effort and cost can be expended on the preliminaries, so wondering about changing your mind at the last minute can be put down to pre-marital nerves. If you buy by private treaty then you can’t back out because word would soon get around the investment community that you’re unreliable, your word is not your bond, so you’ll have to exchange regardless, or come up with a plausible excuse.
It’s at times like these when stopping to think is crucial. Never mind the cost of borrowing and the yield that can be bought, the question is where is the demand going to come from to provide capital and rental growth. Why should the tenant want to pay more, when most tenants are struggling as it is or bargain-hunting? And if you think tenants have no choice because the rent review is upward-only then you really don’t understand.
There’s another thing: a difference exists between price and market value. Price is subjective, whatever the seller wants and how much the buyer is willing to pay. Market value is objective, what someone else would pay. If you don’t understand the difference or don’t think there is a difference then that’s where you’ll be going wrong.
Caveat emptor. The first point to remember about price is that when you buy, the seller is wanting to sell you something which, until you’ve bought, you might not discover what it is. With private treaty, ‘subject to contract’. you can take as long as you like for due-diligence, subject to the seller’s patience, but the answers to pre-contract enquiries are only as good as the questions you’ve asked. When you buy at auction, you only have about 6-8 weeks to make enquiries and carry out research, so you’ll have to have your wits about you, which should include someone on your side to point out the pitfalls and ensure any assumptions you may be making are in fact correct.
Commercial property investment involves commercial contracts, which means the parties are deemed to know what they’re doing. It’s one thing to know what you are doing when you do what you know, quite another to know what to do when something goes wrong or more usefully to know how to avoid going wrong in the first place.
The role of professional advisers is to help landlords and tenants to be successful. Professional advisers are know-alls, or at least they should be. We know that landlords become successful when their investments perform. We also know that tenants become successful not just when their businesses are performing well but also when the total property cost commitment is kept to a minimum. In our professional capacity, we’re on the client’s side. But deep down it’s a matter of whose side your adviser is really on, and that would depend upon a host of factors. In private, in our personal political views and ideology, we might be outright capitalist, woolly-headed liberal, or hardened socialist. Caring about the wider-consequences? How far we allow our personal beliefs to influence our professional advice depends upon our attitude, our experience, whether we mix business with pleasure, and our principal source of earnings.
Principal-to-principal, in theory, the relationship between landlord and tenant should be a partnership. In practice, it is not. In practice, there is wariness on both sides and in many cases a deep resentment that, through operation of law, rental valuation, and cunning, often involving skillful advisers, the landlord or the tenant is better off at the expense of the other.
The reason for the difference in achievement is that the commercial property market is not a perfect market which, from an investment perspective, is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market. In an imperfect market, there is no level playing field. Different people, different levels of experience, different approaches to asset management, some passive, others pro-active. As a tenant-client told me “for lessons in how to be stitched up, the shop property market has no equal”. Not just how to capitalise on opportunities but how to create opportunities. It all adds up to know-how.
As a specialist in rent review and business tenancy advice for landlords and retailers, I work at the sharp end of commercial property market, to be precise, shop property. I’m not an agent in the general-public perception of estate agency. My work is almost entirely behind-the scenes. Sometimes investors consult me on whether a proposition would be a good buy, but mostly I get involved after the property has been bought and at the stage when the landlord wants to take a back-seat in dealings with the tenant, for example on requests for assignment of the lease and such like, or at rent review and tenancy expiry/renewal when the relationship between landlord and tenant is more likely to be fraught.
Whether you are a landlord or a tenant, an advantage of your instructing a surveyor is to have a ‘shield’ between you and the other party. When you deal with the matter yourself, personality issues can get in the way and you could end being accommodating and agreeing to things that you wouldn’t otherwise or a surveyor would question. I tailor my approach to suit the client’s objective, the circumstances, the nature of the parties, so on.
The work is demanding and over the years has become more tiring. That is not a feature of advancing years, young surveyors tell me how exhausting the work can be. It would be so much easier if the other side would give in to reason without a fight, without resorting to ploys that can inject fear into cautious landlords and tenants. Socially, I’ll tell people what I do if they ask and if they probe then I say I argue for a living. It’s not ‘New Age’ negotiation “you win, I win, everyone’s happy”, but ruthless ‘I win, you lose’. I use my skills to increase rent for landlords, unless acting for the tenants in which case I’ll do the reverse. It may not be politically-correct to ignore the wider consequences and disregard the layer of socialism that pervades most walks of life, as summed up in the phrase “we’re all in this together” but when I’m being paid for my services, I’m a technician, not a philosopher. I can discuss whether something is a good idea, I can advise on the consequences, I can recommend, but ultimately it’s up to the client to decide.
Frankly, I think many landlords get a raw deal from tenants, especially from some multiple retailers whose surveyors seem to delight in putting the wind-up landlords. Something tenants are good at is selling: selling the idea they can’t afford any more, selling the idea they’d trigger the break clause if the landlord won’t agree. Whatever the ploy, it’s all grist to the mill of reducing property costs and keeping up appearances.
Is it possible for a surveyor to sit on the metaphorical fence, one moment acting for a landlord, the next for a tenant? In my philosophy, there is no need for emotional involvement or attachment. As a vegetarian, I wouldn’t be able to do my job properly if I were squeamish about going into a butcher’s shop. The more cosmopolitan the commercial property market becomes, the greater the diversity in attitude, the more flexible in views, opinions and application of skill one must be to stay on the ball. For me, landlords and tenants fall into two categories: those whose business methods and attitude generally I admire and respect, and everyone else. Over the years, I’ve honed my early warning system. Generally, people self-select. Even so, it’s not that easy to sift the wheat from the chaff: often the truth doesn’t emerge until after the work is underway. Ultimately, it’s about discernment: about helping the sort of people I like, people on the same wavelength.
Shortly after I established my practice, a public property company instructed me to manage a parade of shops and offices. Although I do manage property for a few clients, full management is not a service I offer as a matter of course – mostly I provide assisted-management, for example, the landlord deals with the rent collection, I do everything else. Curious why a plc should want me of all people to undertake full management, I was told that was the only way the company could instruct me to do any work for them and which it wanted to do because it was scared I should act against them!
I am unsure what I did to deserve being described as the ‘most obstinate surveyor in Harrow’ by a surveyor whom I crossed swords with on occasions, but as my reputation began to precede me, it got to the point that an auctioneer said that if it were known I were acting for the tenant then prospective investors could forget any idea of getting a rent increase. Over 20 years ago, having relocated my office to Herefordshire, where away from the noise and stress of London, it’s possible to think clearly, I had a go at mixing business with pleasure (until the novelty wore off and I reverted to my own method of marketing my services). The experience paid off: a tenant instructed me to deal with a rent review. The landlord had had a go himself but the tenant didn’t want to pay so much, so the landlord instructed a local surveyor who turned up the heat. I inspected the premises, read the lease, and told the surveyor no increase. The surveyor’s response that I might be right but if I wanted to get on in this part of the world then I should learn to play the game. I said I was happy to learn provided it wouldn’t cost my client any more. My client agreed with me, the landlord conceded.
Often employed as a troubleshooter, I crop up all over England and Wales but the bulk of my work is in London and the South-East. Dealing with different landlords, different tenants, different types of property, different locations, I have extensive experience of diversity.
Whether landlord or tenant, principals in commercial property market comprise professionals and amateurs. Professionals wouldn’t dream of agreeing to anything without taking advice and tend to stick with their trusted advisers, through thick and thin. Amateurs seem more concerned about the cost of advice than the quality, so shop around. The commercial property market attracts parasites: people that have latched on to property’s popularity and produce glowing reports and blind you with statistics. They take your money for transactions and all the glossy-stuff but frankly they haven’t a clue about life at the sharp end of tenancy management. Blaming the state of the market is an excuse which sounds plausible because investors are conditioned to think like that. Hence, if you invest without taking advice from people who really know their stuff, but instead doing your own research, gathering informations from all manner of sources and from that conclude that it can’t possibly be as complicated as the experts make out then you’d be correct in theory were it not for the difference between what it says in the classroom textbook and what happens in practice.
Most or all of which may be easier said than done, because investors generally are far more influenced towards poor judgement than they might realise. In this scientific world we have created for ourselves, opinions that are not evidence-based don’t seem to count for much. Yet successful investment is not only about considering the evidence, but also the art of knowing.
Knowing is awareness, about being informed. Knowing is different from knowledge. Facts, information and skills can all be learned and from experience relied upon. But experience may be out-of-date, limited, or not suited to different ways of thinking. Knowledge provides a basis for logic. People are comfortable with logic: it is reasoned so it follows. But, logical thinking is based on past experience, whereas the future is uncertain. Life changes, attitudes shift, people change. That’s why past performance is no guide to the future. No one knows for sure, but that doesn’t mean we can’t predict with a fair degree of accuracy, especially when you know what you’re about. Which brings me to asking you to ask yourself: what are you about? What is it about you that would enable you to appraise an investment with sufficient confidence to be certain of your conclusion. How come you can pick winners?
Successful investment in commercial property includes the ability to be discerning, the more adept you become, the more you can gauge at a glance whether the proposition is likely to perform. Performance despite any resistance by the tenant. Why would the tenant resist?
The answer is that you understand the market in which you’re investing. You understand what makes it tick and where it’s heading.
It’s when you don’t understand the fundamental principles that you are likely to come unstuck somewhere along the way. With commercial property, coming unstuck is what plenty of investors do do through fault of their own.
It doesn’t have to be like that.
If through my explaining the principles, you say to yourself, ‘yes, I know all that’ then fair enough. At least we’ve started with the basics rather than charged straight into the deep-end. Jumping to conclusions is what investors in commercial property generally do, only to discover that finding out the hard way can prove an expensive mistake.
Once upon a time, commercial property could be relied upon to adjust to its owner’s mistakes. Never mind if you got it wrong, somehow the market would find a way to bail you out. It’s different now. here have you heard that before? But it is. The commercial property market is polarising, it has been for years. Every so often another gap appears in the level of understanding whereupon another load of investors falls by the wayside. The credit-crunch, the recession, merely brought it to the surface. Take away the money-supply and the commercial property market is exposed for what it is. Overnight, yields soared, prices fell, loan covenants breached, the banks repossessed. An aberration in an otherwise long-term hedge that is generally interpreted a consequence of the state of the economy, but it wasn’t; at least not in my opinion, it wasn’t. I should know, I act for and against more than enough different landlords to know whose investments have powered ahead despite the downturn, and whose haven’t.
The experts tell us the property market is cyclical, but is it? Perhaps it’s steady all the way. Naturally, life has ups-and-downs, but attitudes are flexible, we can remain in sync. We’re not supposed to come unstuck in times of change. Thinking problems are normal is where people go wrong.
In my philosophy, a problem is symptomatic of a fault in direction: either you are thinking the wrong way for you, or the wrong way for the property, or a combination of both. The wrong way for you could be that you’re not cut out for commercial property, you don’t have what it takes to manage the investment as it should be done. The wrong way for the property is that it is no longer fit for purpose, it has outlived its usefulness.
A cyclical market can become a roller-coaster, bliss “if you like that sort of thing” (to quote the comic actor Tim Brooke-Taylor), but perhaps the norm is when yield is high, commensurate with the risk? After all, when you assess a commercial property investment based upon property fundamentals, as distinct from comparing returns with what you get from cash on deposit, it is unlikely there’ll be that many places where growth would be expected.
Performance is the measure of growth. Whether after allowing for all the costs, and adjusting for inflation, and net of tax you are actually that much better off – and not just in the long-run, but from day one.
The ‘day one’ test is that if you were to sell the property on the day immediately following exchange of contracts or completion then you’d get your money back and more. Even if ‘day one’ is too much like wishful thinking for your taste, whatever longer period of time you’d prefer, the test is whether at any point in time your investment would pass the test of getting your money back and more, regardless of the state of the market.
———————————–
The property market is composed of owner-occupiers, developers, landlords (also known as investors) and tenants (also known as occupiers).
There are two ways to participate in the commercial property investment market: each has its advantages and disadvantages.
You can invest in commercial property indirectly, buying shares in a quoted property company on the stock-market, or a property investment trust, or real estate investment trust (REIT), or property unit trust (PUT), or property fund or a property bond. With indirect investment, you are entrusting the success of your investment to the skills and judgement of the directors and managers of the company, and your interpretation of the company’s accounts. A key indicator is the net asset value, so why pay more for a share than the NAV. Share prices at a premium to NAV are an expectancy that the NAV will continue to rise, but it may not. The stock may be in short-supply so you may be competing with demand or market-makers flexing their muscles. In any event, NAV is not enough by itself: it’s also a question of who provided the valuation: surveyors vary in their opinions and estimates from the cautious to the optimistic. It’s also a question of the quality of the company’s existing properties and whether if in the market to sell they’d then fetch at least the same as the value in the company’s books. Where’s the money coming from to pay dividends and how come the directors and staff get pay rises and issue themselves with stock options, but the shareholders can’t count on getting higher dividends. Then there’s the ultimate challenge for anyone investing in equities: timing the volatility of the stock market.
You can invest directly in commercial property, either buying an empty property and letting it from scratch and/or developing the property into something more valuable or buying an existing investment; in doing so you are exposed to an unregulated market. To give the impression that the risk of loss would be minimised, the market is dominated by professional advisers: surveyors, lawyers, and accountants, many of whom also advise the banks and other lenders on the value of property.
(Another way, which is nearly the same as buying directly, is to be a tenant, buy the freehold (assuming the owner would sell) and then when you sell your business as a going-concern, keep the property and grant a new lease to the buyer of your business. )
The volume of information on-line and in the media has exacerbated the mass-market influences for how to appraise commercial property for investment but rarely are the reasons for under-and non-performance of commercial property investments highlighted. The reason I suspect is that the emphasis is on getting you to invest and thereafter using the advisers’ services to maximise performance.
Advisers have a duty of care but the duty doesn’t always extend beyond the adviser’s client. For the most part, it’s caveat emptor (“let the buyer beware”). Therefore, if you choose to be on your own, left to your own devices, and take the view that the people who run the market presumably know what they’re doing, then don’t complain when the experts tell you that the state of the market is the reason your investment isn’t performing as well as you expected when you bought it.
For successful investment in commercial property, there are three levels of understanding, all inter-dependent, and none of which should be considered in isolation:
- Property fundamentals
- Technical analysis
- Sentiment
Generally, property fundamentals are easily identifiable. Technical analysis is experience of business tenancy law and valuation. Sentiment is when investors get carried away.
Market activity and momentum conveys feelings of comfort and reassurance but, when you go along with what you think others know, all you’re doing is following: buying into investor confidence, what is known as market sentiment. Fair enough if you’re going to cash in and sell as prices rise further, but not if you’re planning to hold long-term for a pension plan. Property dealers trade but, generally, investors buy to hold for at the least the duration of the mortgage.
Wealth warning: sentiment is mostly hot air which makes the market hot and inflates bubbles.
A bubble is a situation where market prices are unsustainable. The life-cycle of a bubble starts with the stealth phase, the smart money. As the market takes off, and institutional investors become interested, the first sell off occurs. With the media attention, that grabs the enthusiasm of public, the mania phase fuels greed and delusion. At the peak is the new paradigm, the shift in thinking. Demand wobbles. A sell off occurs. Rebound. Fear and collapse set in. Despair arrives. As the dust settles, demand slowly picks up and return to the mean average.
At present, the market is booming, apparently it’s a no-brainer not to get involved. Low interest rates, awash with cash from overseas investors, émigrés fleeing equities and bonds, and anticipation of a wall of money from cashed-in pension pots. A leading auctioneer tells me demand for commercial property investment is outstripping supply, especially in London and the South-East. The state of the market is bound to be different this time. It always is, that’s the nature of sentiment, very persuasive.
Having set your sights on what you want to buy, a great deal of time, effort and cost can be expended on the preliminaries, so wondering about changing your mind at the last minute can be put down to pre-marital nerves. If you buy by private treaty then you can’t back out because word would soon get around the investment community that you’re unreliable, your word is not your bond, so you’ll have to exchange regardless, or come up with a plausible excuse.
It’s at times like these when stopping to think is crucial. Never mind the cost of borrowing and the yield that can be bought, the question is where is the demand going to come from to provide capital and rental growth. Why should the tenant want to pay more, when most tenants are struggling as it is or bargain-hunting? And if you think tenants have no choice because the rent review is upward-only then you really don’t understand.
There’s another thing: a difference exists between price and market value. Price is subjective, whatever the seller wants and how much the buyer is willing to pay. Market value is objective, what someone else would pay. If you don’t understand the difference or don’t think there is a difference then that’s where you’ll be going wrong.
Caveat emptor. The first point to remember about price is that when you buy, the seller is wanting to sell you something which, until you’ve bought, you might not discover what it is. With private treaty, ‘subject to contract’. you can take as long as you like for due-diligence, subject to the seller’s patience, but the answers to pre-contract enquiries are only as good as the questions you’ve asked. When you buy at auction, you only have about 6-8 weeks to make enquiries and carry out research, so you’ll have to have your wits about you, which should include someone on your side to point out the pitfalls and ensure any assumptions you may be making are in fact correct.
Commercial property investment involves commercial contracts, which means the parties are deemed to know what they’re doing. It’s one thing to know what you are doing when you do what you know, quite another to know what to do when something goes wrong or more usefully to know how to avoid going wrong in the first place.
The role of professional advisers is to help landlords and tenants to be successful. Professional advisers are know-alls, or at least they should be. We know that landlords become successful when their investments perform. We also know that tenants become successful not just when their businesses are performing well but also when the total property cost commitment is kept to a minimum. In our professional capacity, we’re on the client’s side. But deep down it’s a matter of whose side your adviser is really on, and that would depend upon a host of factors. In private, in our personal political views and ideology, we might be outright capitalist, woolly-headed liberal, or hardened socialist. Caring about the wider-consequences? How far we allow our personal beliefs to influence our professional advice depends upon our attitude, our experience, whether we mix business with pleasure, and our principal source of earnings.
Principal-to-principal, in theory, the relationship between landlord and tenant should be a partnership. In practice, it is not. In practice, there is wariness on both sides and in many cases a deep resentment that, through operation of law, rental valuation, and cunning, often involving skillful advisers, the landlord or the tenant is better off at the expense of the other.
The reason for the difference in achievement is that the commercial property market is not a perfect market which, from an investment perspective, is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market. In an imperfect market, there is no level playing field. Different people, different levels of experience, different approaches to asset management, some passive, others pro-active. As a tenant-client told me “for lessons in how to be stitched up, the shop property market has no equal”. Not just how to capitalise on opportunities but how to create opportunities. It all adds up to know-how.
As a specialist in rent review and business tenancy advice for landlords and retailers, I work at the sharp end of commercial property market, to be precise, shop property. I’m not an agent in the general-public perception of estate agency. My work is almost entirely behind-the scenes. Sometimes investors consult me on whether a proposition would be a good buy, but mostly I get involved after the property has been bought and at the stage when the landlord wants to take a back-seat in dealings with the tenant, for example on requests for assignment of the lease and such like, or at rent review and tenancy expiry/renewal when the relationship between landlord and tenant is more likely to be fraught.
Whether you are a landlord or a tenant, an advantage of your instructing a surveyor is to have a ‘shield’ between you and the other party. When you deal with the matter yourself, personality issues can get in the way and you could end being accommodating and agreeing to things that you wouldn’t otherwise or a surveyor would question. I tailor my approach to suit the client’s objective, the circumstances, the nature of the parties, so on.
The work is demanding and over the years has become more tiring. That is not a feature of advancing years, young surveyors tell me how exhausting the work can be. It would be so much easier if the other side would give in to reason without a fight, without resorting to ploys that can inject fear into cautious landlords and tenants. Socially, I’ll tell people what I do if they ask and if they probe then I say I argue for a living. It’s not ‘New Age’ negotiation “you win, I win, everyone’s happy”, but ruthless ‘I win, you lose’. I use my skills to increase rent for landlords, unless acting for the tenants in which case I’ll do the reverse. It may not be politically-correct to ignore the wider consequences and disregard the layer of socialism that pervades most walks of life, as summed up in the phrase “we’re all in this together” but when I’m being paid for my services, I’m a technician, not a philosopher. I can discuss whether something is a good idea, I can advise on the consequences, I can recommend, but ultimately it’s up to the client to decide.
Frankly, I think many landlords get a raw deal from tenants, especially from some multiple retailers whose surveyors seem to delight in putting the wind-up landlords. Something tenants are good at is selling: selling the idea they can’t afford any more, selling the idea they’d trigger the break clause if the landlord won’t agree. Whatever the ploy, it’s all grist to the mill of reducing property costs and keeping up appearances.
Is it possible for a surveyor to sit on the metaphorical fence, one moment acting for a landlord, the next for a tenant? In my philosophy, there is no need for emotional involvement or attachment. As a vegetarian, I wouldn’t be able to do my job properly if I were squeamish about going into a butcher’s shop. The more cosmopolitan the commercial property market becomes, the greater the diversity in attitude, the more flexible in views, opinions and application of skill one must be to stay on the ball. For me, landlords and tenants fall into two categories: those whose business methods and attitude generally I admire and respect, and everyone else. Over the years, I’ve honed my early warning system. Generally, people self-select. Even so, it’s not that easy to sift the wheat from the chaff: often the truth doesn’t emerge until after the work is underway. Ultimately, it’s about discernment: about helping the sort of people I like, people on the same wavelength.
Shortly after I established my practice, a public property company instructed me to manage a parade of shops and offices. Although I do manage property for a few clients, full management is not a service I offer as a matter of course – mostly I provide assisted-management, for example, the landlord deals with the rent collection, I do everything else. Curious why a plc should want me of all people to undertake full management, I was told that was the only way the company could instruct me to do any work for them and which it wanted to do because it was scared I should act against them!
I am unsure what I did to deserve being described as the ‘most obstinate surveyor in Harrow’ by a surveyor whom I crossed swords with on occasions, but as my reputation began to precede me, it got to the point that an auctioneer said that if it were known I were acting for the tenant then prospective investors could forget any idea of getting a rent increase. Over 20 years ago, having relocated my office to Herefordshire, where away from the noise and stress of London, it’s possible to think clearly, I had a go at mixing business with pleasure (until the novelty wore off and I reverted to my own method of marketing my services). The experience paid off: a tenant instructed me to deal with a rent review. The landlord had had a go himself but the tenant didn’t want to pay so much, so the landlord instructed a local surveyor who turned up the heat. I inspected the premises, read the lease, and told the surveyor no increase. The surveyor’s response that I might be right but if I wanted to get on in this part of the world then I should learn to play the game. I said I was happy to learn provided it wouldn’t cost my client any more. My client agreed with me, the landlord conceded.
Often employed as a troubleshooter, I crop up all over England and Wales but the bulk of my work is in London and the South-East. Dealing with different landlords, different tenants, different types of property, different locations, I have extensive experience of diversity.
Whether landlord or tenant, principals in commercial property market comprise professionals and amateurs. Professionals wouldn’t dream of agreeing to anything without taking advice and tend to stick with their trusted advisers, through thick and thin. Amateurs seem more concerned about the cost of advice than the quality, so shop around. The commercial property market attracts parasites: people that have latched on to property’s popularity and produce glowing reports and blind you with statistics. They take your money for transactions and all the glossy-stuff but frankly they haven’t a clue about life at the sharp end of tenancy management. Blaming the state of the market is an excuse which sounds plausible because investors are conditioned to think like that. Hence, if you invest without taking advice from people who really know their stuff, but instead doing your own research, gathering informations from all manner of sources and from that conclude that it can’t possibly be as complicated as the experts make out then you’d be correct in theory were it not for the difference between what it says in the classroom textbook and what happens in practice.
Investment Psychology
27/March/2014
Psychology occupies the middle-ground between who you are and who you want to become, and all that that entails. To become something you have to invest. Investment is about becoming better off than you are now. How long it takes to become better off depends upon a combination of two factors: the practical and the psychological.
The practical is the time that it takes to make a profit; the psychological the level of risk that the investor is willing to shoulder. How much profit depends upon your personal definition of whether the amount of profit is worthwhile. For example, if you want to make a profit to enable you to afford a property in a different league then the profit from each proposition could be likened to stepping stones.
A plan for creating a commercial property portfolio from scratch is to buy with a mortgage then re-mortgage the equity at intervals and use the released money to buy more property.
A difference ought not to exist between investment and successful investment but it does. Property is a depreciating asset whose value fluctuates depending on the state of the market. Allowing for costs of buying and selling, management costs, mortgage interest including loss of notional interest on personal equity, and adjusting for inflation and taxes, an investment might not perform as well as imagined.
If you ignore all those factors and simply calculate profit as the difference between how much you paid and what the property would fetch were you to sell it then growth is largely a delusion.
The rate of depreciation is not a constant so that in itself is challenging. To exceed or at least maintain parity with the rate of depreciation, the investment will have to perform. Property performance is the measure of growth.
Property has a reputation as a long-term hedge against inflation but, when you invest in property, you are not buying into the market in its entirety, but a particular property. Therefore, the criteria for whether the proposition is likely to perform needs to be assessed against that particular property, regardless of what might be happening in the market generally.
It may be suggested there is never a right time to buy property but there is. There are only two times: (1) when the seller has under-priced the value of the property, or (2) when mortgages are difficult to come by.
To assess whether a proposition is under-priced, you really have to know your stuff: the technicalities and the fundamentals. If you simply assess by reference to superficial criteria (for example, yield) then a proposition could appear cheap when actually it is not.
When credit is hard to get and market activity is driven by cash buyers, most investors will be left out in the cold. When bank lending criteria is relaxed, the number of investors increases and so do selling prices.
For successful investment, a rising market is a double-edged sword: on one side, an improvement in sentiment is comforting generally so can override caution. On the other, higher prices bring better quality propositions onto the market, thereby testing buyer experience of the nature of potential and the challenge of whether the propositions are really that much better.
Most investments fail to perform, sometimes miserably, but if your luck’s in then they end up ordinary, nothing special. Two reasons investments fail to succeed is to do with misunderstanding initial yield and buying covenant.
Yield is a measure of the rental return you’ll get from the property, all being well, but it is not the only measure. Indeed, it could be the least important even though the inexperienced invariably regard yield as paramount.
Over the years, covenant, the tenant’s financial standing, has worked its way up the appraisal–ladder, so much so that it has usurped technicalities and fundamentals and created a new layer of analysis: sentiment.
If you are borrowing to buy then the cost of borrowing may need to be covered by the rental. I emphasise ‘may’ because not all investors suffer the iniquity of having to justify each proposition to a lender. Many investors have facilities that do not require them to get the bank’s permission beforehand. When each proposition has to stack up so far as the bank is concerned, the buyer is less likely to apply for a loan on a proposition that the bank would reject. Hence, the popularity of readily-mortgageable investments.
For sellers, the measure of popularity amongst buyers is heaven-sent: attractively packaged, an investment dressed up to look good and ticking all the right boxes on the buyer checklist, such as long term lease and tenant covenant, is a guarantee that the price obtainable will most likely exceed the value of the proposition.
Value is not the same as price. Price is subjective. Price is the worth of the property to the buyer, the price that the buyer is willing to pay. Value is objective, how much the market would pay. Most buyers do not see it like that; most buyers think they are the market. Their concerns are for the attractiveness of the proposition.
The negative aspects are discounted in favour of the plus points. Criticism can sound illogical and be interpreted as out of touch. In this scientific world we have created for ourselves, the only test is evidence.
Opinions don’t count for much. Pitfalls can be explained away, doubts dispelled by overlooking the blemishes. Excited by market momentum, itching to spend, money burning a hole in the investor pocket, infected with auction fever, a show of hands, enthusiasm carries them away.
Investors that think themselves the market and take comfort from prices obtained in auction rooms are living in cloud cuckoo-land. If you do not strip away the superficiality and expose the proposition for what it is, if you do not listen to what you don’t want to hear, then more than likely you are going to experience the difference between investment and successful investment.
The practical is the time that it takes to make a profit; the psychological the level of risk that the investor is willing to shoulder. How much profit depends upon your personal definition of whether the amount of profit is worthwhile. For example, if you want to make a profit to enable you to afford a property in a different league then the profit from each proposition could be likened to stepping stones.
A plan for creating a commercial property portfolio from scratch is to buy with a mortgage then re-mortgage the equity at intervals and use the released money to buy more property.
A difference ought not to exist between investment and successful investment but it does. Property is a depreciating asset whose value fluctuates depending on the state of the market. Allowing for costs of buying and selling, management costs, mortgage interest including loss of notional interest on personal equity, and adjusting for inflation and taxes, an investment might not perform as well as imagined.
If you ignore all those factors and simply calculate profit as the difference between how much you paid and what the property would fetch were you to sell it then growth is largely a delusion.
The rate of depreciation is not a constant so that in itself is challenging. To exceed or at least maintain parity with the rate of depreciation, the investment will have to perform. Property performance is the measure of growth.
Property has a reputation as a long-term hedge against inflation but, when you invest in property, you are not buying into the market in its entirety, but a particular property. Therefore, the criteria for whether the proposition is likely to perform needs to be assessed against that particular property, regardless of what might be happening in the market generally.
It may be suggested there is never a right time to buy property but there is. There are only two times: (1) when the seller has under-priced the value of the property, or (2) when mortgages are difficult to come by.
To assess whether a proposition is under-priced, you really have to know your stuff: the technicalities and the fundamentals. If you simply assess by reference to superficial criteria (for example, yield) then a proposition could appear cheap when actually it is not.
When credit is hard to get and market activity is driven by cash buyers, most investors will be left out in the cold. When bank lending criteria is relaxed, the number of investors increases and so do selling prices.
For successful investment, a rising market is a double-edged sword: on one side, an improvement in sentiment is comforting generally so can override caution. On the other, higher prices bring better quality propositions onto the market, thereby testing buyer experience of the nature of potential and the challenge of whether the propositions are really that much better.
Most investments fail to perform, sometimes miserably, but if your luck’s in then they end up ordinary, nothing special. Two reasons investments fail to succeed is to do with misunderstanding initial yield and buying covenant.
Yield is a measure of the rental return you’ll get from the property, all being well, but it is not the only measure. Indeed, it could be the least important even though the inexperienced invariably regard yield as paramount.
Over the years, covenant, the tenant’s financial standing, has worked its way up the appraisal–ladder, so much so that it has usurped technicalities and fundamentals and created a new layer of analysis: sentiment.
If you are borrowing to buy then the cost of borrowing may need to be covered by the rental. I emphasise ‘may’ because not all investors suffer the iniquity of having to justify each proposition to a lender. Many investors have facilities that do not require them to get the bank’s permission beforehand. When each proposition has to stack up so far as the bank is concerned, the buyer is less likely to apply for a loan on a proposition that the bank would reject. Hence, the popularity of readily-mortgageable investments.
For sellers, the measure of popularity amongst buyers is heaven-sent: attractively packaged, an investment dressed up to look good and ticking all the right boxes on the buyer checklist, such as long term lease and tenant covenant, is a guarantee that the price obtainable will most likely exceed the value of the proposition.
Value is not the same as price. Price is subjective. Price is the worth of the property to the buyer, the price that the buyer is willing to pay. Value is objective, how much the market would pay. Most buyers do not see it like that; most buyers think they are the market. Their concerns are for the attractiveness of the proposition.
The negative aspects are discounted in favour of the plus points. Criticism can sound illogical and be interpreted as out of touch. In this scientific world we have created for ourselves, the only test is evidence.
Opinions don’t count for much. Pitfalls can be explained away, doubts dispelled by overlooking the blemishes. Excited by market momentum, itching to spend, money burning a hole in the investor pocket, infected with auction fever, a show of hands, enthusiasm carries them away.
Investors that think themselves the market and take comfort from prices obtained in auction rooms are living in cloud cuckoo-land. If you do not strip away the superficiality and expose the proposition for what it is, if you do not listen to what you don’t want to hear, then more than likely you are going to experience the difference between investment and successful investment.
Valuation and Over-Paying
01/March/2014
I want to dispel a widely held notion, the strong belief in which leads to investors overpaying for shop property. It is a notion that has contributed to substantial over-valuation (along with over-mortgaging by the banks and other lenders) of shop property investments for more than three decades.
When you buy a shop property for investment, you are not buying into the existing or proposed tenant's business: the only thing you own is the property itself. That is all. How the tenant chooses to run its business, the prospects for the business including the market sector the tenant's business serves, are nothing to do with you. You are buying the property and whether it is the entire building or part of a building, that is all. Therefore, the identity of the tenant makes no difference whatsoever to the value of the property. The only relevance of what is known as the 'covenant' of the tenant that makes a difference is the chances of rent on time and other requirements of the occupancy honoured throughout the term of the lease. Therefore, if you pay a higher price because the shop property is let to a well-known covenant, then that 'premium' adds to the risk and may not be recoverable when you want to sell.
To understand why even though there is no link between the value of the property and the tenant's covenant nevertheless a strong connection is made, it is necessary to go back to events in the shop property market during the mid-1970s. In 1972, all Asians were expelled from Uganda by Idi Amin, the president of Uganda at that time. Those holding British passports came to Britain. Many had been businesspeople in Africa and rebuilt up their lives in Britain. Some became retailers while others found suitable employment.
An explosive growth in demand for shops and retail businesses led to a widespread change in attitude. Before the immigration-influx, I think it fair to say many 'white' shopkeepers were living off their laurels, for example half-day closing during the week was the norm, trading times out of kilter with an increasingly cosmopolitan society. Asian shops, the ubiquitous 'Mr Patel', opened longer hours, closing at 10pm rather than 5.30pm, and extended the shopping week to include all day Sunday. Prices obtainable in the market for selling going-concern businesses also rose. In the newsagent, confectioner, tobacconist sector, ("CTN"), it was said a 'white' buyer would pay ten times turnover, but an 'Asian' buyer would pay fifteen times turnover. The difference in price was accounted for by removing staff costs and so on, because the Asian family would work in the shop. Strictly, it shouldn't make any difference to price payable that savings can be made from being more operationally efficient, but I do not think that was the agenda. It was not so much about wanting more income, so much as wanting more capital. By modernising the business, turnover could be increased and the business re-sold for a profit. It also gave the Asian family an opportunity to establish 'roots' in the wider community.
(The presence of Asian shopkeepers in Britain was by no means new. The earliest origins of settlement of South Asians in Great Britain is uncertain, perhaps the Middle Ages. By the late 19th/early 20th centuries there were approximately 70,000 South Asians in Britain and following World War II and the break-up of the British Empire, immigration increased throughout the 1950s and 1960s as citizens of Commonwealth countries and former Caribbean colonies moved to Britain. Following restrictions on primary immigration, much of the subsequent growth in the British Asian community has come from the births of second and third-generation Asian Britons. As time passes, the formation and development of community can alter the demographics. Southall, in north-west Greater London, for example, is a case in point. In 1950, the first group of South Asians arrived in Southall, reputedly recruited to work in a factory owned by a former British Army officer. With the closeness of expanding employment opportunities such as Heathrow Airport, nowadays over 55% of Southall's population of 70,000 is Indian/Pakistani, Southall has one of the largest Sikh Temples outside India and Southall contains the largest Asian shopping centre in the London area.)
An attraction of English property law is freehold ownership. As the ultimate owner of the property, freehold provides both physical and emotional security. Owning shop property freehold can contribute to status in community and business. As anyone that has tried to buy shop property for investment will testify, it is not an easy step. The first hurdle is convincing commercial property agencies you are serious! It's not that surveyors were impossible to deal with, simply they have regular buyers and saw no reason to give newcomers a bite of the cherry. Also, many established surveyors can't be bothered with inexperienced investors. Then there is a question of credibility. Unless you pay the asking price or your offer is very close, you risk being considered a time-waster. Similarly, if you mess about and delay exchange of contract and/or fail to complete. Moreover, there may be a language barrier. Even if you fulfil the criteria, there is no certainty of being offered anything with potential. The solution is to buy at property auctions. Property auctions lend themselves to anonymity. Property auctions have long been popular with people of all nationalities, but before the mid-1970s there was a greater tacit understanding of shop valuation methodology. What the new wave of investors did not appreciate (or at least not give an impression) was that, in principle, a high yield suggests a shop property where little or no capital growth is expected, conversely a low-yield offers prospects for growth. In any event, because the cost of borrowing money is the same nationwide, it made no sense to be able to buy a shop property investment yielding say 12% for a lower price pro-rata than a shop property showing 7%. Hence, what began to happen and rapidly gathered steam, until the influence of the change in approach became the 'norm', was for shop properties having little or no growth prospects to go up price which in turn led to an increase in price for properties with growth prospects.
Finance plays a pivotal role in the commercial property market. It is said that property investment is more about finance than property. When a buyer wants to mortgage an investment property, or needs a mortgage in order to buy the property in the first place, ways to repay the mortgage include the borrower's other sources of income and whether the yield on the property exceeds the instalment for payment of the mortgage. Whilst a lender will assess the credit-worthiness of the borrower, a lender is not normally interested in the prospects for the investment: all a mortgagee cares about is whether the borrower could honour the requirements of the mortgage, or in the event of default the property could be sold to repay the loan. The fact that high-yielding investments are more risky is of no consequence to the lender, and may in fact be considered more secure simply because of a higher yield. In effect, thanks to their mortgage criteria, what the banks have imposed on buyers of shop property is the equivalent of a business plan, whereby never mind whether the shop property constitutes an investment, all that matters is that the financial side of things stack up.
What stemmed from inexperience became the 'norm' thanks to mortgage valuation surveyors. The task of a mortgage valuation surveyor, often a chartered surveyor, is to give an opinion of the market value of the property. However, the market value of a property is only the value of the property itself. It is not the value of the investment. The investment comprises the property and any existing or proposed 'tenancy' involving that property. So, since the value of the investment can vary depending upon terms of the tenancy, arguably a valuation surveyor should make that clear in the report, otherwise there is the risk the banks could be misled into thinking lending on the property is more secure than it is.
The fact that a layer of variable value can be added to the intrinsic value of a property is not something lost on sellers. The marketing of commercial property for investment involves very sophisticated and shrewd techniques. For example, one of the most obvious ways to maximise the price is to create an investment that is readily mortgageable. When selling a shop property investment, the seller is not interested in the value of the property as such, but how much the property and all that comes with it is likely to fetch in the market. It is the existence of that subtle difference for which the inexperienced investor can pay a hefty price. Selling a shop property for investment is no different to any other form of selling. Dress it up to look its best and hope the buyer doesn't spot what's wrong. Any complaints afterwards can be met by caveat emptor: the buyer alone is responsible for checking the quality and suitability of goods before making the purchase. Moreover, unlike products and services where the seller might be concerned to safeguard reputation for future custom, a seller of shop property is unlikely to care a jot about goodwill.
Although the seller of shop property is unlikely to care about goodwill, the seller's agents are mindful of their reputation in the market. To maximise the selling process whilst attempting to minimise the repercussions of overpayment, auctioneers have, for some time, highlighted the financial status of the tenant in the auction catalogue, for example the retailer's number of branches, latest turnover and profit figures.
Covenant and early review lots are guaranteed to fetch top prices. In the details, much emphasis is given to the date of review, with the estimated rental value suggested, either by having issued the rent review notice quoting a very high proposal, or by stating the vendor's opinion of rental value, or by citing a brief mention of a nearby new letting.
Pre-occupation with quality of covenant has driven investment yields down to levels which, for the type of property, is more commonly expected for prime propositions, offering assured long-term growth!
Consequently, what has happened is that not only has the way shop property is valued disconnected from fundamental principles, but also the banks and vested interests have create a market that is completely divorced from the reality of property itself. The test of that claim is easy to pass, for example: imagine two shop properties, next door to each other, both shops identical size, layout, etc, both let for 20 years at the same rent with rent reviews at five yearly intervals. One shop is let to a national multiple retailer with dozens of branches, the other to a local shopkeeper with just that one shop. Both properties are offered for sale by auction on the same date by the same auctioneer. What's the betting the shop let to the multiple retailer would fetch a higher price?
In my opinion, it is not up to valuation surveyors to insist banks lend only on the value of the property, as distinct from the market value of the investment. That decision is for the banks alone. However, I do consider valuation surveyors have a duty of care to ensure the banks understand there is a difference which might not necessarily be allowed for in the 'forced' sale valuation. A definition of 'forced sale' valuation is "the highest price which a property can reasonably be expected to bring, if offered for sale without the consent or concurrence of the owner by virtue of judicial process, in what may be a restricted market place, within a restricted time frame, to a prudent, willing and able purchaser who may have limited knowledge about the property, its uses and capability." If the forced sale valuation is a percentage of the market value of the property then in my opinion the mortgage is likely to be more secure, than if the forced sale value is the valuation of the investment.
When you buy a shop property for investment, you are not buying into the existing or proposed tenant's business: the only thing you own is the property itself. That is all. How the tenant chooses to run its business, the prospects for the business including the market sector the tenant's business serves, are nothing to do with you. You are buying the property and whether it is the entire building or part of a building, that is all. Therefore, the identity of the tenant makes no difference whatsoever to the value of the property. The only relevance of what is known as the 'covenant' of the tenant that makes a difference is the chances of rent on time and other requirements of the occupancy honoured throughout the term of the lease. Therefore, if you pay a higher price because the shop property is let to a well-known covenant, then that 'premium' adds to the risk and may not be recoverable when you want to sell.
To understand why even though there is no link between the value of the property and the tenant's covenant nevertheless a strong connection is made, it is necessary to go back to events in the shop property market during the mid-1970s. In 1972, all Asians were expelled from Uganda by Idi Amin, the president of Uganda at that time. Those holding British passports came to Britain. Many had been businesspeople in Africa and rebuilt up their lives in Britain. Some became retailers while others found suitable employment.
An explosive growth in demand for shops and retail businesses led to a widespread change in attitude. Before the immigration-influx, I think it fair to say many 'white' shopkeepers were living off their laurels, for example half-day closing during the week was the norm, trading times out of kilter with an increasingly cosmopolitan society. Asian shops, the ubiquitous 'Mr Patel', opened longer hours, closing at 10pm rather than 5.30pm, and extended the shopping week to include all day Sunday. Prices obtainable in the market for selling going-concern businesses also rose. In the newsagent, confectioner, tobacconist sector, ("CTN"), it was said a 'white' buyer would pay ten times turnover, but an 'Asian' buyer would pay fifteen times turnover. The difference in price was accounted for by removing staff costs and so on, because the Asian family would work in the shop. Strictly, it shouldn't make any difference to price payable that savings can be made from being more operationally efficient, but I do not think that was the agenda. It was not so much about wanting more income, so much as wanting more capital. By modernising the business, turnover could be increased and the business re-sold for a profit. It also gave the Asian family an opportunity to establish 'roots' in the wider community.
(The presence of Asian shopkeepers in Britain was by no means new. The earliest origins of settlement of South Asians in Great Britain is uncertain, perhaps the Middle Ages. By the late 19th/early 20th centuries there were approximately 70,000 South Asians in Britain and following World War II and the break-up of the British Empire, immigration increased throughout the 1950s and 1960s as citizens of Commonwealth countries and former Caribbean colonies moved to Britain. Following restrictions on primary immigration, much of the subsequent growth in the British Asian community has come from the births of second and third-generation Asian Britons. As time passes, the formation and development of community can alter the demographics. Southall, in north-west Greater London, for example, is a case in point. In 1950, the first group of South Asians arrived in Southall, reputedly recruited to work in a factory owned by a former British Army officer. With the closeness of expanding employment opportunities such as Heathrow Airport, nowadays over 55% of Southall's population of 70,000 is Indian/Pakistani, Southall has one of the largest Sikh Temples outside India and Southall contains the largest Asian shopping centre in the London area.)
An attraction of English property law is freehold ownership. As the ultimate owner of the property, freehold provides both physical and emotional security. Owning shop property freehold can contribute to status in community and business. As anyone that has tried to buy shop property for investment will testify, it is not an easy step. The first hurdle is convincing commercial property agencies you are serious! It's not that surveyors were impossible to deal with, simply they have regular buyers and saw no reason to give newcomers a bite of the cherry. Also, many established surveyors can't be bothered with inexperienced investors. Then there is a question of credibility. Unless you pay the asking price or your offer is very close, you risk being considered a time-waster. Similarly, if you mess about and delay exchange of contract and/or fail to complete. Moreover, there may be a language barrier. Even if you fulfil the criteria, there is no certainty of being offered anything with potential. The solution is to buy at property auctions. Property auctions lend themselves to anonymity. Property auctions have long been popular with people of all nationalities, but before the mid-1970s there was a greater tacit understanding of shop valuation methodology. What the new wave of investors did not appreciate (or at least not give an impression) was that, in principle, a high yield suggests a shop property where little or no capital growth is expected, conversely a low-yield offers prospects for growth. In any event, because the cost of borrowing money is the same nationwide, it made no sense to be able to buy a shop property investment yielding say 12% for a lower price pro-rata than a shop property showing 7%. Hence, what began to happen and rapidly gathered steam, until the influence of the change in approach became the 'norm', was for shop properties having little or no growth prospects to go up price which in turn led to an increase in price for properties with growth prospects.
Finance plays a pivotal role in the commercial property market. It is said that property investment is more about finance than property. When a buyer wants to mortgage an investment property, or needs a mortgage in order to buy the property in the first place, ways to repay the mortgage include the borrower's other sources of income and whether the yield on the property exceeds the instalment for payment of the mortgage. Whilst a lender will assess the credit-worthiness of the borrower, a lender is not normally interested in the prospects for the investment: all a mortgagee cares about is whether the borrower could honour the requirements of the mortgage, or in the event of default the property could be sold to repay the loan. The fact that high-yielding investments are more risky is of no consequence to the lender, and may in fact be considered more secure simply because of a higher yield. In effect, thanks to their mortgage criteria, what the banks have imposed on buyers of shop property is the equivalent of a business plan, whereby never mind whether the shop property constitutes an investment, all that matters is that the financial side of things stack up.
What stemmed from inexperience became the 'norm' thanks to mortgage valuation surveyors. The task of a mortgage valuation surveyor, often a chartered surveyor, is to give an opinion of the market value of the property. However, the market value of a property is only the value of the property itself. It is not the value of the investment. The investment comprises the property and any existing or proposed 'tenancy' involving that property. So, since the value of the investment can vary depending upon terms of the tenancy, arguably a valuation surveyor should make that clear in the report, otherwise there is the risk the banks could be misled into thinking lending on the property is more secure than it is.
The fact that a layer of variable value can be added to the intrinsic value of a property is not something lost on sellers. The marketing of commercial property for investment involves very sophisticated and shrewd techniques. For example, one of the most obvious ways to maximise the price is to create an investment that is readily mortgageable. When selling a shop property investment, the seller is not interested in the value of the property as such, but how much the property and all that comes with it is likely to fetch in the market. It is the existence of that subtle difference for which the inexperienced investor can pay a hefty price. Selling a shop property for investment is no different to any other form of selling. Dress it up to look its best and hope the buyer doesn't spot what's wrong. Any complaints afterwards can be met by caveat emptor: the buyer alone is responsible for checking the quality and suitability of goods before making the purchase. Moreover, unlike products and services where the seller might be concerned to safeguard reputation for future custom, a seller of shop property is unlikely to care a jot about goodwill.
Although the seller of shop property is unlikely to care about goodwill, the seller's agents are mindful of their reputation in the market. To maximise the selling process whilst attempting to minimise the repercussions of overpayment, auctioneers have, for some time, highlighted the financial status of the tenant in the auction catalogue, for example the retailer's number of branches, latest turnover and profit figures.
Covenant and early review lots are guaranteed to fetch top prices. In the details, much emphasis is given to the date of review, with the estimated rental value suggested, either by having issued the rent review notice quoting a very high proposal, or by stating the vendor's opinion of rental value, or by citing a brief mention of a nearby new letting.
Pre-occupation with quality of covenant has driven investment yields down to levels which, for the type of property, is more commonly expected for prime propositions, offering assured long-term growth!
Consequently, what has happened is that not only has the way shop property is valued disconnected from fundamental principles, but also the banks and vested interests have create a market that is completely divorced from the reality of property itself. The test of that claim is easy to pass, for example: imagine two shop properties, next door to each other, both shops identical size, layout, etc, both let for 20 years at the same rent with rent reviews at five yearly intervals. One shop is let to a national multiple retailer with dozens of branches, the other to a local shopkeeper with just that one shop. Both properties are offered for sale by auction on the same date by the same auctioneer. What's the betting the shop let to the multiple retailer would fetch a higher price?
In my opinion, it is not up to valuation surveyors to insist banks lend only on the value of the property, as distinct from the market value of the investment. That decision is for the banks alone. However, I do consider valuation surveyors have a duty of care to ensure the banks understand there is a difference which might not necessarily be allowed for in the 'forced' sale valuation. A definition of 'forced sale' valuation is "the highest price which a property can reasonably be expected to bring, if offered for sale without the consent or concurrence of the owner by virtue of judicial process, in what may be a restricted market place, within a restricted time frame, to a prudent, willing and able purchaser who may have limited knowledge about the property, its uses and capability." If the forced sale valuation is a percentage of the market value of the property then in my opinion the mortgage is likely to be more secure, than if the forced sale value is the valuation of the investment.
Chasing Rainbows
20/February/2014
Unlike investing in stocks and shares where the volatility of share prices and uncertainty of dividends can lead to long term buy and lose, investment in property offers two advantages: firstly, because the relationship between landlord and tenant rests on a legally-binding contract, there is the potential for both capital and rental growth. Secondly, unlike the Stock Market where in the scheme of things individual private investors have little or no influence over the company’s performance, the property market offers the thought of being in control.
I emphasise ‘thought’ because landlords are not actually in as much control as they might like to think. The landlord owns the building, not the tenant’s business and tenants are not obliged to keep the landlord informed as regarding the intention for the business. All that a tenant is obliged to do is comply with the terms and conditions of the lease and even that the terms and conditions would be subject to any overriding legislation and/or business tenancy case-law. For example, a shop let to multiple retailer which might be thought a secure investment and hence command a higher capital value could fall in valley simply by the multiple retailer deciding to close the branch and assigning the tenancy or subletting the premises to a nobody.
Stocks and shares and property are forms of illiquid investment, but the stock market for the most part less so since buying and selling can be transacted within seconds, with middle-men, or market-makers, to take up the slack whenever demand and supply fluctuate. With property, however, there are no market-makers as such; to buy and sell a property requires a seller and a buyer, and to transact at the desired price requires a seller or buyer at that price.
With stocks and shares, share prices are published and during market hours a trade can be executed at or around the published price. It’s not like that with property: no published prices in advance, no certainty that what someone got for a particular property would result in at least the same price for a virtually identical property paid by someone else. As for value, some say that’s whatever the property fetches but actually the price could simply be a measure of worth for the buyer: otherwise, the market value is based upon one person’s opinion; an informed opinion provided by a professional, but an opinion nevertheless.
Despite the underlying value of property being anyone’s guess, another layer of value is added to be on the safe side. The income from a property let to a good covenant on a long lease also constitutes an investment. All other factors remaining constant, the best time to sell the investment layer is when the end of the lease is so far off that it becomes impossible for mere mortals to predict what would happen by then. For the same reason, it is also the worst time to buy, but that doesn’t stop investors piling in regardless. Because it is easier to mortgage a property let on a long lease and because the total income, ignoring any reviews, is known in advance, the present value of that income can be calculated.
The attraction and value of that present value fluctuates according to confidence in the investment market. Investment confidence varies with bank lending criteria. The easier and cheaper it is to borrow, the more risk may be taken, the higher the price. Conversely, the harder, the more expensive, the less risk, the lower the price.
A paradox of investment-thinking is the difference in attitude between experienced professional investors and everyone else. EPIs focus on the bottom-line: the worst scenario. Challenging at the best of times, protecting the bottom-line is not easy when wanting to invest at a time of improving sentiment. Sentiment is a measure of confidence. Increasing confidence attracts more investors and in turn becomes a virtuous circle, onwards and upwards. Momentum investing is like playing the game of musical chairs: you hope there’ll be somewhere to sit when the music stops. The property game is not limited to a few seats. Widespread availability of propositions enables investors to venture further afield. Outside the hot spots, yields are generally higher not because those places are necessarily neglected through oversight but that growth is hard to come by or non-existent. Despite lower prices, often there is considerably more risk.
On paper it makes sense to capitalise on the difference between the cost of borrowing and the yield obtainable. In practice, it may not make sense at all. A common failing is overestimating the growth potential and underestimating the cost of achieving growth. Often, both factors are symptomatic of tenant-covenant fixation.
Play your cards right and a great deal of money can be made from trading in momentum. Investing for ever requires a different mind-set. Not only a question of timing but also whether the initial yield would be sustainable. After an investment is bought, the investor becomes a landlord and experiences the reality of asset management. A test of performance is the rent review or lease renewal. Naturally, investors/landlords desire a return on capital that is commensurate with their expectations, but at rent review (assuming to market rent) or lease renewal the actual landlord’s aspirations are irrelevant and depending upon skill of the tenant’s advisers could result in less than expected. Moreover, a lot can happen to the whereabouts and/or to a property as time passes: the economy might improve but not rub off on a particular property. To cap it all, the tenant might go broke and the new tenant an inferior covenant.
Whatever the reason for the purchase price, whether sellers offering higher yields for the sole purpose of achieving the highest possible price or high prices bringing out better properties that would otherwise not be sold so commanding scarcity value, any difference between the fundamental value and the investment layer reflects buyers chasing rainbows.
I emphasise ‘thought’ because landlords are not actually in as much control as they might like to think. The landlord owns the building, not the tenant’s business and tenants are not obliged to keep the landlord informed as regarding the intention for the business. All that a tenant is obliged to do is comply with the terms and conditions of the lease and even that the terms and conditions would be subject to any overriding legislation and/or business tenancy case-law. For example, a shop let to multiple retailer which might be thought a secure investment and hence command a higher capital value could fall in valley simply by the multiple retailer deciding to close the branch and assigning the tenancy or subletting the premises to a nobody.
Stocks and shares and property are forms of illiquid investment, but the stock market for the most part less so since buying and selling can be transacted within seconds, with middle-men, or market-makers, to take up the slack whenever demand and supply fluctuate. With property, however, there are no market-makers as such; to buy and sell a property requires a seller and a buyer, and to transact at the desired price requires a seller or buyer at that price.
With stocks and shares, share prices are published and during market hours a trade can be executed at or around the published price. It’s not like that with property: no published prices in advance, no certainty that what someone got for a particular property would result in at least the same price for a virtually identical property paid by someone else. As for value, some say that’s whatever the property fetches but actually the price could simply be a measure of worth for the buyer: otherwise, the market value is based upon one person’s opinion; an informed opinion provided by a professional, but an opinion nevertheless.
Despite the underlying value of property being anyone’s guess, another layer of value is added to be on the safe side. The income from a property let to a good covenant on a long lease also constitutes an investment. All other factors remaining constant, the best time to sell the investment layer is when the end of the lease is so far off that it becomes impossible for mere mortals to predict what would happen by then. For the same reason, it is also the worst time to buy, but that doesn’t stop investors piling in regardless. Because it is easier to mortgage a property let on a long lease and because the total income, ignoring any reviews, is known in advance, the present value of that income can be calculated.
The attraction and value of that present value fluctuates according to confidence in the investment market. Investment confidence varies with bank lending criteria. The easier and cheaper it is to borrow, the more risk may be taken, the higher the price. Conversely, the harder, the more expensive, the less risk, the lower the price.
A paradox of investment-thinking is the difference in attitude between experienced professional investors and everyone else. EPIs focus on the bottom-line: the worst scenario. Challenging at the best of times, protecting the bottom-line is not easy when wanting to invest at a time of improving sentiment. Sentiment is a measure of confidence. Increasing confidence attracts more investors and in turn becomes a virtuous circle, onwards and upwards. Momentum investing is like playing the game of musical chairs: you hope there’ll be somewhere to sit when the music stops. The property game is not limited to a few seats. Widespread availability of propositions enables investors to venture further afield. Outside the hot spots, yields are generally higher not because those places are necessarily neglected through oversight but that growth is hard to come by or non-existent. Despite lower prices, often there is considerably more risk.
On paper it makes sense to capitalise on the difference between the cost of borrowing and the yield obtainable. In practice, it may not make sense at all. A common failing is overestimating the growth potential and underestimating the cost of achieving growth. Often, both factors are symptomatic of tenant-covenant fixation.
Play your cards right and a great deal of money can be made from trading in momentum. Investing for ever requires a different mind-set. Not only a question of timing but also whether the initial yield would be sustainable. After an investment is bought, the investor becomes a landlord and experiences the reality of asset management. A test of performance is the rent review or lease renewal. Naturally, investors/landlords desire a return on capital that is commensurate with their expectations, but at rent review (assuming to market rent) or lease renewal the actual landlord’s aspirations are irrelevant and depending upon skill of the tenant’s advisers could result in less than expected. Moreover, a lot can happen to the whereabouts and/or to a property as time passes: the economy might improve but not rub off on a particular property. To cap it all, the tenant might go broke and the new tenant an inferior covenant.
Whatever the reason for the purchase price, whether sellers offering higher yields for the sole purpose of achieving the highest possible price or high prices bringing out better properties that would otherwise not be sold so commanding scarcity value, any difference between the fundamental value and the investment layer reflects buyers chasing rainbows.
Recession - a time for transformation
01/December/2013
As I say time and again, essentially, a problem is a fault in direction which, when left to its own devices, may fragment into seemingly different problems, so as to attract attention. It is not enough to resolve a problem: it must be transformed. Finding a solution simply dilutes the problem, until it is bearable. It is not enough to alter perception: when symptoms are merely relieved, the problem will crop up again.
Transformation is a thorough, possibly dramatic, change in underlying attitude. In my healing experience, such as it is, few people are adept at transforming problems into commercial opportunities as they go. Mostly, people metaphorically brush problems under the carpet, ignore them and hope they’ll go away. They don’t. The problem waits for an opportunity to arise again, often in different guises. When you have an unresolved problem, you will not progress. You, your business, are stuck. A problem at micro-level becomes a macro large-scale.
In my newsletter December 1985, I said “Costs in the property industry have reached record levels. The actual amount of money involved in day-to-day transactions imposes constant pressure to meet critical financial targets. Any attempt to question or stop is met by a barrage of vested interests intent upon maintaining momentum. The cost of error is rapidly reaching the point whereby individual foresight will be crushed by the weight of uncontrollable dynamism. In the prime shop market, the corporate income of some retailers is inextricably bound up with the consumer’s willingness to keep on spending on credit. It only needs a few months’ lull for the structure to crack under the weight of operating costs. ”
And in June 1998, “When retailers get carried away and form the wrong impression of reality, the knock-on effect is destabilisation. Flat demand is caused by an addiction to competition. ”
Generally, retailers don’t care where the money comes from. As long as it does. As long as the business plan is approved by the bank and facilities can be renewed, as long as customers can be persuaded to spend more, as long as the lust for more shops can be satisfied, as long as landlords can be dumped or treated like any other supplier, that’s all that matters. Operating in splendid isolation, indifference to the wider long-term consequences cannot be appeased by giving to charity: playing power-games, bullying tactics, is completely the wrong approach for long-term consistent success.
Not only retailers, but also landlords and surveyors have fallen down the slippery slope. Indifference to repercussions of pro-active asset management, over-developing, over-estimating values, manipulating rents, it all fuels the get-rich-quick mentality, and the greed has so rotted the core that they’re going cap in hand to shareholders and banks for more money to feed the cravings.
It’s not the market’s fault. That is akin to admonishing customers, the source of spending-power. It’s not that the market suddenly turned, or no one could have foreseen. The direction had been changing for years. It merely needed to tip the balance. It was foreseen, but warnings went unheeded. Views like mine are not what most people want to hear. In December 1985 I said “success in retailing today is too dependent upon the availability of credit. Credit enables retailers to control the concept of what represents value for money. “ As I said in June 1998 “the cost of prejudice: a preference for conformity. It is thinking problems are normal. “ Credit interferes with the law of balance. It increases the money-supply artificially. You cannot blow something out of all proportion and expect it to stay there. A time must arrive when it bursts, a point at which it is so fed up it cannot contain itself.
In my opinion, the bubble was about to burst in mid-2004, but greed gave it a final blow. In April 2008, as I put in my blog “in my opinion, the sub-prime crisis was deliberately orchestrated by some very shrewd operators who have made trillions of $ or whatever out of the debacle. ” Be that as it may, the credit-crunch has highlighted just how much pretentiousness exists.
Credit creates its own vicious circle of spiralling costs. Artificial growth, opening more shops, for more than fair share, gives an impression of strong demand, thereby attracting competitors, increasing pressure for performance. Also, the terms of a loan can restrict the freedom to synchronise with reality: the direction in which customers are going.
Businesses and properties exist to serve customers: not the other way round. Borrowing is considered par for the course, but whereas it is okay to want a helping hand to begin with, there comes a point surely, when a business ought to stand on its own feet? In my opinion, for a business to consider itself successful it should have no need of debt. That is not to say it should not have any borrowing facility, simply it should rarely need to use it. The credit crunch shows just how much businesses that depend on borrowing have become a drag. In the aftermath of years of a booming economy, that few businesses have amassed cash confirms most directors are more interested in “living the life of Riley” than ploughing the profits into developing the business.
The money has to come from somewhere. To live off borrowings, assuming they would always be replenished on the strength of the business plan, is the result of allowing the art of avoiding challenging questions to run companies. It is a wonder of the pyramid, whereby the person in charge surrounds themselves with layers of management, so as to create the illusion that person must be very talented. Not realising the light at the end of the tunnel could be the train coming towards you can lead to a series of mistakes that start when someone is sold on an idea and there is no stopping them. By the time the idea is up and running, it is failing all over the place and costing a packet.
I think it’s sad, not to mention a waste of resources, that retailers and landlords are obliged to fail, and for shareholders to suffer, before directors will learn how to listen. Perhaps it’s hardly surprising: their contemporaries are on the same wavelength: standing firm and resolute on a massive psychological block. A clean-sweep is necessary: to remove from positions of power those that need tangible evidence before they’ll act. Fact is when you ignore the signs and don’t change willingly, change will be forced upon you. It’s as simple as that.
For long-term consistent success, to be progressive, to avoid coming unstuck in times of change, you have to think deeply and not allow superficial influences to cloud your judgement. As I say, “I think it important to have a feel for what you do, because then you can find your way around in the dark”.
It is clear to me what is happening. It’s a shift, to living true to form and allowing business development to unfold naturally. If you would like to know what that means for your own business then I should be pleased to advise.
Transformation is a thorough, possibly dramatic, change in underlying attitude. In my healing experience, such as it is, few people are adept at transforming problems into commercial opportunities as they go. Mostly, people metaphorically brush problems under the carpet, ignore them and hope they’ll go away. They don’t. The problem waits for an opportunity to arise again, often in different guises. When you have an unresolved problem, you will not progress. You, your business, are stuck. A problem at micro-level becomes a macro large-scale.
In my newsletter December 1985, I said “Costs in the property industry have reached record levels. The actual amount of money involved in day-to-day transactions imposes constant pressure to meet critical financial targets. Any attempt to question or stop is met by a barrage of vested interests intent upon maintaining momentum. The cost of error is rapidly reaching the point whereby individual foresight will be crushed by the weight of uncontrollable dynamism. In the prime shop market, the corporate income of some retailers is inextricably bound up with the consumer’s willingness to keep on spending on credit. It only needs a few months’ lull for the structure to crack under the weight of operating costs. ”
And in June 1998, “When retailers get carried away and form the wrong impression of reality, the knock-on effect is destabilisation. Flat demand is caused by an addiction to competition. ”
Generally, retailers don’t care where the money comes from. As long as it does. As long as the business plan is approved by the bank and facilities can be renewed, as long as customers can be persuaded to spend more, as long as the lust for more shops can be satisfied, as long as landlords can be dumped or treated like any other supplier, that’s all that matters. Operating in splendid isolation, indifference to the wider long-term consequences cannot be appeased by giving to charity: playing power-games, bullying tactics, is completely the wrong approach for long-term consistent success.
Not only retailers, but also landlords and surveyors have fallen down the slippery slope. Indifference to repercussions of pro-active asset management, over-developing, over-estimating values, manipulating rents, it all fuels the get-rich-quick mentality, and the greed has so rotted the core that they’re going cap in hand to shareholders and banks for more money to feed the cravings.
It’s not the market’s fault. That is akin to admonishing customers, the source of spending-power. It’s not that the market suddenly turned, or no one could have foreseen. The direction had been changing for years. It merely needed to tip the balance. It was foreseen, but warnings went unheeded. Views like mine are not what most people want to hear. In December 1985 I said “success in retailing today is too dependent upon the availability of credit. Credit enables retailers to control the concept of what represents value for money. “ As I said in June 1998 “the cost of prejudice: a preference for conformity. It is thinking problems are normal. “ Credit interferes with the law of balance. It increases the money-supply artificially. You cannot blow something out of all proportion and expect it to stay there. A time must arrive when it bursts, a point at which it is so fed up it cannot contain itself.
In my opinion, the bubble was about to burst in mid-2004, but greed gave it a final blow. In April 2008, as I put in my blog “in my opinion, the sub-prime crisis was deliberately orchestrated by some very shrewd operators who have made trillions of $ or whatever out of the debacle. ” Be that as it may, the credit-crunch has highlighted just how much pretentiousness exists.
Credit creates its own vicious circle of spiralling costs. Artificial growth, opening more shops, for more than fair share, gives an impression of strong demand, thereby attracting competitors, increasing pressure for performance. Also, the terms of a loan can restrict the freedom to synchronise with reality: the direction in which customers are going.
Businesses and properties exist to serve customers: not the other way round. Borrowing is considered par for the course, but whereas it is okay to want a helping hand to begin with, there comes a point surely, when a business ought to stand on its own feet? In my opinion, for a business to consider itself successful it should have no need of debt. That is not to say it should not have any borrowing facility, simply it should rarely need to use it. The credit crunch shows just how much businesses that depend on borrowing have become a drag. In the aftermath of years of a booming economy, that few businesses have amassed cash confirms most directors are more interested in “living the life of Riley” than ploughing the profits into developing the business.
The money has to come from somewhere. To live off borrowings, assuming they would always be replenished on the strength of the business plan, is the result of allowing the art of avoiding challenging questions to run companies. It is a wonder of the pyramid, whereby the person in charge surrounds themselves with layers of management, so as to create the illusion that person must be very talented. Not realising the light at the end of the tunnel could be the train coming towards you can lead to a series of mistakes that start when someone is sold on an idea and there is no stopping them. By the time the idea is up and running, it is failing all over the place and costing a packet.
I think it’s sad, not to mention a waste of resources, that retailers and landlords are obliged to fail, and for shareholders to suffer, before directors will learn how to listen. Perhaps it’s hardly surprising: their contemporaries are on the same wavelength: standing firm and resolute on a massive psychological block. A clean-sweep is necessary: to remove from positions of power those that need tangible evidence before they’ll act. Fact is when you ignore the signs and don’t change willingly, change will be forced upon you. It’s as simple as that.
For long-term consistent success, to be progressive, to avoid coming unstuck in times of change, you have to think deeply and not allow superficial influences to cloud your judgement. As I say, “I think it important to have a feel for what you do, because then you can find your way around in the dark”.
It is clear to me what is happening. It’s a shift, to living true to form and allowing business development to unfold naturally. If you would like to know what that means for your own business then I should be pleased to advise.
Asset Strippers
21/November/2013
Investment in shop property is very rewarding provided you know what you are doing. Many private investors, particularly novices, do not understand how to go about it. Instead of formulating and sticking to a clearly defined strategy, in which expectations for property performance respect business tenancy principles, most investors have a scatter–gun approach, alighting upon anything that takes the fancy within their price range.
A challenge for any investor whose source of funding demands that the passing rent should at least cover the cost of the bank loan is that, unless the timing of the purchase coincides with the bottom of the market or the proposition really is a bargain and not just dressed up to look like one, higher–yielding propositions rarely come with any chance of capital growth, or at least not enough to offset inflation.
Without capital growth, which to be maintained is a product of rental increase and pro–active asset management, rather than the vagaries of investment market momentum, the asset is likely to depreciate in value through a combination of inflation, non-recoverable costs during ownership, shortening lease term, shifting trading positions and multiple–retailer branch closure. In my opinion, most peripheral trading positions have gone ex–growth. The only trading position (by which I mean actual location, not tenant covenant) to buy into is 100% prime: anything else is on a hiding to nothing, a downward spiral in the making.
Whenever I’m asked whether I think the asking price for an investment property is reasonable, my stock answer is that property generally is overpriced by about 50%. The difference is in the value of the layer of borrowing that, by virtue of the difference between the value of a property with vacant possession and the same property let on a mortgageable lease, has come into existence because the banks are comfortable with lending against cash-flow. Go back in time before property was thought of as a store of value and in a bygone era the value of land, buildings, bricks and mortar was what the real estate could be used for by the owner, as distinct from what it might fetch if sold to someone that could afford to buy provided someone else would lend the buyer the money.
Buying covenant makes sense in the context of improving the chances of getting the rent in on time, but retailers whose financial standing counts for something in the investment market are not daft. Property–cost reduction and minimising tenancy–liabilities is the mantra. Canniness is apparent with the capital–releasing of ex–growth property using sale–and–leaseback where a building let to a well–known company on a long lease with rent reviews at regular intervals is a mouthwatering prospect, tailor–made for a mortgage, guaranteed to attract keen demand and commensurate price.
Unlike the local trader whose financial decisions are likely to be curtailed by resources, whether or not the tenant has a surveyor acting for him, so may cave-in under pressure, the multiple retailer is usually in a stronger position to argue and resist; most multiple retailers have more resources at their disposal than do many of their landlords. Consequently, surveyors acting for inexperienced investors against multiple–retailers in non–core trading positions know full well that the likelihood of the landlords’ rental expectations being met are going to be slim. Managing client expectations calls for a sensitive approach in the wording of recommendation, (a skill which incidentally isn’t something readily grasped by the generalist surveyor fraternity whose advice is dismissed by the landlord refusing to concur and instead instructing someone like me with a specialist perspective). Part of the difficulty is that despite my best attempts via my website – I’d like to think other surveyors too, even though a random search on Google does not reveal much attempt at enlightenment – getting the message across to inexperience that an “upward–only” review does not mean the rent necessarily has to increase has not permeated private investor collective consciousness. Instead, the investor having bought a low yield as a result of investment–market workings sets his sights on a rental hike that would increase the return on capital to a level commensurate with the self–perceived wisdom of the buying choice.
The flight from cash on deposit and derisory interest rates and/or the volatility of dividends from stocks and shares and/or the hassle of residential buy–to–let into the higher yields of a business tenancy and perceived rich pickings of shop property investment is not without risk. The commercial property market, of which shop property is a sector, is unregulated and a paradise for the shrewd. Asset stripping is not only the transfer between connected parties: it is also the extrication by the seller of cash liquidity from the buyer. It is said that a fool and his money are soon parted but surely the millions of pounds that exchanged regularly in auction rooms are not going to result in every buyer ending up feeling disappointed with their purchase? But why not? Why when auction–fever has taken over from the arguably more thorough due diligence of private treaty “subject to contract” should the excitement of bidding before the fall of the gavel not interfere with sound judgement?
In my opinion, the most important point to keep in mind when choosing a shop property for investment is that property is a depreciating asset whose rate of depreciation is only going to be counter–balanced and tilted toward prospects for growth if the host of factors and variables that generate growth are in alignment. It doesn’t take much for the subtle link between the location and/or trading position and/or terms and conditions of the tenancy to be out of sync.
A challenge for any investor whose source of funding demands that the passing rent should at least cover the cost of the bank loan is that, unless the timing of the purchase coincides with the bottom of the market or the proposition really is a bargain and not just dressed up to look like one, higher–yielding propositions rarely come with any chance of capital growth, or at least not enough to offset inflation.
Without capital growth, which to be maintained is a product of rental increase and pro–active asset management, rather than the vagaries of investment market momentum, the asset is likely to depreciate in value through a combination of inflation, non-recoverable costs during ownership, shortening lease term, shifting trading positions and multiple–retailer branch closure. In my opinion, most peripheral trading positions have gone ex–growth. The only trading position (by which I mean actual location, not tenant covenant) to buy into is 100% prime: anything else is on a hiding to nothing, a downward spiral in the making.
Whenever I’m asked whether I think the asking price for an investment property is reasonable, my stock answer is that property generally is overpriced by about 50%. The difference is in the value of the layer of borrowing that, by virtue of the difference between the value of a property with vacant possession and the same property let on a mortgageable lease, has come into existence because the banks are comfortable with lending against cash-flow. Go back in time before property was thought of as a store of value and in a bygone era the value of land, buildings, bricks and mortar was what the real estate could be used for by the owner, as distinct from what it might fetch if sold to someone that could afford to buy provided someone else would lend the buyer the money.
Buying covenant makes sense in the context of improving the chances of getting the rent in on time, but retailers whose financial standing counts for something in the investment market are not daft. Property–cost reduction and minimising tenancy–liabilities is the mantra. Canniness is apparent with the capital–releasing of ex–growth property using sale–and–leaseback where a building let to a well–known company on a long lease with rent reviews at regular intervals is a mouthwatering prospect, tailor–made for a mortgage, guaranteed to attract keen demand and commensurate price.
Unlike the local trader whose financial decisions are likely to be curtailed by resources, whether or not the tenant has a surveyor acting for him, so may cave-in under pressure, the multiple retailer is usually in a stronger position to argue and resist; most multiple retailers have more resources at their disposal than do many of their landlords. Consequently, surveyors acting for inexperienced investors against multiple–retailers in non–core trading positions know full well that the likelihood of the landlords’ rental expectations being met are going to be slim. Managing client expectations calls for a sensitive approach in the wording of recommendation, (a skill which incidentally isn’t something readily grasped by the generalist surveyor fraternity whose advice is dismissed by the landlord refusing to concur and instead instructing someone like me with a specialist perspective). Part of the difficulty is that despite my best attempts via my website – I’d like to think other surveyors too, even though a random search on Google does not reveal much attempt at enlightenment – getting the message across to inexperience that an “upward–only” review does not mean the rent necessarily has to increase has not permeated private investor collective consciousness. Instead, the investor having bought a low yield as a result of investment–market workings sets his sights on a rental hike that would increase the return on capital to a level commensurate with the self–perceived wisdom of the buying choice.
The flight from cash on deposit and derisory interest rates and/or the volatility of dividends from stocks and shares and/or the hassle of residential buy–to–let into the higher yields of a business tenancy and perceived rich pickings of shop property investment is not without risk. The commercial property market, of which shop property is a sector, is unregulated and a paradise for the shrewd. Asset stripping is not only the transfer between connected parties: it is also the extrication by the seller of cash liquidity from the buyer. It is said that a fool and his money are soon parted but surely the millions of pounds that exchanged regularly in auction rooms are not going to result in every buyer ending up feeling disappointed with their purchase? But why not? Why when auction–fever has taken over from the arguably more thorough due diligence of private treaty “subject to contract” should the excitement of bidding before the fall of the gavel not interfere with sound judgement?
In my opinion, the most important point to keep in mind when choosing a shop property for investment is that property is a depreciating asset whose rate of depreciation is only going to be counter–balanced and tilted toward prospects for growth if the host of factors and variables that generate growth are in alignment. It doesn’t take much for the subtle link between the location and/or trading position and/or terms and conditions of the tenancy to be out of sync.
Shop Investment
29/May/2013
I have resisted commenting on the Portas review of the ‘High Street’ and ensuing media and industry reports, because all of what has happened, is happening, and likely to happen I wrote about years ago in my newsletters for clients and contacts. Years ago, it wasn’t difficult, at least not for me, to predict with certainty what was bound to happen as a consequence of retailer expansion combined with a failure by directors to recognise let alone appreciate the shift in attitude amongst shoppers. In resisting also the temptation to say I told them so, there is, nevertheless, a lesson to be learned, the message of which may still not be appreciated.
A difference can exist between the value of a shop property with vacant possession and its value as an investment. Generally, in prime trading positions, the definition of which will vary depending on retailer activity, the number of propositions for sale is few and far between. One reason for scarcity is that where tenant demand for premises exceeds supply the market rent and prospects for rental growth could exceed comfortably the value with vacant possession; in short, the property has investment potential.
In secondary positions, the definition of which also varies, the investment potential is by no means as identifiable. The availability of propositions is often dependent upon incumbent owners’ reluctance to sell, or be able to afford to sell if overly indebted. Generally, private investors are tax- and loss-averse so less likely than institutional and professional landlords to rejig portfolios to synchronise with changes in retailing, and will often hang on to ex-growth, problematic, and empty premises in the hope of better times ahead.
Investment is about becoming better off than you were, but successful investment is about timing and not every shop property has investment potential . Buying a vacant property let’s say for £300,000 and letting at £30,000 pa - 10% yield (ignoring costs and tax) - means that after 10 years, you’ve your money back plus a property that, all other factors remaining constant, would fetch £300,000 but, adjusting for likely inflation, would buy less than today. Property has a reputation as a hedge against inflation, but the market is inefficient, so capital value does not have to go up, and neither does the rent. There are plenty of places where values have remained static for years, or fallen. An ‘upward only’ review to market rent during the 10 years may not help: all that means is that the rent payable after the market rent is agreed or ascertained will not be less than the rent payable before the review (unless provided for in documentation). And even if the market rent does increase, no reason to assume a commensurate increase in capital value: a rent increase might merely counteract a fall in capital value.
In the shop property market, a strong correlation exists between investment potential and tenant demand. An investor that ignores, overlooks or does not appreciate the subtle influences affecting demand does so at his peril. The landlord owns the building, not the tenant’s business. .
Often the price of a retail property investment is based on an artificial evaluation that bears little or no relationship to the underlying value of the property. Ignoring special situations, such as redevelopment, the perceived difference in value may come about from creative thinking. For example ‘yield compression, a feature of the pre-2008 boom years, is valuation by reference to interest rates. An inflated method of pricing, the downside of which is evaporation the moment the supply of cheap money dries up, as the banks have discovered in the undoing of investors that had overpaid. Could it happen again? The market is awash with cash-buyers, stock market emigrants, SIPPers, and overseas investors for whom the rate of exchange makes commercial property seem good value, mostly buying on yield.
As a rule, it makes more sense to buy at or close to the bottom of the market. However, quite apart from the opportunity being in what you actually buy, rather than just anything, most investors shy away from the bottom of the market; either they don’t have the experience to assess whether prices are rock-bottom or they get petrified by tales of doom and gloom. The bottom of the market is a paradise for the shrewd investor. The buyer that would need a mortgage before completing the purchase, let alone exchange contracts, is not in the same league.
Although timing the bottom makes sense in the context of possible uplift, it is often better to buy when prices are higher because rising prices are more likely to bring out the sellers of propositions worth buying. However, the question is why are prices higher? The answer is not necessarily an improvement in confidence; in the prevailing climate, it is pursuit of yield.
When there are ‘extra layers’ between buyer aspirations and the underlying value of the property, the buyer can be fooled into thinking the investment would at least maintain the purchase price. That would only hold true when others share the same attitude and there is enough momentum for the proposition to be re-sold for at least the same price. If you are buying to keep indefinitely and/or for a pension, momentum is risky: it is difficult to predict when the attitude might change, also how far from the end or close to the start of a momentum your timing. Waiting for others to make the first move is ‘confidence compression’ and is nothing to do with the underlying value of the property.
Underlying value is affected by the calibre of tenant demand for the premises. However, where many investors come unstuck is in equating tenant covenant with trading position. In my opinion, prevailing higher yields are not good value compared with the recent past. In my opinion, the lower yields of yesteryear were the aberration, the higher yields now the norm.
A difference can exist between the value of a shop property with vacant possession and its value as an investment. Generally, in prime trading positions, the definition of which will vary depending on retailer activity, the number of propositions for sale is few and far between. One reason for scarcity is that where tenant demand for premises exceeds supply the market rent and prospects for rental growth could exceed comfortably the value with vacant possession; in short, the property has investment potential.
In secondary positions, the definition of which also varies, the investment potential is by no means as identifiable. The availability of propositions is often dependent upon incumbent owners’ reluctance to sell, or be able to afford to sell if overly indebted. Generally, private investors are tax- and loss-averse so less likely than institutional and professional landlords to rejig portfolios to synchronise with changes in retailing, and will often hang on to ex-growth, problematic, and empty premises in the hope of better times ahead.
Investment is about becoming better off than you were, but successful investment is about timing and not every shop property has investment potential . Buying a vacant property let’s say for £300,000 and letting at £30,000 pa - 10% yield (ignoring costs and tax) - means that after 10 years, you’ve your money back plus a property that, all other factors remaining constant, would fetch £300,000 but, adjusting for likely inflation, would buy less than today. Property has a reputation as a hedge against inflation, but the market is inefficient, so capital value does not have to go up, and neither does the rent. There are plenty of places where values have remained static for years, or fallen. An ‘upward only’ review to market rent during the 10 years may not help: all that means is that the rent payable after the market rent is agreed or ascertained will not be less than the rent payable before the review (unless provided for in documentation). And even if the market rent does increase, no reason to assume a commensurate increase in capital value: a rent increase might merely counteract a fall in capital value.
In the shop property market, a strong correlation exists between investment potential and tenant demand. An investor that ignores, overlooks or does not appreciate the subtle influences affecting demand does so at his peril. The landlord owns the building, not the tenant’s business. .
Often the price of a retail property investment is based on an artificial evaluation that bears little or no relationship to the underlying value of the property. Ignoring special situations, such as redevelopment, the perceived difference in value may come about from creative thinking. For example ‘yield compression, a feature of the pre-2008 boom years, is valuation by reference to interest rates. An inflated method of pricing, the downside of which is evaporation the moment the supply of cheap money dries up, as the banks have discovered in the undoing of investors that had overpaid. Could it happen again? The market is awash with cash-buyers, stock market emigrants, SIPPers, and overseas investors for whom the rate of exchange makes commercial property seem good value, mostly buying on yield.
As a rule, it makes more sense to buy at or close to the bottom of the market. However, quite apart from the opportunity being in what you actually buy, rather than just anything, most investors shy away from the bottom of the market; either they don’t have the experience to assess whether prices are rock-bottom or they get petrified by tales of doom and gloom. The bottom of the market is a paradise for the shrewd investor. The buyer that would need a mortgage before completing the purchase, let alone exchange contracts, is not in the same league.
Although timing the bottom makes sense in the context of possible uplift, it is often better to buy when prices are higher because rising prices are more likely to bring out the sellers of propositions worth buying. However, the question is why are prices higher? The answer is not necessarily an improvement in confidence; in the prevailing climate, it is pursuit of yield.
When there are ‘extra layers’ between buyer aspirations and the underlying value of the property, the buyer can be fooled into thinking the investment would at least maintain the purchase price. That would only hold true when others share the same attitude and there is enough momentum for the proposition to be re-sold for at least the same price. If you are buying to keep indefinitely and/or for a pension, momentum is risky: it is difficult to predict when the attitude might change, also how far from the end or close to the start of a momentum your timing. Waiting for others to make the first move is ‘confidence compression’ and is nothing to do with the underlying value of the property.
Underlying value is affected by the calibre of tenant demand for the premises. However, where many investors come unstuck is in equating tenant covenant with trading position. In my opinion, prevailing higher yields are not good value compared with the recent past. In my opinion, the lower yields of yesteryear were the aberration, the higher yields now the norm.
SIPP and Commercial Property
26/March/2013
On 14 March 2013, LandlordZONE reported that growing numbers of retirement savers with self–invested pension plans (SIPP) are building up their pension pots by putting money into commercial property, the main reason for the increase that business owners are buying their own premises. Along with obvious tax advantages, it is suggested buying your own premises to form part of your pension is probably a good move. But is it really?
When a business tenant becomes the landlord as well, a different mindset is called for. Criteria for choosing premises for occupation differs from what is needed for appraising whether the property would make a good investment. With an arm’s length relationship, the landlord owns the property, not the tenant’s business. When the parties are connected, the tenancy can be structured to be tax advantageous but, while tinkering for tax is prudent, for property investment it may be wrong. For example, when the business pays more than market rent, an objective appraisal of the investment would be over–rented, and quite possibly down-valued.
The same applies when, for a tenant, ownership enables a new lease to be granted when the business at the premises is sold as a going-concern. Business owners selling a going concern will grant a new lease to the buyer with the rent either low deliberately in order to maximise the price for the business, or at a level the business can afford. A low rent to begin with assumes that on review the rent would be increased to full rent. But that way of thinking presupposes, all other factors constant, that the terms and conditions of the lease are designed to achieve the higher rent on review. Often they are not. As I said in my article in the February newsletter, leaving the drafting to a lawyer can be a mistake. As for the rent the business could support, it is quite possible the amount would exceed the market rent at the review date, resulting in no increase. Since, per business tenancy law, the tenant’s ability to afford more is irrelevant, it is not uncommon for an initial rent to remain unchanged over the entire term of lease; and thereafter, to make matters worse, the rent lower on renewal of that lease. Moreover, not all businesses are property-specific: a buyer might relocate the business, get rid of the lease or vest in a dormant company, and leave the landlord with less-security.
For pension planning, the higher yields that commercial property offers may seem good value compared with the peak of the market about five years ago, and with lower returns and volatility elsewhere a high–yielding investment, particularly where the relationship between landlord and tenant is not arm’s length, safety of income with relatively little hassle commercial property may fit the bill. But there is more to commercial property than immediate yield. Essentially, property is a depreciating asset whose investment potential is a combination of capital and rental growth, neither of which are necessarily linear nor logical. It is possible for capital value to go up or down or remain the same regardless of the rent, and similarly for rent to remain unchanged for years regardless of growth elsewhere. Property is an illiquid asset so while a commercial property investment can be mortgaged, cash is only realisable when there is a buyer at the price required. Even when an investment is regarded as an annuity, there is no certainty the tenant would remain solvent or renew for a term or at a rent commensurate with pension-requirements. As for saleability and funding, there may also be a difference between valuation theory, buyer expectations and mortgage lending criteria. The only ways to profit are either to buy a bargain or when the capital value of the property if sold with vacant possession or subject to an existing tenancy exceeds the purchase price including all costs during the ownership, tax payable, loss of interest on equity, and adjusting for inflation.
All types of business premises fall within the commercial property remit; shops, offices factories, warehouses, pubs, leisure, etc. Property has a reputation as a hedge against inflation and agencies report that commercial property does increase in value, but the commercial property market is not one big market where everything happening necessarily affects each individual property. Furthermore, because there is no standard form of lease, the terms and conditions of the actual lease can make or break the investment. As for pricing, shrewd professionals can dupe the inexperienced buyer into over paying; a tenant may be expected to pay more than an investor. A difference, often substantial, can exist between the value of a commercial property with vacant possession and the same property let; also the remaining duration of the contractual term can affect value, so too the identity and financial status of the tenant in occupation. During the boom years, the driver for rising prices was yield compression, even though the intrinsic value was often unchanged. Countless investors sucked in by the momentum now find themselves lumbered with commercial property which has gone ex–growth and where the property may well be unsaleable without accepting a thumping great loss.
For successful investment in commercial property, the art and skill is all about judicious choice. Pension planning is a long–term commitment to uncertainty. If you are going to buy and hold commercial property in a SIPP then the question is whether the proposition stacks up if you ignore the tax advantages and any tinkering with the tenancy. As for advisers, the people on your side should also be able to think long–term. It’s no good jumping on the bandwagon, demand for commercial property is intertwined with infrastructural changes in the business sector. For the investor, whether landlord or tenant, the ability to select the right commercial property from a vast array of propositions is about identifying the places and properties that still have potential for growth and investment performance.
When a business tenant becomes the landlord as well, a different mindset is called for. Criteria for choosing premises for occupation differs from what is needed for appraising whether the property would make a good investment. With an arm’s length relationship, the landlord owns the property, not the tenant’s business. When the parties are connected, the tenancy can be structured to be tax advantageous but, while tinkering for tax is prudent, for property investment it may be wrong. For example, when the business pays more than market rent, an objective appraisal of the investment would be over–rented, and quite possibly down-valued.
The same applies when, for a tenant, ownership enables a new lease to be granted when the business at the premises is sold as a going-concern. Business owners selling a going concern will grant a new lease to the buyer with the rent either low deliberately in order to maximise the price for the business, or at a level the business can afford. A low rent to begin with assumes that on review the rent would be increased to full rent. But that way of thinking presupposes, all other factors constant, that the terms and conditions of the lease are designed to achieve the higher rent on review. Often they are not. As I said in my article in the February newsletter, leaving the drafting to a lawyer can be a mistake. As for the rent the business could support, it is quite possible the amount would exceed the market rent at the review date, resulting in no increase. Since, per business tenancy law, the tenant’s ability to afford more is irrelevant, it is not uncommon for an initial rent to remain unchanged over the entire term of lease; and thereafter, to make matters worse, the rent lower on renewal of that lease. Moreover, not all businesses are property-specific: a buyer might relocate the business, get rid of the lease or vest in a dormant company, and leave the landlord with less-security.
For pension planning, the higher yields that commercial property offers may seem good value compared with the peak of the market about five years ago, and with lower returns and volatility elsewhere a high–yielding investment, particularly where the relationship between landlord and tenant is not arm’s length, safety of income with relatively little hassle commercial property may fit the bill. But there is more to commercial property than immediate yield. Essentially, property is a depreciating asset whose investment potential is a combination of capital and rental growth, neither of which are necessarily linear nor logical. It is possible for capital value to go up or down or remain the same regardless of the rent, and similarly for rent to remain unchanged for years regardless of growth elsewhere. Property is an illiquid asset so while a commercial property investment can be mortgaged, cash is only realisable when there is a buyer at the price required. Even when an investment is regarded as an annuity, there is no certainty the tenant would remain solvent or renew for a term or at a rent commensurate with pension-requirements. As for saleability and funding, there may also be a difference between valuation theory, buyer expectations and mortgage lending criteria. The only ways to profit are either to buy a bargain or when the capital value of the property if sold with vacant possession or subject to an existing tenancy exceeds the purchase price including all costs during the ownership, tax payable, loss of interest on equity, and adjusting for inflation.
All types of business premises fall within the commercial property remit; shops, offices factories, warehouses, pubs, leisure, etc. Property has a reputation as a hedge against inflation and agencies report that commercial property does increase in value, but the commercial property market is not one big market where everything happening necessarily affects each individual property. Furthermore, because there is no standard form of lease, the terms and conditions of the actual lease can make or break the investment. As for pricing, shrewd professionals can dupe the inexperienced buyer into over paying; a tenant may be expected to pay more than an investor. A difference, often substantial, can exist between the value of a commercial property with vacant possession and the same property let; also the remaining duration of the contractual term can affect value, so too the identity and financial status of the tenant in occupation. During the boom years, the driver for rising prices was yield compression, even though the intrinsic value was often unchanged. Countless investors sucked in by the momentum now find themselves lumbered with commercial property which has gone ex–growth and where the property may well be unsaleable without accepting a thumping great loss.
For successful investment in commercial property, the art and skill is all about judicious choice. Pension planning is a long–term commitment to uncertainty. If you are going to buy and hold commercial property in a SIPP then the question is whether the proposition stacks up if you ignore the tax advantages and any tinkering with the tenancy. As for advisers, the people on your side should also be able to think long–term. It’s no good jumping on the bandwagon, demand for commercial property is intertwined with infrastructural changes in the business sector. For the investor, whether landlord or tenant, the ability to select the right commercial property from a vast array of propositions is about identifying the places and properties that still have potential for growth and investment performance.
Rent Review in the Prevailing Climate
22/November/2012
Investment is about becoming financially better off. Investing in commercial property can be rewarding provided you know what you’re doing, otherwise risky. Commercial property is a generic term for all types of business premises; offices, factories, warehouses, shops, supermarkets, retail warehouses, factory outlets, trade counters, pubs, restaurants, and leisure. Essentially, a commercial property is a fixed asset whose investment value requires sufficient appreciation to at least counteract depreciation. Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell. Generally, assuming the objective is investment, not development, landlords want both capital value and the rent to least keep pace with inflation. Property has a reputation as a long-term hedge against inflation, but not all properties make good investments. Any potential for capital gain and/or rental growth depends on the variables.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
'Readiness for Sale' - A Guide for Streamlining Commercial Property Transactions
01/June/2012
“In 1995, a working party was set up by the Investment Property Forum (IPF) to consider existing procedures for the acquisition and disposal of real estate and to recommend improvements that would speed up the sale and purchase disposal process. The consultation led to the publication of ‘Readiness for Sale’ in 1996.
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "
Good time to invest?
01/September/2009
It seems to me there are a growing number of people thinking to themselves now seems like a good time to invest in shop property. But I'm not convinced. Not because life's difficult for many retailers, and that for many struggling on in the hope of surviving is possibly about the best they can do, but that that the sort of property on the market for sale doesn't fill me with much enthusiasm for its investment potential.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Distressed Sellers
01/September/2009
"Distressed" seller is the latest way for sellers to get rid of rubbish. The sort of properties that nobody else would buy. Start off by putting on the market over-priced. Expect to sell for much less. Attract interest, consider offers much lower than the quoting price. Do some due diligence as to whether the buyer has the money. Agree to accept what is thought by the buyer to be a bargain price. Exchange and complete contracts as soon as possible. Everyone is happy.
A rare opportunity for landlords
01/June/2009
Now the credit-crunch has settled, landlords have a rare, possibly unique, opportunity to determine the future of retailing, for good.
As I see it, a lot of hard-working decent honourable tenants, good at what they do, have found their property costs inflated as a result of the legacy of a bunch of irresponsible retailers who, operating in splendid isolation, behaved like drunken idiots by throwing their weight around when they could borrow lots and go on a spending spree, but are no longer full of confidence now the money-tap is turned off. Indeed, with balance-sheets hung up for all to see, it is interesting just how many retailers are heavily indebted. Which makes one wonder where all the money went.
Let’s face it, an awful lot of multiple retailers are not as good as they like to think, and many were struggling before recession arrived. It’s also fascinating how many multiple retailers think the world owes them a living. And how fond they are of blaming rent, rates, the economy, for their loss-making. The truth is a failure to address operational difficulties. It’s easy to manage without coming unstuck in times of change, so not getting the formula right is tantamount to gross negligence at the highest level. It is not as though there is no money about. You only have to look at turnover figures to see how much is spent.
Every retailer thinks it has a unique selling proposition, but, actually, there is hardly any originality, and copycat merchandise is in overdrive. The shopping public is doing its bit by not spending indiscriminately, and supermarkets are making life hell for those that think themselves so heavenly wonderful but are no earthly good, but landlords are in a position to accelerate change. One might think failing retailers are helping too, using pre-pack administration and CVA to prune branches, but pre-pack is about yesteryear directors out for whatever they can get.
You may think I’m off my rocker, or living on another planet, but this is no ordinary downturn. Things will never go back to how they were. It’s a shift, to a entirely different set of values and way of doing business. Which is why, in my view, landlords should seize the opportunity to rid us of all the retailers that have got us into this mess, and instead re-let the shops, even if it means lower rents, to those that understand the difference between running a business and managing for long-term consistent success.
As I see it, a lot of hard-working decent honourable tenants, good at what they do, have found their property costs inflated as a result of the legacy of a bunch of irresponsible retailers who, operating in splendid isolation, behaved like drunken idiots by throwing their weight around when they could borrow lots and go on a spending spree, but are no longer full of confidence now the money-tap is turned off. Indeed, with balance-sheets hung up for all to see, it is interesting just how many retailers are heavily indebted. Which makes one wonder where all the money went.
Let’s face it, an awful lot of multiple retailers are not as good as they like to think, and many were struggling before recession arrived. It’s also fascinating how many multiple retailers think the world owes them a living. And how fond they are of blaming rent, rates, the economy, for their loss-making. The truth is a failure to address operational difficulties. It’s easy to manage without coming unstuck in times of change, so not getting the formula right is tantamount to gross negligence at the highest level. It is not as though there is no money about. You only have to look at turnover figures to see how much is spent.
Every retailer thinks it has a unique selling proposition, but, actually, there is hardly any originality, and copycat merchandise is in overdrive. The shopping public is doing its bit by not spending indiscriminately, and supermarkets are making life hell for those that think themselves so heavenly wonderful but are no earthly good, but landlords are in a position to accelerate change. One might think failing retailers are helping too, using pre-pack administration and CVA to prune branches, but pre-pack is about yesteryear directors out for whatever they can get.
You may think I’m off my rocker, or living on another planet, but this is no ordinary downturn. Things will never go back to how they were. It’s a shift, to a entirely different set of values and way of doing business. Which is why, in my view, landlords should seize the opportunity to rid us of all the retailers that have got us into this mess, and instead re-let the shops, even if it means lower rents, to those that understand the difference between running a business and managing for long-term consistent success.
Pre-pack Administration
01/March/2009
My letter published in Estates Gazette, March 2009:
"Whilst I agree with Anthony Ratcliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious egocentric retailers living off borrowings and overpaying for new lettings with no thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to under-perform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."
"Whilst I agree with Anthony Ratcliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious egocentric retailers living off borrowings and overpaying for new lettings with no thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to under-perform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."
Conflict of Interest
01/September/1985
In a period of 'retailing revolution,' one wonders how advisers to pension funds can be so confident that the rate of growth essential to justify low initial yields on purchase price will materialise at the review date.
Many funds are already becoming increasingly disillusioned with their agents' failure to achieve the anticipated rental value. When the same agencies also act for multiple retailers, how do they reconcile their objective for the lowest rental when they may also be acting for the landlord of adjoining property with a brief to get the highest rental?
This conflict exists for all valuers, likely to receive instructions to advise landlords and tenants in the same area, but it surmountable when there is no vested inyerest in the progress of the investment.
Detailed knowledge of a multiple retailers' property affairs must be very useful when advising a fund on investment purchase (not to mention on the company's take-over potential) and the solution appears to aim for a balance, tilted in favour of the landlord, whereby 'comparable evidence,' to back a recommendation to settle, is presented in such a form as to convince the tenant that the conclusion is indeed the right figure, in line with 'the market.'
I cannot understand the business philosophy of major multiple retailers who appear unconcerned that their retained advisers actively market a positive involvement in the investment market. Surely it is better to use a selection of different valuers or, at worst, to deal with negotiations internally.
Many funds are already becoming increasingly disillusioned with their agents' failure to achieve the anticipated rental value. When the same agencies also act for multiple retailers, how do they reconcile their objective for the lowest rental when they may also be acting for the landlord of adjoining property with a brief to get the highest rental?
This conflict exists for all valuers, likely to receive instructions to advise landlords and tenants in the same area, but it surmountable when there is no vested inyerest in the progress of the investment.
Detailed knowledge of a multiple retailers' property affairs must be very useful when advising a fund on investment purchase (not to mention on the company's take-over potential) and the solution appears to aim for a balance, tilted in favour of the landlord, whereby 'comparable evidence,' to back a recommendation to settle, is presented in such a form as to convince the tenant that the conclusion is indeed the right figure, in line with 'the market.'
I cannot understand the business philosophy of major multiple retailers who appear unconcerned that their retained advisers actively market a positive involvement in the investment market. Surely it is better to use a selection of different valuers or, at worst, to deal with negotiations internally.
Supermarkets Visited
01/June/1985
Thinking I was immune from advertising, my first trip to what has now become my local grocers was to satisfy professional curiousity but standing in the car park at Tesco' s l00 tth superstore, I was comfortably aware of some magnetic presence which has brightened up Neasden.
For those of us who thrive on fresh fruit and vegetables, it is paradise to be offered such a wide choice and although the quality may not always be up to Class I, the assortment easily compensates.
I gauge shops by the quality of the staff and my definition of service. Are they dressed nicely, do they smile when serving or look at the customer at the till? So used to staff indifference at the International, opposite my office, it came as a refreshing change to hear 'thank you sir' when having my vegetables weighed and priced. For the best service, however, I don't believe you can beat Waitrose. When I asked a supervisor at Waitrose Brent Cross for some help, she stopped what she was doing and promptly showed me to the stock. At Tesco however, the same situation was delegated by the supervisor so presumably she had more important things to do than serve a customer!
Living in the area means we are spoilt for choice amongst the supermarket majors. Asda Hendon is due open next year although it'll probably be as unimpressive as Park Royal. Gateway has just opened in far-away Willesden and there's Safeway, but we went there once and the getting any common sense out of the staff was clearly going to create problems. Sainsbury' s puts me off because, apart from never being able to find anything, their male staff can often be seen with their ties hanging off their collars which I think is sloppy. These may sound like little things but it's the little things that deter customers otherwise we'd all shop at the same place!
Returning to Tesco, the fact that the staff can be seen to like saying 'thank you' is sufficient recommendation although I do have my doubts whether they are as enthusiastic during the peak and horrific Friday & Saturday shopping periods.
The clear reduction in our weekly food bill in exchange for a wide assortment, easy parking and a relaxing shopping environment must be the recipe for future grocery retailing; I must remember to modify my remarks about people who shop at Tesco. It's blatantly obvious however that the store is only accessible to motorists but it's spending power that Tesco is after and not local convenience. Let's hope the staff travelling to work via Neasden Station don't, as is very likely, get mugged in the long friendless walk to the store. Even if you can resist temptation, it must be worth a detour off the North Circular Road to buy 4 star petrol at 192.3p a gallon
For those of us who thrive on fresh fruit and vegetables, it is paradise to be offered such a wide choice and although the quality may not always be up to Class I, the assortment easily compensates.
I gauge shops by the quality of the staff and my definition of service. Are they dressed nicely, do they smile when serving or look at the customer at the till? So used to staff indifference at the International, opposite my office, it came as a refreshing change to hear 'thank you sir' when having my vegetables weighed and priced. For the best service, however, I don't believe you can beat Waitrose. When I asked a supervisor at Waitrose Brent Cross for some help, she stopped what she was doing and promptly showed me to the stock. At Tesco however, the same situation was delegated by the supervisor so presumably she had more important things to do than serve a customer!
Living in the area means we are spoilt for choice amongst the supermarket majors. Asda Hendon is due open next year although it'll probably be as unimpressive as Park Royal. Gateway has just opened in far-away Willesden and there's Safeway, but we went there once and the getting any common sense out of the staff was clearly going to create problems. Sainsbury' s puts me off because, apart from never being able to find anything, their male staff can often be seen with their ties hanging off their collars which I think is sloppy. These may sound like little things but it's the little things that deter customers otherwise we'd all shop at the same place!
Returning to Tesco, the fact that the staff can be seen to like saying 'thank you' is sufficient recommendation although I do have my doubts whether they are as enthusiastic during the peak and horrific Friday & Saturday shopping periods.
The clear reduction in our weekly food bill in exchange for a wide assortment, easy parking and a relaxing shopping environment must be the recipe for future grocery retailing; I must remember to modify my remarks about people who shop at Tesco. It's blatantly obvious however that the store is only accessible to motorists but it's spending power that Tesco is after and not local convenience. Let's hope the staff travelling to work via Neasden Station don't, as is very likely, get mugged in the long friendless walk to the store. Even if you can resist temptation, it must be worth a detour off the North Circular Road to buy 4 star petrol at 192.3p a gallon
Yield and Pricing
01/June/1985
The current trend for private investors in the retail market to be more concerned with short term gain than long term income is worrying.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
The Future for Secondary Shops
01/December/1984
The historic development of shopping centres makes fascinating reading. Originally, as people went to market, so came permanent shops. In the post-war housing boom, shops started going to the people and even today, new council housing estates boast a block of shops.
The radical change in socio-economic patterns, and the real decline in the cost of transport, means that today, people go to the shops and the goodwill generated by the major operators in all sectors of the retailing market is sufficiently established to influence the prosperity of shopping centres.
When the idea of Brent Cross Shopping Centre was conceived in 1959, it would probably not have been anything like as successful a concept that it is today. In the early 1960' s, shopping development was confined to traditional shopping centres, and precincts, such as the Arndale Centres, were built on land fronting the High Streets. The first suggestion that people might be persuaded to shop away from the traditional pitches was introduced when the·second-generation food supermarkets, such as Tesco and Sainsburys started to move to fringe positions so as to provide on-site parking and loading facilities for their customers.
The need for food is the common link between all people. As it is a perishable product, with people having limited facilities for bulk storage, shopping for food is the main reason why most shopping centres attract daily pedestrian flow. If you take away the food shops, technically known as convenience traders, you also remove the spin-off for durable and service traders.
It is clear that the future of food retailing lies in the free-standing purpose-built supermarket located in an accessible position and offering excellent parking and loading facilities. The strength of buying power for and competition between the major operators means that retail prices are particularly keen. The independent grocer has seen his market share decline gradually since the 1950s and butchers, greengrocers, off-licences, fishmongers have all been hit hard. The ubiquitous confectioner, tobacconist, newsagent only survives because the major wholesalers of newspapers operate retail CTN outlets themselves. The private retailer with expansion ambition knows that the future for retailing must be to take units in busy positions, which are not completely dependent upon the whims and loyalties of local custom.
The importance that the presence of a food supermarket has on shopping positions is still underestimated. The closure by the Co-Op of many neighbourhood supermarkets has had a devastating effect on many local centres. Like cigarette brands, people are loyal to their favourite supermarket group and even if the old 'Tesco' is replaced by an individual grocer, offering the cliches of personal service and flexible opening hours, the damage is done. Local grocers won't survive for ever on people buying a pound of butter at 10 pm. The key to establishing some hold on the market is to contain costs, as there is always scope to participate in automatic local potential, especially as not everyone wants to shop at a superstore. In fact, the major groups are generally pleased that corner and local shops continue because they operate in different markets and, of course, it would be political suicide to admit to their extinction. However, the products are still the same and most shoppers are price conscious.
The top supermarket operators invest in research. They plan well-ahead and commitment to a development programme involving millions of pounds allows for the short term hurdles in favour of long term success. In the same way that the institutional and major landlords are actively selling secondary shops, so the major and multiple groups are actively vacating obsolete trading positions.
Apart from the food groups, the other' enemies within' (so far as the secondary market is concerned) are the DIY, furniture and electrical groups, such as MFI, Harris Queensway, Payless, Texas Homecare, Do-It-All, Comet, B & Q, Homebase, etc, etc. Clamour for revision of the Sunday trading laws adds fuel to a fire which has already devastated the small retailer and is now creeping into the entire secondary centre. This year's CBI-FT figures for Christmas trading predictions mention the local shop's expectations, for the first time. Any trip around secondary shopping centres this year would have indicated the noticeable absence of extra pedestrian flow. In my opinion, 1984's Christmas trading period will mark the beginning of the secondary trader's dread of this traditional time. In the past, all shopkeepers used to look forward to the seasonal upturn, but the rot started last year when shoppers spent a fortune in the High Streets and superstores and this year will prove no exception.
Supporters of the relaxation in Sunday trading laws claim more consumer choice and new jobs. But it is blatantly obvious that the small retailer will be squeezed out by the major operators. Important shopping areas, like Oxford Street, will benefit but the axe will fall on the rest. The new growth area for unemployed will be the self-employed retailer whose business is totally dependent upon pedestrian flow generated by the goodwill of others. Few local retailers actively market their stock; they are inter-dependent upon the collective benefit generated by being in a successful shopping cen tre and without the presence of national companies, generating national advertising and goodwill, there will be little incentive for local people to shop, except for the occasional item.
The future for the secondary shop will rest upon the retailer's personal ability as a retailer, highlighting the fact that few shop-keepers are retailers. The double glazing showrooms are a good example of a modern approach to retailing. They are shops for the visible storage of goods sold by the operator, through advertising and direct marketing. Too many shopkeepers have become complacent; they are used to people walking in automatically instead of actively attracting their interest. If secondary centres do become the equivalent to an overcoat for shoppers - only needed when absolutely necessary - then the future expectations for investment growth must be limited.
In establishing the future importance of a secondary centre, close attention should be paid to the size of the premises occupied by the supermarket operator to ensure it meets modern requirements and also upon the identity of the operator, as this defines the nature of the catchment area. It is important to monitor the locations in which the major operators take sites for their new stores. Most pop up in local and secondary areas because that is where land is most available. The benefit to the surrounding centres, however, will be dependent upon each individual retailer's ability to capitalise on the presence of the extra pedestrian flow by gearing his corporate image to the needs of the people.
Landlords have a role to play in maintaining the balance of trade in a secondary centre. On receipt of applications to change the user, the landlord should refuse consent if the proposed user appears to be in direct competition with established traders.
It comes as a shock to many individual shopkeepers to be told that the rent for the premises is not calculated by reference to their ability to pay it. The level of rents in many secondary centres has already reached a peak at which, combined with the effect of rates, ever increasing overheads and declining revenue, they are now seriously affecting the stability of the centre.
Careful choice for investment is fast becoming essential. There will always be opportunities for growth, but a blanket assumption that all secondary areas will continue to prosper is a fallacy. I predict that investors who expect the percentage increases in rents applicable in the five year period from 1979 to 1984 to be repeated for the latter part of this decade are likely to be very disappointed despite the
The radical change in socio-economic patterns, and the real decline in the cost of transport, means that today, people go to the shops and the goodwill generated by the major operators in all sectors of the retailing market is sufficiently established to influence the prosperity of shopping centres.
When the idea of Brent Cross Shopping Centre was conceived in 1959, it would probably not have been anything like as successful a concept that it is today. In the early 1960' s, shopping development was confined to traditional shopping centres, and precincts, such as the Arndale Centres, were built on land fronting the High Streets. The first suggestion that people might be persuaded to shop away from the traditional pitches was introduced when the·second-generation food supermarkets, such as Tesco and Sainsburys started to move to fringe positions so as to provide on-site parking and loading facilities for their customers.
The need for food is the common link between all people. As it is a perishable product, with people having limited facilities for bulk storage, shopping for food is the main reason why most shopping centres attract daily pedestrian flow. If you take away the food shops, technically known as convenience traders, you also remove the spin-off for durable and service traders.
It is clear that the future of food retailing lies in the free-standing purpose-built supermarket located in an accessible position and offering excellent parking and loading facilities. The strength of buying power for and competition between the major operators means that retail prices are particularly keen. The independent grocer has seen his market share decline gradually since the 1950s and butchers, greengrocers, off-licences, fishmongers have all been hit hard. The ubiquitous confectioner, tobacconist, newsagent only survives because the major wholesalers of newspapers operate retail CTN outlets themselves. The private retailer with expansion ambition knows that the future for retailing must be to take units in busy positions, which are not completely dependent upon the whims and loyalties of local custom.
The importance that the presence of a food supermarket has on shopping positions is still underestimated. The closure by the Co-Op of many neighbourhood supermarkets has had a devastating effect on many local centres. Like cigarette brands, people are loyal to their favourite supermarket group and even if the old 'Tesco' is replaced by an individual grocer, offering the cliches of personal service and flexible opening hours, the damage is done. Local grocers won't survive for ever on people buying a pound of butter at 10 pm. The key to establishing some hold on the market is to contain costs, as there is always scope to participate in automatic local potential, especially as not everyone wants to shop at a superstore. In fact, the major groups are generally pleased that corner and local shops continue because they operate in different markets and, of course, it would be political suicide to admit to their extinction. However, the products are still the same and most shoppers are price conscious.
The top supermarket operators invest in research. They plan well-ahead and commitment to a development programme involving millions of pounds allows for the short term hurdles in favour of long term success. In the same way that the institutional and major landlords are actively selling secondary shops, so the major and multiple groups are actively vacating obsolete trading positions.
Apart from the food groups, the other' enemies within' (so far as the secondary market is concerned) are the DIY, furniture and electrical groups, such as MFI, Harris Queensway, Payless, Texas Homecare, Do-It-All, Comet, B & Q, Homebase, etc, etc. Clamour for revision of the Sunday trading laws adds fuel to a fire which has already devastated the small retailer and is now creeping into the entire secondary centre. This year's CBI-FT figures for Christmas trading predictions mention the local shop's expectations, for the first time. Any trip around secondary shopping centres this year would have indicated the noticeable absence of extra pedestrian flow. In my opinion, 1984's Christmas trading period will mark the beginning of the secondary trader's dread of this traditional time. In the past, all shopkeepers used to look forward to the seasonal upturn, but the rot started last year when shoppers spent a fortune in the High Streets and superstores and this year will prove no exception.
Supporters of the relaxation in Sunday trading laws claim more consumer choice and new jobs. But it is blatantly obvious that the small retailer will be squeezed out by the major operators. Important shopping areas, like Oxford Street, will benefit but the axe will fall on the rest. The new growth area for unemployed will be the self-employed retailer whose business is totally dependent upon pedestrian flow generated by the goodwill of others. Few local retailers actively market their stock; they are inter-dependent upon the collective benefit generated by being in a successful shopping cen tre and without the presence of national companies, generating national advertising and goodwill, there will be little incentive for local people to shop, except for the occasional item.
The future for the secondary shop will rest upon the retailer's personal ability as a retailer, highlighting the fact that few shop-keepers are retailers. The double glazing showrooms are a good example of a modern approach to retailing. They are shops for the visible storage of goods sold by the operator, through advertising and direct marketing. Too many shopkeepers have become complacent; they are used to people walking in automatically instead of actively attracting their interest. If secondary centres do become the equivalent to an overcoat for shoppers - only needed when absolutely necessary - then the future expectations for investment growth must be limited.
In establishing the future importance of a secondary centre, close attention should be paid to the size of the premises occupied by the supermarket operator to ensure it meets modern requirements and also upon the identity of the operator, as this defines the nature of the catchment area. It is important to monitor the locations in which the major operators take sites for their new stores. Most pop up in local and secondary areas because that is where land is most available. The benefit to the surrounding centres, however, will be dependent upon each individual retailer's ability to capitalise on the presence of the extra pedestrian flow by gearing his corporate image to the needs of the people.
Landlords have a role to play in maintaining the balance of trade in a secondary centre. On receipt of applications to change the user, the landlord should refuse consent if the proposed user appears to be in direct competition with established traders.
It comes as a shock to many individual shopkeepers to be told that the rent for the premises is not calculated by reference to their ability to pay it. The level of rents in many secondary centres has already reached a peak at which, combined with the effect of rates, ever increasing overheads and declining revenue, they are now seriously affecting the stability of the centre.
Careful choice for investment is fast becoming essential. There will always be opportunities for growth, but a blanket assumption that all secondary areas will continue to prosper is a fallacy. I predict that investors who expect the percentage increases in rents applicable in the five year period from 1979 to 1984 to be repeated for the latter part of this decade are likely to be very disappointed despite the
Welcome
01/September/1984
Many people know that I am a regular contributor to the correspondence columns, so circulating a commentary of this nature to Clients must look like an ego trip to a captive audience - it has crossed my mind that you may not read it!
The objective is to keep in touch with Clients (past and present) and their legal advisers on a regular basis and to offer a commentary designed to stimulate and keep you informed of the latest developments.
As a potential forum in which to air one's views, a quarterly commentary inevitably suffers from the disadvantage that ideas can be quickly out of date so I shall not be imitating the style of others. Large agencies issue periodic reports on market trends, but most seem to concentrate upon the top end of the market and the recent discovery by Hillier Parker May & Rowden that secondary shop rents have increased at a rate of 9.2% per annum since 1979 simply enhances many people's awareness that the larger agencies, and the property media, are addicted to prime.
It is common knowledge that only relatively few advisers really understand secondary property, despite the fact that it constitutes at least 90% of the market. A noticeable absence of commercial sense amongst many assistant surveyors, working for the larger partnerships, is startling and one wonders whether the modern concept of professionalism removes initiative. Few surveyors, whom I meet in the course of negotiations, display much individuality; most appearing to act as up-market messenger boxes, shielded from their own feelings and decisions by the supervising partner. This cannot possibly benefit the Client who, in instructing a name is entitled to expect the service and attention which the reputation behind that name commands. Since I introduced the concept of specialisation into rent review valuations, there have been many imitators who unfortunately maintain the money for old rope image. Direct personal attention at partnership level on all aspects is the least that every Client deserves - he rarely gets it and strangely enough, seems prepared to accept it!
The objective is to keep in touch with Clients (past and present) and their legal advisers on a regular basis and to offer a commentary designed to stimulate and keep you informed of the latest developments.
As a potential forum in which to air one's views, a quarterly commentary inevitably suffers from the disadvantage that ideas can be quickly out of date so I shall not be imitating the style of others. Large agencies issue periodic reports on market trends, but most seem to concentrate upon the top end of the market and the recent discovery by Hillier Parker May & Rowden that secondary shop rents have increased at a rate of 9.2% per annum since 1979 simply enhances many people's awareness that the larger agencies, and the property media, are addicted to prime.
It is common knowledge that only relatively few advisers really understand secondary property, despite the fact that it constitutes at least 90% of the market. A noticeable absence of commercial sense amongst many assistant surveyors, working for the larger partnerships, is startling and one wonders whether the modern concept of professionalism removes initiative. Few surveyors, whom I meet in the course of negotiations, display much individuality; most appearing to act as up-market messenger boxes, shielded from their own feelings and decisions by the supervising partner. This cannot possibly benefit the Client who, in instructing a name is entitled to expect the service and attention which the reputation behind that name commands. Since I introduced the concept of specialisation into rent review valuations, there have been many imitators who unfortunately maintain the money for old rope image. Direct personal attention at partnership level on all aspects is the least that every Client deserves - he rarely gets it and strangely enough, seems prepared to accept it!
Research or Gut Feeling
01/September/1984
In an increasingly complex economy, research is rapidly intruding upon the traditional province of the valuer: gut feeling. The mixing bowl, into which statistics, 'informed' opInIons, records of past transactions and trends are all technically blended, creates a science out of prediction. An objective appraisal from a source with influential but vested interests is a real test for objectivity.
Of Chartered Pension Fund cynicism, as long as they able to back Surveyors, Hugh Jenkins of the National Coal Board said " (they) will be continue to be regarded with far as their professional capabilities are concerned, as cling to gut feeling about growth prospects without being them up with fundamental research."
It is an integral feature of professionalism that the combination of knowledge and experience inevitably prejudices optimism, except in cases of absolute certainty. Research minimises risk so that while short term deals may be lost, the long term brings substantial reward. As the private investor generally operates in the short term, the limitations imposed by research contradict investment philosophy.
Will research avoid future problems? If you have to spend money, you are going to become increasingly frustrated if your adviser's research tells you not to buy, when all about you, other funds are clearly active. This does not make the advice wrong, as waiting is a very patient game. Gut-feeling is an essential ingredient in the evaluation of research. When I suggested, in the first issue of QC, that the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. It's what makes sense at the time and you can only draw conclusions from information if you are able to adopt a broad view. It is not the result of research which provides a span of information, but the questions that gut-feelings invite you to ask.
The danger with published research, particularly when originating from a source actively participating in the market, is that the media picks upon the conclusions, which make news, without giving sufficient attention to the data. The effect is to institutionalise generalisations. Loose mention that secondary shop rents have grown at 9% per annum over the past 5 years, combined with the prediction that rents will rise 7% per annum above inflation up to May 1985 and 3% per annum in real terms thereafter is inviting inexperienced investors to assume that it is applicable to all secondary areas. The effect of predictions of this nature will be to force secondary yields even further lower and many retailers, in secondary positions, will be unable to reconcile actual profitability with expectations of their landlords. If major firms intend to use research for public relations, they must also recognise the harm they can do to the relationship between landlord and tenant.
Of Chartered Pension Fund cynicism, as long as they able to back Surveyors, Hugh Jenkins of the National Coal Board said " (they) will be continue to be regarded with far as their professional capabilities are concerned, as cling to gut feeling about growth prospects without being them up with fundamental research."
It is an integral feature of professionalism that the combination of knowledge and experience inevitably prejudices optimism, except in cases of absolute certainty. Research minimises risk so that while short term deals may be lost, the long term brings substantial reward. As the private investor generally operates in the short term, the limitations imposed by research contradict investment philosophy.
Will research avoid future problems? If you have to spend money, you are going to become increasingly frustrated if your adviser's research tells you not to buy, when all about you, other funds are clearly active. This does not make the advice wrong, as waiting is a very patient game. Gut-feeling is an essential ingredient in the evaluation of research. When I suggested, in the first issue of QC, that the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. It's what makes sense at the time and you can only draw conclusions from information if you are able to adopt a broad view. It is not the result of research which provides a span of information, but the questions that gut-feelings invite you to ask.
The danger with published research, particularly when originating from a source actively participating in the market, is that the media picks upon the conclusions, which make news, without giving sufficient attention to the data. The effect is to institutionalise generalisations. Loose mention that secondary shop rents have grown at 9% per annum over the past 5 years, combined with the prediction that rents will rise 7% per annum above inflation up to May 1985 and 3% per annum in real terms thereafter is inviting inexperienced investors to assume that it is applicable to all secondary areas. The effect of predictions of this nature will be to force secondary yields even further lower and many retailers, in secondary positions, will be unable to reconcile actual profitability with expectations of their landlords. If major firms intend to use research for public relations, they must also recognise the harm they can do to the relationship between landlord and tenant.