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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.
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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.
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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.
Buyers of property to let less deserving of protection
01/June/2011
Per Scullion v Bank of Scotland plc (t/a Colleys) [2011] the Court of Appeal has overturned the High Court decision that for buy-to-let residential property the valuer was liable to the purchaser.
The CA held that although the valuer had been negligent and the purchaser had relied upon the valuer’s report (amongst other advice) when deciding to proceed, the purchaser did not establish foreseeability of damage or a sufficient degree of proximity between himself and the valuer.
Nor did the purchaser show that it would be "fair, just and reasonable" to impose (on the valuer) a duty of care to the purchaser. The Court held there were important distinctions to be made between valuations for buy-to-let purposes and those made for home buyers.
The court commented that those buying properties to let, were less "deserving of protection by the common law against the risk of negligence than those buying to occupy as their residence."
The CA held that although the valuer had been negligent and the purchaser had relied upon the valuer’s report (amongst other advice) when deciding to proceed, the purchaser did not establish foreseeability of damage or a sufficient degree of proximity between himself and the valuer.
Nor did the purchaser show that it would be "fair, just and reasonable" to impose (on the valuer) a duty of care to the purchaser. The Court held there were important distinctions to be made between valuations for buy-to-let purposes and those made for home buyers.
The court commented that those buying properties to let, were less "deserving of protection by the common law against the risk of negligence than those buying to occupy as their residence."
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.