The Rent Review Specialist
Mercy of the Market
29/03/2017
Any form of investment whose profit-potential depends upon finding someone somewhere to buy it off you, preferably for more than you paid, is risky. For further reading, please visit LandlordZone newsletter - click here
Thinking inside the box
23/02/2017
Anyone can invest in commercial property: all you need is the cash or enough cash to get a mortgage. Anyone can invest isn’t the same as becoming an investor. To become an investor, one needs to… For further reading, please visit LandlordZone newsletter - click here
Exit Strategy
25/01/2017
An alternative investment, property is an alternative to cash and other liquid forms of investment. Arguably, commercial property is more of an alternative … For further reading please visit LandlordZone
Assessing Covenant Strength
09/09/2016
Assuming a commercial property is let already, the proposition an income-producing investment, the investor would be buying the building/property, not the tenant’s business. Since the…For further reading, please visit LandlordZone.
Misreading the signs
28/07/2016
Despite the future being naturally uncertain, we live in an age, fearful of change, when wanting or needing to know in advance what will happen has become a social norm. To know what will happen is… For further reading, please visit LandlordZone.
The Ultimate Break Clause
09/06/2016
Let’s imagine you’ve bought a prime shop property let to a blue-chip multiple retailer on an institutional lease for term 20 years, with 5 yearly upward-only rent reviews to market rent and tenant break clause at year 15. The initial yield …For further reading, please visit LandlordZone.
Investment in Investment
26/05/2016
Commercial property, as with all types of property, is an illiquid asset whose highest value depends on the availability of a ready supply of credit. For further reading, please visit LandlordZone.
Talking up the Regions
29/03/2016
Of the nine regions in England, London region, the capital city, is dominant; next is South East that covers a much larger area but whose population exceeds London by only about 500,000; the other seven are what those in London and the South-East would regard, sometimes in derisory tone, as the provinces. For further reading, please visit LandlordZone.
Susceptible to groupthink
25/02/2016
Commercial property has a reputation as a long-term hedge against inflation; a reputation that most investors take for granted. But not all property performs and increasingly more isn’t. A reflection partly of … For further reading, please visit LandlordZone, click here.
Truth will out
27/01/2016
Over the years, the growth in popularity of the property market reflects its consistency as a store of value. The value of an asset is only worth what a buyer is willing and able to pay for it. An asset doesn’t necessarily appreciate… For further reading, please visit LandlordZone.
Gambling on the future
15/01/2016
Whenever I count from numbers 1 to 10. I find it easier to count up, rather than down. If you don’t know already, try this for yourself: count from 1 to 10: do you find it easier to…For further reading, please visit LandlordZone.
Critical Thinking
14/01/2016
Ever since property started being thought of as a business, rather than a game – although why when one is not a full-time investor property should be thought of as a business is beyond me – the need for critical thinking has become more of a pre-requisite than ever before. For further reading, please visit LandlordZone
Investing in Commercial Property - (2) for Growth
23/12/2015
Commercial property is a depreciating asset whose rate of depreciation can be slowed or offset by appreciation over a period of time. For a property to go up in value between one date and another, one or more things would have to happen. The first question when buying for growth is why should your choice… For further reading, please visit LandlordZone
Thinking inside the box
15/12/2015
2015 hasn’t been kind to retailers. True, a few have done very well and are continuing to do so, but most have not. Most, including major supermarkets, are… For further reading, please visit LandlordZone
More money than sense?
26/11/2015
In the private investor sector, the commercial property market is experiencing a disconnection between pricing and the underlying investment value of the property based on property fundamentals.
A difference has… For further reading, please visit LandlordZone
A difference has… For further reading, please visit LandlordZone
A different perspective
17/11/2015
Amongst my spare-time (if only!) interests is photography. I became interested in photography as a quick way to write poetry. I wrote reams of poems during my teens, my writing style a combination. For further reading, please visit LandlordZone.
Stands to Reason
28/10/2015
The more you pay for a commercial property investment, the less you are likely to make out it at least in the short term, and quite possibly long-term too. For further reading, please visit LandlordZone.
Retail Property Investment Valuation
02/10/2015
Valuation is an opinion, Not merely anyone’s opinion, but an informed opinion; an opinion based on a knowledge of the subject.
The starting point… For further reading, please visit LandlordZone
The starting point… For further reading, please visit LandlordZone
Investing in Commercial Property - (1) for Income
18/09/2015
There are probably only three reasons for investing in commercial property, of which one does not apply to most landlords. The exception is…For further reading, please visit LandlordZone
Liquidity
19/08/2015
Whether better to invest in quoted property companies on the Stock Market or property direct is a matter for debate: each has advantages and disadvantages and… For further reading, please visit LandlordZone.
Base Rate and LTV
07/08/2015
It wouldn’t surprise me to learn there are investors whose borrowing is so close to the edge that a nominal increase in Base Rate (and LIBOR) would tip them over the cliff, but … For further reading, please visit LandlordZone.
The Smart Money
01/07/2015
The smart money is getting out of property. The smart money has long regarded property to be treated like any other commodity, to be bought and sold whenever the time is right. For further reading, please visit LandlordZone.
Privacy - a big issue
05/06/2015
Privacy is a big issue. Data-mining, technically the extraction of information from a dataset to transform it into an understandable structure for further use, or in buzzword parlance the extraction of patterns and knowledge from large amount of data, not the …
Traffic Congestion
02/06/2015
This story may be anecdotal, but at the beginning of the 20th century a leading motor vehicle manufacturer predicted that there would never be more than 1 million cars in the world, because… For further reading, please visit LandlordZone.
Stoop to Conquer
28/05/2015
Despite evidence that many shrewder landlords are selling up while the going is good, the booming market in retail property investments is showing no overt signs of abating. Money to invest is one thing, but money to provide a return on capital is another so it is time to wonder how those tenants that are just about keeping their heads above water are going to manage when their own rents come up for review. For further reading, please visit LandlordZone.
Due Diligence
30/04/2015
Due diligence is an investigation of a business or person prior to signing a contract. Verifying to make sure that everything you’ve been told is correct and above board. For further reading, please visit LandlordZone.
Yield and Return
30/04/2015
A concern for investors in commercial property is how well the investment is performing or how it is expected to perform. Knowing how to gauge performance is essential which is why it’s important to understand the difference between yield and return. For further reading, please visit LandlordZone.
Friday afternoon ramble
10/04/2015
If you’re into creating a balanced portfolio then a bit of residential property and commercial property is necessary, but what happens if you’re not? And even if you are, what happens if you later discover that you’re not cut out for residential or commercial, or vice versa? For further reading, please visit LandlordZone.
Commercial Property Crash
07/04/2015
Predicting the next commercial property market crash is not something to do for the fun of it, but to enable forward-thinking investors to bide their time in readiness for the next buying opportunity. For further reading, please visit LandlordZone.
Self-service at auction
05/03/2015
Every year, millions of pounds of retail, commercial and industrial property investments changes hands, far too often to buyers whose expectations never materialise after completion. …For further reading, please visit LandlordZone
Bubble and squeak
27/02/2015
Let’s face it, if you took my advice then you’d never buy anything! Which is what a client used to tell me before mentioning he’d bought another shop property and wanted…For further reading, please visit LandlordZone
Boot on the other foot
26/02/2015
Whether residential or commercial property, there is a considerable amount of money to be made by playing your cards right. It’s not only investors that can play the property game, so too can banks. For further reading, please visit LandlordZone
New Year Resolution
29/01/2015
For the uninitiated, commercial property is a steep learning curve. For the inexperienced landlord, commercial property is like a minefield, full of pitfalls for the unwary. Whereas residential property is a political hot potato, commercial property is … For further reading, please visit LandlordZone
Investment Strategy
15/01/2015
It is said that if you want to travel from where you are now to where you want to go then you need a map… For further reading, please visit LandlordZone
Expectation for Commercial Property Growth
27/11/2014
Unlike residential property, the factors that determine prospects for commercial property growth are much more dependent upon specific tenant demand, rather than demand and supply generally. For further reading, please visit LandlordZone newsletter issue 30 - click here
Commercial Property and Free Advice
05/11/2014
The recent ruling on why landlords cannot rely upon general advice from HMRC is a timely reminder of the perils of free advice generally. For further reading, please visit LandlordZone, click here.
Appraising High Streets
24/10/2014
My work takes me travelling all over England and Wales so, apart from work for regular clients, I never know in advance where each new instruction might be. Long-distance travelling is not as demanding when… For further reading, please visit LandlordZone - click here
Supermarkets at War
29/09/2014
The Tesco bookkeeping announcement on 22 September 2014 is a useful reminder of what can happen when a retailer becomes so big that the cost of keeping up appearances might lead to all manner of shenanigans. For further reading, please visit newsletter 28 on LandlordZone
Is most commercial property ex-growth?
25/09/2014
Successful investment in commercial property is all about art and timing. The art, which might be described as judicious choice, is the skill needed to discern whether the particular property is likely to continually head in the same direction as the market. For further reading, please visit LandlordZone.
Summertime Blues
11/08/2014
Seen through London eyes, much of the property throughout the rest of Britain is relatively inexpensive, cheap even. Anthropocentric perhaps but, to an extent, London has every right to think itself the most significant. For further reading, please visit LandlordZone.
Auction and Guide Prices
01/08/2014
In July 2014, the Advertising Standards Authority upheld a complaint brought against Auction House Ltd (“AH”) whereby the complainant argued that several properties sold at auction by AH had had reserve prices higher than the guide prices and so could not have been bought at the guide price. For further reading, please visit LandlordZone
“Where are the customers’ yachts?”
31/07/2014
For most people, a state pension is quite possibly the opposite of what they’ve experienced throughout most if not the whole of their working life, presupposing an employee and not running their own business. A pension is other people paying you. For further reading, please visit LandlordZone.
Froth and Reassurance
15/07/2014
Now that the property market has steamed ahead for quite some time, in many cases prices up to pre-2008 crash levels, the pundits are now telling us that everything in the garden is rosy and we shouldn’t be concerned. Talk of good value for money and why prices should continue to rise, any flaws in their reasoning explained away, is, at least in my opinion, rather worrying. For further reading, please visit LandlordZone
Are banks a safe bet?
26/06/2014
Not that long ago, one of the best ways to invest in a bank was through stocks and shares. As well as a slice of the action, you became a part-owner of… For further reading, please visit LandlordZone
A Refreshing Change
29/05/2014
Becoming, being a landlord will change you. In the driving seat, no longer a passenger, will shift you into a different state of mind. Investment does that to people: the feeling that others are paying you is …For further reading, please visit LandlordZone newsletter issue 24 - click here
Safety in Numbers
02/05/2014
Physically outwardly people are different and different nationalities each have their own cultures but, other than gender, human beings are basically inwardly the same. For further reading, please visit LandlordZone - click here
Sentiment v Technicalities
23/04/2014
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: …For further reading, please visit LandlordZone newsletter issue 23 - click here
Location, location, location
12/04/2014
Investment performance despite any resistance by the tenant. Why would the tenant resist? …For further reading, please visit LandlordZone - click here
April Fool or Successful Investor
01/04/2014
Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell…for further reading, please visit LandlordZone - click here
Investment Psychology
27/03/2014
Psychology occupies the middle-ground between who you are and who you want to become, and all that that entails. To become something you have to invest. Investment is about becoming better off than you are now. How long it takes to become better off depends upon a combination of two factors: the practical and the psychological. … For further reading, please visit LandlordZone newsletter issue 22 - click here
Valuation and Over-Paying
01/03/2014
I want to dispel a widely held notion, the strong belief in which leads to investors overpaying for shop property. It is a notion that has contributed to substantial over-valuation (along with over-mortgaging by the banks and other lenders) of shop property investments for more than three decades.
When you buy a shop property for investment, you are not buying into the existing or proposed tenant's business: the only thing you own is the property itself. That is all. How the tenant chooses to run its business, the prospects for the business including the market sector the tenant's business serves, are nothing to do with you. You are buying the property and whether it is the entire building or part of a building, that is all. Therefore, the identity of the tenant makes no difference whatsoever to the value of the property. The only relevance of what is known as the 'covenant' of the tenant that makes a difference is the chances of rent on time and other requirements of the occupancy honoured throughout the term of the lease. Therefore, if you pay a higher price because the shop property is let to a well-known covenant, then that 'premium' adds to the risk and may not be recoverable when you want to sell.
To understand why even though there is no link between the value of the property and the tenant's covenant nevertheless a strong connection is made, it is necessary to go back to events in the shop property market during the mid-1970s. In 1972, all Asians were expelled from Uganda by Idi Amin, the president of Uganda at that time. Those holding British passports came to Britain. Many had been businesspeople in Africa and rebuilt up their lives in Britain. Some became retailers while others found suitable employment.
An explosive growth in demand for shops and retail businesses led to a widespread change in attitude. Before the immigration-influx, I think it fair to say many 'white' shopkeepers were living off their laurels, for example half-day closing during the week was the norm, trading times out of kilter with an increasingly cosmopolitan society. Asian shops, the ubiquitous 'Mr Patel', opened longer hours, closing at 10pm rather than 5.30pm, and extended the shopping week to include all day Sunday. Prices obtainable in the market for selling going-concern businesses also rose. In the newsagent, confectioner, tobacconist sector, ("CTN"), it was said a 'white' buyer would pay ten times turnover, but an 'Asian' buyer would pay fifteen times turnover. The difference in price was accounted for by removing staff costs and so on, because the Asian family would work in the shop. Strictly, it shouldn't make any difference to price payable that savings can be made from being more operationally efficient, but I do not think that was the agenda. It was not so much about wanting more income, so much as wanting more capital. By modernising the business, turnover could be increased and the business re-sold for a profit. It also gave the Asian family an opportunity to establish 'roots' in the wider community.
(The presence of Asian shopkeepers in Britain was by no means new. The earliest origins of settlement of South Asians in Great Britain is uncertain, perhaps the Middle Ages. By the late 19th/early 20th centuries there were approximately 70,000 South Asians in Britain and following World War II and the break-up of the British Empire, immigration increased throughout the 1950s and 1960s as citizens of Commonwealth countries and former Caribbean colonies moved to Britain. Following restrictions on primary immigration, much of the subsequent growth in the British Asian community has come from the births of second and third-generation Asian Britons. As time passes, the formation and development of community can alter the demographics. Southall, in north-west Greater London, for example, is a case in point. In 1950, the first group of South Asians arrived in Southall, reputedly recruited to work in a factory owned by a former British Army officer. With the closeness of expanding employment opportunities such as Heathrow Airport, nowadays over 55% of Southall's population of 70,000 is Indian/Pakistani, Southall has one of the largest Sikh Temples outside India and Southall contains the largest Asian shopping centre in the London area.)
An attraction of English property law is freehold ownership. As the ultimate owner of the property, freehold provides both physical and emotional security. Owning shop property freehold can contribute to status in community and business. As anyone that has tried to buy shop property for investment will testify, it is not an easy step. The first hurdle is convincing commercial property agencies you are serious! It's not that surveyors were impossible to deal with, simply they have regular buyers and saw no reason to give newcomers a bite of the cherry. Also, many established surveyors can't be bothered with inexperienced investors. Then there is a question of credibility. Unless you pay the asking price or your offer is very close, you risk being considered a time-waster. Similarly, if you mess about and delay exchange of contract and/or fail to complete. Moreover, there may be a language barrier. Even if you fulfil the criteria, there is no certainty of being offered anything with potential. The solution is to buy at property auctions. Property auctions lend themselves to anonymity. Property auctions have long been popular with people of all nationalities, but before the mid-1970s there was a greater tacit understanding of shop valuation methodology. What the new wave of investors did not appreciate (or at least not give an impression) was that, in principle, a high yield suggests a shop property where little or no capital growth is expected, conversely a low-yield offers prospects for growth. In any event, because the cost of borrowing money is the same nationwide, it made no sense to be able to buy a shop property investment yielding say 12% for a lower price pro-rata than a shop property showing 7%. Hence, what began to happen and rapidly gathered steam, until the influence of the change in approach became the 'norm', was for shop properties having little or no growth prospects to go up price which in turn led to an increase in price for properties with growth prospects.
Finance plays a pivotal role in the commercial property market. It is said that property investment is more about finance than property. When a buyer wants to mortgage an investment property, or needs a mortgage in order to buy the property in the first place, ways to repay the mortgage include the borrower's other sources of income and whether the yield on the property exceeds the instalment for payment of the mortgage. Whilst a lender will assess the credit-worthiness of the borrower, a lender is not normally interested in the prospects for the investment: all a mortgagee cares about is whether the borrower could honour the requirements of the mortgage, or in the event of default the property could be sold to repay the loan. The fact that high-yielding investments are more risky is of no consequence to the lender, and may in fact be considered more secure simply because of a higher yield. In effect, thanks to their mortgage criteria, what the banks have imposed on buyers of shop property is the equivalent of a business plan, whereby never mind whether the shop property constitutes an investment, all that matters is that the financial side of things stack up.
What stemmed from inexperience became the 'norm' thanks to mortgage valuation surveyors. The task of a mortgage valuation surveyor, often a chartered surveyor, is to give an opinion of the market value of the property. However, the market value of a property is only the value of the property itself. It is not the value of the investment. The investment comprises the property and any existing or proposed 'tenancy' involving that property. So, since the value of the investment can vary depending upon terms of the tenancy, arguably a valuation surveyor should make that clear in the report, otherwise there is the risk the banks could be misled into thinking lending on the property is more secure than it is.
The fact that a layer of variable value can be added to the intrinsic value of a property is not something lost on sellers. The marketing of commercial property for investment involves very sophisticated and shrewd techniques. For example, one of the most obvious ways to maximise the price is to create an investment that is readily mortgageable. When selling a shop property investment, the seller is not interested in the value of the property as such, but how much the property and all that comes with it is likely to fetch in the market. It is the existence of that subtle difference for which the inexperienced investor can pay a hefty price. Selling a shop property for investment is no different to any other form of selling. Dress it up to look its best and hope the buyer doesn't spot what's wrong. Any complaints afterwards can be met by caveat emptor: the buyer alone is responsible for checking the quality and suitability of goods before making the purchase. Moreover, unlike products and services where the seller might be concerned to safeguard reputation for future custom, a seller of shop property is unlikely to care a jot about goodwill.
Although the seller of shop property is unlikely to care about goodwill, the seller's agents are mindful of their reputation in the market. To maximise the selling process whilst attempting to minimise the repercussions of overpayment, auctioneers have, for some time, highlighted the financial status of the tenant in the auction catalogue, for example the retailer's number of branches, latest turnover and profit figures.
Covenant and early review lots are guaranteed to fetch top prices. In the details, much emphasis is given to the date of review, with the estimated rental value suggested, either by having issued the rent review notice quoting a very high proposal, or by stating the vendor's opinion of rental value, or by citing a brief mention of a nearby new letting.
Pre-occupation with quality of covenant has driven investment yields down to levels which, for the type of property, is more commonly expected for prime propositions, offering assured long-term growth!
Consequently, what has happened is that not only has the way shop property is valued disconnected from fundamental principles, but also the banks and vested interests have create a market that is completely divorced from the reality of property itself. The test of that claim is easy to pass, for example: imagine two shop properties, next door to each other, both shops identical size, layout, etc, both let for 20 years at the same rent with rent reviews at five yearly intervals. One shop is let to a national multiple retailer with dozens of branches, the other to a local shopkeeper with just that one shop. Both properties are offered for sale by auction on the same date by the same auctioneer. What's the betting the shop let to the multiple retailer would fetch a higher price?
In my opinion, it is not up to valuation surveyors to insist banks lend only on the value of the property, as distinct from the market value of the investment. That decision is for the banks alone. However, I do consider valuation surveyors have a duty of care to ensure the banks understand there is a difference which might not necessarily be allowed for in the 'forced' sale valuation. A definition of 'forced sale' valuation is "the highest price which a property can reasonably be expected to bring, if offered for sale without the consent or concurrence of the owner by virtue of judicial process, in what may be a restricted market place, within a restricted time frame, to a prudent, willing and able purchaser who may have limited knowledge about the property, its uses and capability." If the forced sale valuation is a percentage of the market value of the property then in my opinion the mortgage is likely to be more secure, than if the forced sale value is the valuation of the investment.
When you buy a shop property for investment, you are not buying into the existing or proposed tenant's business: the only thing you own is the property itself. That is all. How the tenant chooses to run its business, the prospects for the business including the market sector the tenant's business serves, are nothing to do with you. You are buying the property and whether it is the entire building or part of a building, that is all. Therefore, the identity of the tenant makes no difference whatsoever to the value of the property. The only relevance of what is known as the 'covenant' of the tenant that makes a difference is the chances of rent on time and other requirements of the occupancy honoured throughout the term of the lease. Therefore, if you pay a higher price because the shop property is let to a well-known covenant, then that 'premium' adds to the risk and may not be recoverable when you want to sell.
To understand why even though there is no link between the value of the property and the tenant's covenant nevertheless a strong connection is made, it is necessary to go back to events in the shop property market during the mid-1970s. In 1972, all Asians were expelled from Uganda by Idi Amin, the president of Uganda at that time. Those holding British passports came to Britain. Many had been businesspeople in Africa and rebuilt up their lives in Britain. Some became retailers while others found suitable employment.
An explosive growth in demand for shops and retail businesses led to a widespread change in attitude. Before the immigration-influx, I think it fair to say many 'white' shopkeepers were living off their laurels, for example half-day closing during the week was the norm, trading times out of kilter with an increasingly cosmopolitan society. Asian shops, the ubiquitous 'Mr Patel', opened longer hours, closing at 10pm rather than 5.30pm, and extended the shopping week to include all day Sunday. Prices obtainable in the market for selling going-concern businesses also rose. In the newsagent, confectioner, tobacconist sector, ("CTN"), it was said a 'white' buyer would pay ten times turnover, but an 'Asian' buyer would pay fifteen times turnover. The difference in price was accounted for by removing staff costs and so on, because the Asian family would work in the shop. Strictly, it shouldn't make any difference to price payable that savings can be made from being more operationally efficient, but I do not think that was the agenda. It was not so much about wanting more income, so much as wanting more capital. By modernising the business, turnover could be increased and the business re-sold for a profit. It also gave the Asian family an opportunity to establish 'roots' in the wider community.
(The presence of Asian shopkeepers in Britain was by no means new. The earliest origins of settlement of South Asians in Great Britain is uncertain, perhaps the Middle Ages. By the late 19th/early 20th centuries there were approximately 70,000 South Asians in Britain and following World War II and the break-up of the British Empire, immigration increased throughout the 1950s and 1960s as citizens of Commonwealth countries and former Caribbean colonies moved to Britain. Following restrictions on primary immigration, much of the subsequent growth in the British Asian community has come from the births of second and third-generation Asian Britons. As time passes, the formation and development of community can alter the demographics. Southall, in north-west Greater London, for example, is a case in point. In 1950, the first group of South Asians arrived in Southall, reputedly recruited to work in a factory owned by a former British Army officer. With the closeness of expanding employment opportunities such as Heathrow Airport, nowadays over 55% of Southall's population of 70,000 is Indian/Pakistani, Southall has one of the largest Sikh Temples outside India and Southall contains the largest Asian shopping centre in the London area.)
An attraction of English property law is freehold ownership. As the ultimate owner of the property, freehold provides both physical and emotional security. Owning shop property freehold can contribute to status in community and business. As anyone that has tried to buy shop property for investment will testify, it is not an easy step. The first hurdle is convincing commercial property agencies you are serious! It's not that surveyors were impossible to deal with, simply they have regular buyers and saw no reason to give newcomers a bite of the cherry. Also, many established surveyors can't be bothered with inexperienced investors. Then there is a question of credibility. Unless you pay the asking price or your offer is very close, you risk being considered a time-waster. Similarly, if you mess about and delay exchange of contract and/or fail to complete. Moreover, there may be a language barrier. Even if you fulfil the criteria, there is no certainty of being offered anything with potential. The solution is to buy at property auctions. Property auctions lend themselves to anonymity. Property auctions have long been popular with people of all nationalities, but before the mid-1970s there was a greater tacit understanding of shop valuation methodology. What the new wave of investors did not appreciate (or at least not give an impression) was that, in principle, a high yield suggests a shop property where little or no capital growth is expected, conversely a low-yield offers prospects for growth. In any event, because the cost of borrowing money is the same nationwide, it made no sense to be able to buy a shop property investment yielding say 12% for a lower price pro-rata than a shop property showing 7%. Hence, what began to happen and rapidly gathered steam, until the influence of the change in approach became the 'norm', was for shop properties having little or no growth prospects to go up price which in turn led to an increase in price for properties with growth prospects.
Finance plays a pivotal role in the commercial property market. It is said that property investment is more about finance than property. When a buyer wants to mortgage an investment property, or needs a mortgage in order to buy the property in the first place, ways to repay the mortgage include the borrower's other sources of income and whether the yield on the property exceeds the instalment for payment of the mortgage. Whilst a lender will assess the credit-worthiness of the borrower, a lender is not normally interested in the prospects for the investment: all a mortgagee cares about is whether the borrower could honour the requirements of the mortgage, or in the event of default the property could be sold to repay the loan. The fact that high-yielding investments are more risky is of no consequence to the lender, and may in fact be considered more secure simply because of a higher yield. In effect, thanks to their mortgage criteria, what the banks have imposed on buyers of shop property is the equivalent of a business plan, whereby never mind whether the shop property constitutes an investment, all that matters is that the financial side of things stack up.
What stemmed from inexperience became the 'norm' thanks to mortgage valuation surveyors. The task of a mortgage valuation surveyor, often a chartered surveyor, is to give an opinion of the market value of the property. However, the market value of a property is only the value of the property itself. It is not the value of the investment. The investment comprises the property and any existing or proposed 'tenancy' involving that property. So, since the value of the investment can vary depending upon terms of the tenancy, arguably a valuation surveyor should make that clear in the report, otherwise there is the risk the banks could be misled into thinking lending on the property is more secure than it is.
The fact that a layer of variable value can be added to the intrinsic value of a property is not something lost on sellers. The marketing of commercial property for investment involves very sophisticated and shrewd techniques. For example, one of the most obvious ways to maximise the price is to create an investment that is readily mortgageable. When selling a shop property investment, the seller is not interested in the value of the property as such, but how much the property and all that comes with it is likely to fetch in the market. It is the existence of that subtle difference for which the inexperienced investor can pay a hefty price. Selling a shop property for investment is no different to any other form of selling. Dress it up to look its best and hope the buyer doesn't spot what's wrong. Any complaints afterwards can be met by caveat emptor: the buyer alone is responsible for checking the quality and suitability of goods before making the purchase. Moreover, unlike products and services where the seller might be concerned to safeguard reputation for future custom, a seller of shop property is unlikely to care a jot about goodwill.
Although the seller of shop property is unlikely to care about goodwill, the seller's agents are mindful of their reputation in the market. To maximise the selling process whilst attempting to minimise the repercussions of overpayment, auctioneers have, for some time, highlighted the financial status of the tenant in the auction catalogue, for example the retailer's number of branches, latest turnover and profit figures.
Covenant and early review lots are guaranteed to fetch top prices. In the details, much emphasis is given to the date of review, with the estimated rental value suggested, either by having issued the rent review notice quoting a very high proposal, or by stating the vendor's opinion of rental value, or by citing a brief mention of a nearby new letting.
Pre-occupation with quality of covenant has driven investment yields down to levels which, for the type of property, is more commonly expected for prime propositions, offering assured long-term growth!
Consequently, what has happened is that not only has the way shop property is valued disconnected from fundamental principles, but also the banks and vested interests have create a market that is completely divorced from the reality of property itself. The test of that claim is easy to pass, for example: imagine two shop properties, next door to each other, both shops identical size, layout, etc, both let for 20 years at the same rent with rent reviews at five yearly intervals. One shop is let to a national multiple retailer with dozens of branches, the other to a local shopkeeper with just that one shop. Both properties are offered for sale by auction on the same date by the same auctioneer. What's the betting the shop let to the multiple retailer would fetch a higher price?
In my opinion, it is not up to valuation surveyors to insist banks lend only on the value of the property, as distinct from the market value of the investment. That decision is for the banks alone. However, I do consider valuation surveyors have a duty of care to ensure the banks understand there is a difference which might not necessarily be allowed for in the 'forced' sale valuation. A definition of 'forced sale' valuation is "the highest price which a property can reasonably be expected to bring, if offered for sale without the consent or concurrence of the owner by virtue of judicial process, in what may be a restricted market place, within a restricted time frame, to a prudent, willing and able purchaser who may have limited knowledge about the property, its uses and capability." If the forced sale valuation is a percentage of the market value of the property then in my opinion the mortgage is likely to be more secure, than if the forced sale value is the valuation of the investment.
Chasing Rainbows
20/02/2014
Unlike investing in stocks and shares where the volatility of share prices and uncertainty of dividends can lead to long term buy and lose, investment in property offers two advantages: … For further reading, please visit LandlordZone newsletter issue 21 - click here
Pension Plan
01/01/2014
A pension is a long-term commitment and tax relief is attractive, but setting-up fees and on-going charges for pension plans can be disproportionately high. I suggest thinking inside the box. The question to ask is: would the proposition be worth buying if there were no tax advantages? Many property investment schemes and plans are sold on tax advantages but unless the property itself makes sense as a long-term investment then I suggest the only likely advantage would be for the scheme promoter and manager of the plan.
Generally, commercial property is a depreciating asset. Since costs of buying (including Stamp Duty) and selling, and non-recoverable expenses during ownership, can be substantial, to get your money back, the value of the property must increase by enough to cover all those costs, plus loss of interest on your equity, plus adjustment for inflation, and allowing for tax on the gain. If, when you want to sell, the value has not increased by at least enough to cover all those costs and adjustments then you would either break-even, or be worse off.
There is a school of thought that treats property investment as an annuity. Provided the tenant is financially stable and likely to remain sound for the duration of the term of the tenancy, buying an investment for yield, regardless of the value of the asset may be lucrative. Even so, it is all too easy to overpay for income. Furthermore, unless the landlord’s interest is leasehold, (in which case the interest would probably revert to the freeholder on expiry (subject to any rights to renew or enfranchise), the property would revert to the landlord on expiry of the tenancy (subject to any rights of the tenant to renew) and any difficulties in reletting or otherwise disposing of the property could cause problems for the landlords.
For a SIPP (self-investment personal pension), generally buying a shop property investment for a pension based on tax advantages is not the best way to go about creating a pension. Unless the purchase is wholly a business-expense, in which case what I am about to say does not apply, the snag with buying property for investment because of the tax advantages can lead to the prospect of getting tax relief ignoring the prospects for the property as an investment itself.
I am sure there are many landlords that over the years since SIPPS were introduced in 2000 nowadays own properties that have fallen in value with no obvious likelihood of going back up to the price paid. Of course, when you are buying long-term, the occasional drop in value is only to be expected, but the question is whether any fall in value can be reasonably expected to be offset by any rise, or whether the ups-and-downs over the period of time simply cancel out each other.
Since most propositions are going to decline over the years, because of the principles of marketing, it is very much a matter of timing: the challenge is to sell and let someone else buy the slack before it becomes obvious that the investment is not going to perform. To some people, the idea of dumping on the unsuspecting might be thought anti-social, but when it’s your money you’re investing why stick around just in case?
The question is: long-term buy and hold, or long-term buy and lose?
Generally, commercial property is a depreciating asset. Since costs of buying (including Stamp Duty) and selling, and non-recoverable expenses during ownership, can be substantial, to get your money back, the value of the property must increase by enough to cover all those costs, plus loss of interest on your equity, plus adjustment for inflation, and allowing for tax on the gain. If, when you want to sell, the value has not increased by at least enough to cover all those costs and adjustments then you would either break-even, or be worse off.
There is a school of thought that treats property investment as an annuity. Provided the tenant is financially stable and likely to remain sound for the duration of the term of the tenancy, buying an investment for yield, regardless of the value of the asset may be lucrative. Even so, it is all too easy to overpay for income. Furthermore, unless the landlord’s interest is leasehold, (in which case the interest would probably revert to the freeholder on expiry (subject to any rights to renew or enfranchise), the property would revert to the landlord on expiry of the tenancy (subject to any rights of the tenant to renew) and any difficulties in reletting or otherwise disposing of the property could cause problems for the landlords.
For a SIPP (self-investment personal pension), generally buying a shop property investment for a pension based on tax advantages is not the best way to go about creating a pension. Unless the purchase is wholly a business-expense, in which case what I am about to say does not apply, the snag with buying property for investment because of the tax advantages can lead to the prospect of getting tax relief ignoring the prospects for the property as an investment itself.
I am sure there are many landlords that over the years since SIPPS were introduced in 2000 nowadays own properties that have fallen in value with no obvious likelihood of going back up to the price paid. Of course, when you are buying long-term, the occasional drop in value is only to be expected, but the question is whether any fall in value can be reasonably expected to be offset by any rise, or whether the ups-and-downs over the period of time simply cancel out each other.
Since most propositions are going to decline over the years, because of the principles of marketing, it is very much a matter of timing: the challenge is to sell and let someone else buy the slack before it becomes obvious that the investment is not going to perform. To some people, the idea of dumping on the unsuspecting might be thought anti-social, but when it’s your money you’re investing why stick around just in case?
The question is: long-term buy and hold, or long-term buy and lose?
Mortgage and Loan
01/01/2014
Even if they start by using cash, many purchasers are concerned with the cost of financing property. In my experience, they can often be more concerned with finance than the value of the proposition. This situation typically arises when property is offered at a high yield, compared with interest rates, but not high enough when measured on (traditional) investment criteria.
Depending on lending criteria, that may range from stringent to lax depending the lender's policy at the time, commercial mortgages can usually be obtained for between 40-70% of capital value, provided the cost of repaying the mortgage is covered by the rental income.
When a mortgage based on the value of the investment, as distinct from the property, and if the investment value has gone up, it may be possible to remortgage.
Where a rent is subject to early review or the tenancy to expiry (reversion), mortgagees will normally lend only by reference to the rent passing, but subject to the borrower's other resources and the relationship with the lender, it may be possible to extract extra funds in anticipation of the level of increase and its immediate effect on capital value. Once the new rent is established, it may then be possible to re-mortgage so as to release further equity.
The source of finance is important. Since the price of shop property can be substantial and may be beyond the reach of cash buyers, where would the money come from to fuel demand for shop property investments?
The answer is there is plenty of money about. You only have to look at the turnover figures for retailers and other businesses to realise how many GBP billions are in circulation. The criteria for bank lending is judicious choice of borrower. By lending (more) to fewer borrowers, the banks are doing what all forward-thinking businesses have been doing for years: moving away from the mass-market catering for everyone and concentrating on the more profitable customers/borrowers.
The amount of funds and facilities for borrowing determines flexibility. Income can be used to finance mortgage, capital can be released for buying a second investment and so on. If you do not want to borrow, then your purchase would be limited to your own resources, the price range and/or required initial yield, in which case decisions can be harder for fear that something better might turn up. The more you have to invest, the more flexible you can be. Even so, successful investment in shop property is not about spreading the risk, but buying wisely.
A wise investment is one that performs through thick and thin. Property performance is a measure of confidence. At any time the value of a shop investment is what other investors in the market at that time would pay, but how the value is calculated depends upon the terms and provisions of the tenancy and that depends upon the tenant’s agreement or if a dispute has to be resolved then the tenant’s conduct in the aftermath.
Depending on lending criteria, that may range from stringent to lax depending the lender's policy at the time, commercial mortgages can usually be obtained for between 40-70% of capital value, provided the cost of repaying the mortgage is covered by the rental income.
When a mortgage based on the value of the investment, as distinct from the property, and if the investment value has gone up, it may be possible to remortgage.
Where a rent is subject to early review or the tenancy to expiry (reversion), mortgagees will normally lend only by reference to the rent passing, but subject to the borrower's other resources and the relationship with the lender, it may be possible to extract extra funds in anticipation of the level of increase and its immediate effect on capital value. Once the new rent is established, it may then be possible to re-mortgage so as to release further equity.
The source of finance is important. Since the price of shop property can be substantial and may be beyond the reach of cash buyers, where would the money come from to fuel demand for shop property investments?
The answer is there is plenty of money about. You only have to look at the turnover figures for retailers and other businesses to realise how many GBP billions are in circulation. The criteria for bank lending is judicious choice of borrower. By lending (more) to fewer borrowers, the banks are doing what all forward-thinking businesses have been doing for years: moving away from the mass-market catering for everyone and concentrating on the more profitable customers/borrowers.
The amount of funds and facilities for borrowing determines flexibility. Income can be used to finance mortgage, capital can be released for buying a second investment and so on. If you do not want to borrow, then your purchase would be limited to your own resources, the price range and/or required initial yield, in which case decisions can be harder for fear that something better might turn up. The more you have to invest, the more flexible you can be. Even so, successful investment in shop property is not about spreading the risk, but buying wisely.
A wise investment is one that performs through thick and thin. Property performance is a measure of confidence. At any time the value of a shop investment is what other investors in the market at that time would pay, but how the value is calculated depends upon the terms and provisions of the tenancy and that depends upon the tenant’s agreement or if a dispute has to be resolved then the tenant’s conduct in the aftermath.
Growth
01/01/2014
The rate of growth is a combination of rental and capital growth. Although capital growth is often rental-dependent, a higher price may be obtainable from an owner-occupier rather than an investor or developer. Also, because a difference can exist between the value of a property and a proposition, investment sentiment can affect growth.
A recent sentiment, that came into being in 1999 or thereabouts, is "yield compression" - essentially a gamble on interest rates. For example, a shop investment let at £20,000 a year and priced at £200,000 (yield 10%) when mortgage interest is 5% might be thought a bargain, so the price goes up to reflect the difference between the return and cost of borrowing. Nowadays, we have what I call 'confidence compression' where buyers are banking on capital growth as the gap narrows between the cost of borrowing and the investment yield.
Capital value is calculated by multiplying the estimated rental value ("ERV") by the yield (or year's purchase) that the market would require at the date of valuation. Note I say estimated’, not actual. A shop let at £20,000 a year in 2005 might not fetch £20,000 a year in 2010 if offered to let on the same terms and conditions in the lease as in 2005. The estimated rent might be more, or less.
Yield is the actual rental expressed as a percentage of the capital value. Year's purchase (“YP”) is the yield expressed as an integer. For examples, an investment priced at £300,000 the rent at £15,000 would yield 5%. The year's purchase is 100/5 = 20 YP. In my opinion, use of YP enables a more readily identifiable indication of investment prospects because it tells you how many years are needed for that amount of rent to recoup the purchase price.
Rental growth reflects one or two factors, or a combination of both: 1) demand and supply of the sort of shops that suit the prevailing requirements of tenants that are in the market for premises; and 2) whether, in comparison with other premises and their tenancies, there is 'something' in the wording of the tenancy that would justify a greater rent.
Although a shop property that is let is an investment, not all shop investments perform, or are capable of performing. For example, there may be no likelihood of the rent increasing, or no likelihood someone else would pay more than you, so you might not get your money back and depending upon the market when you want to sell you might not be able to attract a buyer. Also, a great many shop investments with no chance whatsoever of performing are created by cunning sellers to attract naive buyers into paying far more than the property would be valued at.
Many investors become successful, despite mistakes. Often, achievements outweigh the cost of mistakes, but all that means is that they have benefitted from market momentum. When the market changes, as it does and sometimes suddenly, negative events can overtake achievements. With shop property, one worst thing that could happen is that the property becomes vacant and unlettable at a rent that would give you a proper return on the investment; and whilst you are hoping to attract a tenant, the building is deteriorating and empty property rates are draining your resources. The other thing is foreclosure and being made bankrupt. Of course, the worst may not happen: but what does happen more often than not is that the investment fails to perform: the rent never increases and the value falls.
A recent sentiment, that came into being in 1999 or thereabouts, is "yield compression" - essentially a gamble on interest rates. For example, a shop investment let at £20,000 a year and priced at £200,000 (yield 10%) when mortgage interest is 5% might be thought a bargain, so the price goes up to reflect the difference between the return and cost of borrowing. Nowadays, we have what I call 'confidence compression' where buyers are banking on capital growth as the gap narrows between the cost of borrowing and the investment yield.
Capital value is calculated by multiplying the estimated rental value ("ERV") by the yield (or year's purchase) that the market would require at the date of valuation. Note I say estimated’, not actual. A shop let at £20,000 a year in 2005 might not fetch £20,000 a year in 2010 if offered to let on the same terms and conditions in the lease as in 2005. The estimated rent might be more, or less.
Yield is the actual rental expressed as a percentage of the capital value. Year's purchase (“YP”) is the yield expressed as an integer. For examples, an investment priced at £300,000 the rent at £15,000 would yield 5%. The year's purchase is 100/5 = 20 YP. In my opinion, use of YP enables a more readily identifiable indication of investment prospects because it tells you how many years are needed for that amount of rent to recoup the purchase price.
Rental growth reflects one or two factors, or a combination of both: 1) demand and supply of the sort of shops that suit the prevailing requirements of tenants that are in the market for premises; and 2) whether, in comparison with other premises and their tenancies, there is 'something' in the wording of the tenancy that would justify a greater rent.
Although a shop property that is let is an investment, not all shop investments perform, or are capable of performing. For example, there may be no likelihood of the rent increasing, or no likelihood someone else would pay more than you, so you might not get your money back and depending upon the market when you want to sell you might not be able to attract a buyer. Also, a great many shop investments with no chance whatsoever of performing are created by cunning sellers to attract naive buyers into paying far more than the property would be valued at.
Many investors become successful, despite mistakes. Often, achievements outweigh the cost of mistakes, but all that means is that they have benefitted from market momentum. When the market changes, as it does and sometimes suddenly, negative events can overtake achievements. With shop property, one worst thing that could happen is that the property becomes vacant and unlettable at a rent that would give you a proper return on the investment; and whilst you are hoping to attract a tenant, the building is deteriorating and empty property rates are draining your resources. The other thing is foreclosure and being made bankrupt. Of course, the worst may not happen: but what does happen more often than not is that the investment fails to perform: the rent never increases and the value falls.
Asset Strippers
21/11/2013
Investment in shop property is very rewarding provided you know what you are doing. Many private investors, particularly novices, do not understand how to go about it. Instead of formulating and sticking to a clearly defined strategy, most investors have a scatter–gun approach, alighting upon anything that takes the fancy within their price range. For further reading, please visit LandlordZone newsletter issue 18 - click here
Shop Investment
29/05/2013
I have resisted commenting on the Portas review of the ‘High Street’ and ensuing media and industry reports, because …for further reading, please visit LandlordZone newsletter issue 12 - click here
SIPP and Commercial Property
26/03/2013
Growing numbers of retirement savers with self–invested pension plans (SIPP) are building up their pension pots by putting money into commercial property; it is suggested buying your own premises to form part of your pension is probably a good move. But is it really? For further reading, please visit LandlordZone newsletter issue 10 - click here
Rent Review in the Prevailing Climate
22/11/2012
Investment is about becoming financially better off. Investing in commercial property can be rewarding provided you know what you’re doing, otherwise risky. For further reading, please visit LandlordZone newsletter issue 6 - click here
'Readiness for Sale' - A Guide for Streamlining Commercial Property Transactions
01/06/2012
“In 1995, a working party was set up by the Investment Property Forum (IPF) to consider existing procedures for the acquisition and disposal of real estate and to recommend improvements that would speed up the sale and purchase disposal process. The consultation led to the publication of ‘Readiness for Sale’ in 1996.
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "
Good time to invest?
01/09/2009
It seems to me there are a growing number of people thinking to themselves now seems like a good time to invest in shop property. But I'm not convinced. Not because life's difficult for many retailers, and that for many struggling on in the hope of surviving is possibly about the best they can do, but that that the sort of property on the market for sale doesn't fill me with much enthusiasm for its investment potential.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Distressed Sellers
01/09/2009
"Distressed" seller is the latest way for sellers to get rid of rubbish. The sort of properties that nobody else would buy. Start off by putting on the market over-priced. Expect to sell for much less. Attract interest, consider offers much lower than the quoting price. Do some due diligence as to whether the buyer has the money. Agree to accept what is thought by the buyer to be a bargain price. Exchange and complete contracts as soon as possible. Everyone is happy.
A rare opportunity for landlords
01/06/2009
Now the credit-crunch has settled, landlords have a rare, possibly unique, opportunity to determine the future of retailing, for good.
As I see it, a lot of hard-working decent honourable tenants, good at what they do, have found their property costs inflated as a result of the legacy of a bunch of irresponsible retailers who, operating in splendid isolation, behaved like drunken idiots by throwing their weight around when they could borrow lots and go on a spending spree, but are no longer full of confidence now the money-tap is turned off. Indeed, with balance-sheets hung up for all to see, it is interesting just how many retailers are heavily indebted. Which makes one wonder where all the money went.
Let’s face it, an awful lot of multiple retailers are not as good as they like to think, and many were struggling before recession arrived. It’s also fascinating how many multiple retailers think the world owes them a living. And how fond they are of blaming rent, rates, the economy, for their loss-making. The truth is a failure to address operational difficulties. It’s easy to manage without coming unstuck in times of change, so not getting the formula right is tantamount to gross negligence at the highest level. It is not as though there is no money about. You only have to look at turnover figures to see how much is spent.
Every retailer thinks it has a unique selling proposition, but, actually, there is hardly any originality, and copycat merchandise is in overdrive. The shopping public is doing its bit by not spending indiscriminately, and supermarkets are making life hell for those that think themselves so heavenly wonderful but are no earthly good, but landlords are in a position to accelerate change. One might think failing retailers are helping too, using pre-pack administration and CVA to prune branches, but pre-pack is about yesteryear directors out for whatever they can get.
You may think I’m off my rocker, or living on another planet, but this is no ordinary downturn. Things will never go back to how they were. It’s a shift, to a entirely different set of values and way of doing business. Which is why, in my view, landlords should seize the opportunity to rid us of all the retailers that have got us into this mess, and instead re-let the shops, even if it means lower rents, to those that understand the difference between running a business and managing for long-term consistent success.
As I see it, a lot of hard-working decent honourable tenants, good at what they do, have found their property costs inflated as a result of the legacy of a bunch of irresponsible retailers who, operating in splendid isolation, behaved like drunken idiots by throwing their weight around when they could borrow lots and go on a spending spree, but are no longer full of confidence now the money-tap is turned off. Indeed, with balance-sheets hung up for all to see, it is interesting just how many retailers are heavily indebted. Which makes one wonder where all the money went.
Let’s face it, an awful lot of multiple retailers are not as good as they like to think, and many were struggling before recession arrived. It’s also fascinating how many multiple retailers think the world owes them a living. And how fond they are of blaming rent, rates, the economy, for their loss-making. The truth is a failure to address operational difficulties. It’s easy to manage without coming unstuck in times of change, so not getting the formula right is tantamount to gross negligence at the highest level. It is not as though there is no money about. You only have to look at turnover figures to see how much is spent.
Every retailer thinks it has a unique selling proposition, but, actually, there is hardly any originality, and copycat merchandise is in overdrive. The shopping public is doing its bit by not spending indiscriminately, and supermarkets are making life hell for those that think themselves so heavenly wonderful but are no earthly good, but landlords are in a position to accelerate change. One might think failing retailers are helping too, using pre-pack administration and CVA to prune branches, but pre-pack is about yesteryear directors out for whatever they can get.
You may think I’m off my rocker, or living on another planet, but this is no ordinary downturn. Things will never go back to how they were. It’s a shift, to a entirely different set of values and way of doing business. Which is why, in my view, landlords should seize the opportunity to rid us of all the retailers that have got us into this mess, and instead re-let the shops, even if it means lower rents, to those that understand the difference between running a business and managing for long-term consistent success.
Pre-pack Administration
01/03/2009
My letter published in Estates Gazette, March 2009:
"Whilst I agree with Anthony Ratcliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious egocentric retailers living off borrowings and overpaying for new lettings with no thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to under-perform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."
"Whilst I agree with Anthony Ratcliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious egocentric retailers living off borrowings and overpaying for new lettings with no thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to under-perform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."
Conflict of Interest
01/09/1985
In a period of 'retailing revolution,' one wonders how advisers to pension funds can be so confident that the rate of growth essential to justify low initial yields on purchase price will materialise at the review date.
Many funds are already becoming increasingly disillusioned with their agents' failure to achieve the anticipated rental value. When the same agencies also act for multiple retailers, how do they reconcile their objective for the lowest rental when they may also be acting for the landlord of adjoining property with a brief to get the highest rental?
This conflict exists for all valuers, likely to receive instructions to advise landlords and tenants in the same area, but it surmountable when there is no vested inyerest in the progress of the investment.
Detailed knowledge of a multiple retailers' property affairs must be very useful when advising a fund on investment purchase (not to mention on the company's take-over potential) and the solution appears to aim for a balance, tilted in favour of the landlord, whereby 'comparable evidence,' to back a recommendation to settle, is presented in such a form as to convince the tenant that the conclusion is indeed the right figure, in line with 'the market.'
I cannot understand the business philosophy of major multiple retailers who appear unconcerned that their retained advisers actively market a positive involvement in the investment market. Surely it is better to use a selection of different valuers or, at worst, to deal with negotiations internally.
Many funds are already becoming increasingly disillusioned with their agents' failure to achieve the anticipated rental value. When the same agencies also act for multiple retailers, how do they reconcile their objective for the lowest rental when they may also be acting for the landlord of adjoining property with a brief to get the highest rental?
This conflict exists for all valuers, likely to receive instructions to advise landlords and tenants in the same area, but it surmountable when there is no vested inyerest in the progress of the investment.
Detailed knowledge of a multiple retailers' property affairs must be very useful when advising a fund on investment purchase (not to mention on the company's take-over potential) and the solution appears to aim for a balance, tilted in favour of the landlord, whereby 'comparable evidence,' to back a recommendation to settle, is presented in such a form as to convince the tenant that the conclusion is indeed the right figure, in line with 'the market.'
I cannot understand the business philosophy of major multiple retailers who appear unconcerned that their retained advisers actively market a positive involvement in the investment market. Surely it is better to use a selection of different valuers or, at worst, to deal with negotiations internally.
Supermarkets Visited
01/06/1985
Thinking I was immune from advertising, my first trip to what has now become my local grocers was to satisfy professional curiousity but standing in the car park at Tesco' s l00 tth superstore, I was comfortably aware of some magnetic presence which has brightened up Neasden.
For those of us who thrive on fresh fruit and vegetables, it is paradise to be offered such a wide choice and although the quality may not always be up to Class I, the assortment easily compensates.
I gauge shops by the quality of the staff and my definition of service. Are they dressed nicely, do they smile when serving or look at the customer at the till? So used to staff indifference at the International, opposite my office, it came as a refreshing change to hear 'thank you sir' when having my vegetables weighed and priced. For the best service, however, I don't believe you can beat Waitrose. When I asked a supervisor at Waitrose Brent Cross for some help, she stopped what she was doing and promptly showed me to the stock. At Tesco however, the same situation was delegated by the supervisor so presumably she had more important things to do than serve a customer!
Living in the area means we are spoilt for choice amongst the supermarket majors. Asda Hendon is due open next year although it'll probably be as unimpressive as Park Royal. Gateway has just opened in far-away Willesden and there's Safeway, but we went there once and the getting any common sense out of the staff was clearly going to create problems. Sainsbury' s puts me off because, apart from never being able to find anything, their male staff can often be seen with their ties hanging off their collars which I think is sloppy. These may sound like little things but it's the little things that deter customers otherwise we'd all shop at the same place!
Returning to Tesco, the fact that the staff can be seen to like saying 'thank you' is sufficient recommendation although I do have my doubts whether they are as enthusiastic during the peak and horrific Friday & Saturday shopping periods.
The clear reduction in our weekly food bill in exchange for a wide assortment, easy parking and a relaxing shopping environment must be the recipe for future grocery retailing; I must remember to modify my remarks about people who shop at Tesco. It's blatantly obvious however that the store is only accessible to motorists but it's spending power that Tesco is after and not local convenience. Let's hope the staff travelling to work via Neasden Station don't, as is very likely, get mugged in the long friendless walk to the store. Even if you can resist temptation, it must be worth a detour off the North Circular Road to buy 4 star petrol at 192.3p a gallon
For those of us who thrive on fresh fruit and vegetables, it is paradise to be offered such a wide choice and although the quality may not always be up to Class I, the assortment easily compensates.
I gauge shops by the quality of the staff and my definition of service. Are they dressed nicely, do they smile when serving or look at the customer at the till? So used to staff indifference at the International, opposite my office, it came as a refreshing change to hear 'thank you sir' when having my vegetables weighed and priced. For the best service, however, I don't believe you can beat Waitrose. When I asked a supervisor at Waitrose Brent Cross for some help, she stopped what she was doing and promptly showed me to the stock. At Tesco however, the same situation was delegated by the supervisor so presumably she had more important things to do than serve a customer!
Living in the area means we are spoilt for choice amongst the supermarket majors. Asda Hendon is due open next year although it'll probably be as unimpressive as Park Royal. Gateway has just opened in far-away Willesden and there's Safeway, but we went there once and the getting any common sense out of the staff was clearly going to create problems. Sainsbury' s puts me off because, apart from never being able to find anything, their male staff can often be seen with their ties hanging off their collars which I think is sloppy. These may sound like little things but it's the little things that deter customers otherwise we'd all shop at the same place!
Returning to Tesco, the fact that the staff can be seen to like saying 'thank you' is sufficient recommendation although I do have my doubts whether they are as enthusiastic during the peak and horrific Friday & Saturday shopping periods.
The clear reduction in our weekly food bill in exchange for a wide assortment, easy parking and a relaxing shopping environment must be the recipe for future grocery retailing; I must remember to modify my remarks about people who shop at Tesco. It's blatantly obvious however that the store is only accessible to motorists but it's spending power that Tesco is after and not local convenience. Let's hope the staff travelling to work via Neasden Station don't, as is very likely, get mugged in the long friendless walk to the store. Even if you can resist temptation, it must be worth a detour off the North Circular Road to buy 4 star petrol at 192.3p a gallon
Yield and Pricing
01/06/1985
The current trend for private investors in the retail market to be more concerned with short term gain than long term income is worrying.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
Participants seem to have overlooked the fact that the essence in capital gain to date owes more to previous levels of inflation than to design. And even if high inflation does return, the retailing revolution will stultify any likelihood of a repeat boom.
Many new investors believe that rental value reflects expected investment yield, based upon the price they have paid. In fact, investment value is calculated by reference to the level of rent and not vice versa. However, high prices paid for some investments can only reflect a very optimistic view of rental value. With the exception of property formerly owned by notedly cautious landlords, the idea that the previous owner must have agreed too low a rent, especially if set during the period 1981-1983, is too simplistic. By having always to aim for the top rental on review, to cover purchasing expectations, any failure to achieve the objective rubs off on the relationship with the valuer whose advice is dismissed as 'negative.'
The tenant becomes saddled with a difficult landlord and often with a rental commitment far above the economics of his business. In the open market, cyclical change is inevitable, but in the quest for short term gain, while the loss of one particular tenant may not matter, it is the collective effect of the pressure for high rents which radically affects long term stability, since there cannot be capital gain without security of income.
In the past, their owners' low inflation investment values have had a useful way of adjusting to mistakes, but with changes in the pattern of retailing, and high interest rates, the margin for error now is very small.
The investor who overpays, through ignorance or greed, only to find that the resultant yield, following review, is well below comfortable resale price will have to fund the shortfall somehow. While it is churlish to insist upon strict consideration of investment criteria, since the pressure to use substantial borrowing facilities dominates the market, the problem is unlikely to grow.
The Future for Secondary Shops
01/12/1984
The historic development of shopping centres makes fascinating reading. Originally, as people went to market, so came permanent shops. In the post-war housing boom, shops started going to the people and even today, new council housing estates boast a block of shops.
The radical change in socio-economic patterns, and the real decline in the cost of transport, means that today, people go to the shops and the goodwill generated by the major operators in all sectors of the retailing market is sufficiently established to influence the prosperity of shopping centres.
When the idea of Brent Cross Shopping Centre was conceived in 1959, it would probably not have been anything like as successful a concept that it is today. In the early 1960' s, shopping development was confined to traditional shopping centres, and precincts, such as the Arndale Centres, were built on land fronting the High Streets. The first suggestion that people might be persuaded to shop away from the traditional pitches was introduced when the·second-generation food supermarkets, such as Tesco and Sainsburys started to move to fringe positions so as to provide on-site parking and loading facilities for their customers.
The need for food is the common link between all people. As it is a perishable product, with people having limited facilities for bulk storage, shopping for food is the main reason why most shopping centres attract daily pedestrian flow. If you take away the food shops, technically known as convenience traders, you also remove the spin-off for durable and service traders.
It is clear that the future of food retailing lies in the free-standing purpose-built supermarket located in an accessible position and offering excellent parking and loading facilities. The strength of buying power for and competition between the major operators means that retail prices are particularly keen. The independent grocer has seen his market share decline gradually since the 1950s and butchers, greengrocers, off-licences, fishmongers have all been hit hard. The ubiquitous confectioner, tobacconist, newsagent only survives because the major wholesalers of newspapers operate retail CTN outlets themselves. The private retailer with expansion ambition knows that the future for retailing must be to take units in busy positions, which are not completely dependent upon the whims and loyalties of local custom.
The importance that the presence of a food supermarket has on shopping positions is still underestimated. The closure by the Co-Op of many neighbourhood supermarkets has had a devastating effect on many local centres. Like cigarette brands, people are loyal to their favourite supermarket group and even if the old 'Tesco' is replaced by an individual grocer, offering the cliches of personal service and flexible opening hours, the damage is done. Local grocers won't survive for ever on people buying a pound of butter at 10 pm. The key to establishing some hold on the market is to contain costs, as there is always scope to participate in automatic local potential, especially as not everyone wants to shop at a superstore. In fact, the major groups are generally pleased that corner and local shops continue because they operate in different markets and, of course, it would be political suicide to admit to their extinction. However, the products are still the same and most shoppers are price conscious.
The top supermarket operators invest in research. They plan well-ahead and commitment to a development programme involving millions of pounds allows for the short term hurdles in favour of long term success. In the same way that the institutional and major landlords are actively selling secondary shops, so the major and multiple groups are actively vacating obsolete trading positions.
Apart from the food groups, the other' enemies within' (so far as the secondary market is concerned) are the DIY, furniture and electrical groups, such as MFI, Harris Queensway, Payless, Texas Homecare, Do-It-All, Comet, B & Q, Homebase, etc, etc. Clamour for revision of the Sunday trading laws adds fuel to a fire which has already devastated the small retailer and is now creeping into the entire secondary centre. This year's CBI-FT figures for Christmas trading predictions mention the local shop's expectations, for the first time. Any trip around secondary shopping centres this year would have indicated the noticeable absence of extra pedestrian flow. In my opinion, 1984's Christmas trading period will mark the beginning of the secondary trader's dread of this traditional time. In the past, all shopkeepers used to look forward to the seasonal upturn, but the rot started last year when shoppers spent a fortune in the High Streets and superstores and this year will prove no exception.
Supporters of the relaxation in Sunday trading laws claim more consumer choice and new jobs. But it is blatantly obvious that the small retailer will be squeezed out by the major operators. Important shopping areas, like Oxford Street, will benefit but the axe will fall on the rest. The new growth area for unemployed will be the self-employed retailer whose business is totally dependent upon pedestrian flow generated by the goodwill of others. Few local retailers actively market their stock; they are inter-dependent upon the collective benefit generated by being in a successful shopping cen tre and without the presence of national companies, generating national advertising and goodwill, there will be little incentive for local people to shop, except for the occasional item.
The future for the secondary shop will rest upon the retailer's personal ability as a retailer, highlighting the fact that few shop-keepers are retailers. The double glazing showrooms are a good example of a modern approach to retailing. They are shops for the visible storage of goods sold by the operator, through advertising and direct marketing. Too many shopkeepers have become complacent; they are used to people walking in automatically instead of actively attracting their interest. If secondary centres do become the equivalent to an overcoat for shoppers - only needed when absolutely necessary - then the future expectations for investment growth must be limited.
In establishing the future importance of a secondary centre, close attention should be paid to the size of the premises occupied by the supermarket operator to ensure it meets modern requirements and also upon the identity of the operator, as this defines the nature of the catchment area. It is important to monitor the locations in which the major operators take sites for their new stores. Most pop up in local and secondary areas because that is where land is most available. The benefit to the surrounding centres, however, will be dependent upon each individual retailer's ability to capitalise on the presence of the extra pedestrian flow by gearing his corporate image to the needs of the people.
Landlords have a role to play in maintaining the balance of trade in a secondary centre. On receipt of applications to change the user, the landlord should refuse consent if the proposed user appears to be in direct competition with established traders.
It comes as a shock to many individual shopkeepers to be told that the rent for the premises is not calculated by reference to their ability to pay it. The level of rents in many secondary centres has already reached a peak at which, combined with the effect of rates, ever increasing overheads and declining revenue, they are now seriously affecting the stability of the centre.
Careful choice for investment is fast becoming essential. There will always be opportunities for growth, but a blanket assumption that all secondary areas will continue to prosper is a fallacy. I predict that investors who expect the percentage increases in rents applicable in the five year period from 1979 to 1984 to be repeated for the latter part of this decade are likely to be very disappointed despite the
The radical change in socio-economic patterns, and the real decline in the cost of transport, means that today, people go to the shops and the goodwill generated by the major operators in all sectors of the retailing market is sufficiently established to influence the prosperity of shopping centres.
When the idea of Brent Cross Shopping Centre was conceived in 1959, it would probably not have been anything like as successful a concept that it is today. In the early 1960' s, shopping development was confined to traditional shopping centres, and precincts, such as the Arndale Centres, were built on land fronting the High Streets. The first suggestion that people might be persuaded to shop away from the traditional pitches was introduced when the·second-generation food supermarkets, such as Tesco and Sainsburys started to move to fringe positions so as to provide on-site parking and loading facilities for their customers.
The need for food is the common link between all people. As it is a perishable product, with people having limited facilities for bulk storage, shopping for food is the main reason why most shopping centres attract daily pedestrian flow. If you take away the food shops, technically known as convenience traders, you also remove the spin-off for durable and service traders.
It is clear that the future of food retailing lies in the free-standing purpose-built supermarket located in an accessible position and offering excellent parking and loading facilities. The strength of buying power for and competition between the major operators means that retail prices are particularly keen. The independent grocer has seen his market share decline gradually since the 1950s and butchers, greengrocers, off-licences, fishmongers have all been hit hard. The ubiquitous confectioner, tobacconist, newsagent only survives because the major wholesalers of newspapers operate retail CTN outlets themselves. The private retailer with expansion ambition knows that the future for retailing must be to take units in busy positions, which are not completely dependent upon the whims and loyalties of local custom.
The importance that the presence of a food supermarket has on shopping positions is still underestimated. The closure by the Co-Op of many neighbourhood supermarkets has had a devastating effect on many local centres. Like cigarette brands, people are loyal to their favourite supermarket group and even if the old 'Tesco' is replaced by an individual grocer, offering the cliches of personal service and flexible opening hours, the damage is done. Local grocers won't survive for ever on people buying a pound of butter at 10 pm. The key to establishing some hold on the market is to contain costs, as there is always scope to participate in automatic local potential, especially as not everyone wants to shop at a superstore. In fact, the major groups are generally pleased that corner and local shops continue because they operate in different markets and, of course, it would be political suicide to admit to their extinction. However, the products are still the same and most shoppers are price conscious.
The top supermarket operators invest in research. They plan well-ahead and commitment to a development programme involving millions of pounds allows for the short term hurdles in favour of long term success. In the same way that the institutional and major landlords are actively selling secondary shops, so the major and multiple groups are actively vacating obsolete trading positions.
Apart from the food groups, the other' enemies within' (so far as the secondary market is concerned) are the DIY, furniture and electrical groups, such as MFI, Harris Queensway, Payless, Texas Homecare, Do-It-All, Comet, B & Q, Homebase, etc, etc. Clamour for revision of the Sunday trading laws adds fuel to a fire which has already devastated the small retailer and is now creeping into the entire secondary centre. This year's CBI-FT figures for Christmas trading predictions mention the local shop's expectations, for the first time. Any trip around secondary shopping centres this year would have indicated the noticeable absence of extra pedestrian flow. In my opinion, 1984's Christmas trading period will mark the beginning of the secondary trader's dread of this traditional time. In the past, all shopkeepers used to look forward to the seasonal upturn, but the rot started last year when shoppers spent a fortune in the High Streets and superstores and this year will prove no exception.
Supporters of the relaxation in Sunday trading laws claim more consumer choice and new jobs. But it is blatantly obvious that the small retailer will be squeezed out by the major operators. Important shopping areas, like Oxford Street, will benefit but the axe will fall on the rest. The new growth area for unemployed will be the self-employed retailer whose business is totally dependent upon pedestrian flow generated by the goodwill of others. Few local retailers actively market their stock; they are inter-dependent upon the collective benefit generated by being in a successful shopping cen tre and without the presence of national companies, generating national advertising and goodwill, there will be little incentive for local people to shop, except for the occasional item.
The future for the secondary shop will rest upon the retailer's personal ability as a retailer, highlighting the fact that few shop-keepers are retailers. The double glazing showrooms are a good example of a modern approach to retailing. They are shops for the visible storage of goods sold by the operator, through advertising and direct marketing. Too many shopkeepers have become complacent; they are used to people walking in automatically instead of actively attracting their interest. If secondary centres do become the equivalent to an overcoat for shoppers - only needed when absolutely necessary - then the future expectations for investment growth must be limited.
In establishing the future importance of a secondary centre, close attention should be paid to the size of the premises occupied by the supermarket operator to ensure it meets modern requirements and also upon the identity of the operator, as this defines the nature of the catchment area. It is important to monitor the locations in which the major operators take sites for their new stores. Most pop up in local and secondary areas because that is where land is most available. The benefit to the surrounding centres, however, will be dependent upon each individual retailer's ability to capitalise on the presence of the extra pedestrian flow by gearing his corporate image to the needs of the people.
Landlords have a role to play in maintaining the balance of trade in a secondary centre. On receipt of applications to change the user, the landlord should refuse consent if the proposed user appears to be in direct competition with established traders.
It comes as a shock to many individual shopkeepers to be told that the rent for the premises is not calculated by reference to their ability to pay it. The level of rents in many secondary centres has already reached a peak at which, combined with the effect of rates, ever increasing overheads and declining revenue, they are now seriously affecting the stability of the centre.
Careful choice for investment is fast becoming essential. There will always be opportunities for growth, but a blanket assumption that all secondary areas will continue to prosper is a fallacy. I predict that investors who expect the percentage increases in rents applicable in the five year period from 1979 to 1984 to be repeated for the latter part of this decade are likely to be very disappointed despite the
Research or Gut Feeling
01/09/1984
In an increasingly complex economy, research is rapidly intruding upon the traditional province of the valuer: gut feeling. The mixing bowl, into which statistics, 'informed' opInIons, records of past transactions and trends are all technically blended, creates a science out of prediction. An objective appraisal from a source with influential but vested interests is a real test for objectivity.
Of Chartered Pension Fund cynicism, as long as they able to back Surveyors, Hugh Jenkins of the National Coal Board said " (they) will be continue to be regarded with far as their professional capabilities are concerned, as cling to gut feeling about growth prospects without being them up with fundamental research."
It is an integral feature of professionalism that the combination of knowledge and experience inevitably prejudices optimism, except in cases of absolute certainty. Research minimises risk so that while short term deals may be lost, the long term brings substantial reward. As the private investor generally operates in the short term, the limitations imposed by research contradict investment philosophy.
Will research avoid future problems? If you have to spend money, you are going to become increasingly frustrated if your adviser's research tells you not to buy, when all about you, other funds are clearly active. This does not make the advice wrong, as waiting is a very patient game. Gut-feeling is an essential ingredient in the evaluation of research. When I suggested, in the first issue of QC, that the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. It's what makes sense at the time and you can only draw conclusions from information if you are able to adopt a broad view. It is not the result of research which provides a span of information, but the questions that gut-feelings invite you to ask.
The danger with published research, particularly when originating from a source actively participating in the market, is that the media picks upon the conclusions, which make news, without giving sufficient attention to the data. The effect is to institutionalise generalisations. Loose mention that secondary shop rents have grown at 9% per annum over the past 5 years, combined with the prediction that rents will rise 7% per annum above inflation up to May 1985 and 3% per annum in real terms thereafter is inviting inexperienced investors to assume that it is applicable to all secondary areas. The effect of predictions of this nature will be to force secondary yields even further lower and many retailers, in secondary positions, will be unable to reconcile actual profitability with expectations of their landlords. If major firms intend to use research for public relations, they must also recognise the harm they can do to the relationship between landlord and tenant.
Of Chartered Pension Fund cynicism, as long as they able to back Surveyors, Hugh Jenkins of the National Coal Board said " (they) will be continue to be regarded with far as their professional capabilities are concerned, as cling to gut feeling about growth prospects without being them up with fundamental research."
It is an integral feature of professionalism that the combination of knowledge and experience inevitably prejudices optimism, except in cases of absolute certainty. Research minimises risk so that while short term deals may be lost, the long term brings substantial reward. As the private investor generally operates in the short term, the limitations imposed by research contradict investment philosophy.
Will research avoid future problems? If you have to spend money, you are going to become increasingly frustrated if your adviser's research tells you not to buy, when all about you, other funds are clearly active. This does not make the advice wrong, as waiting is a very patient game. Gut-feeling is an essential ingredient in the evaluation of research. When I suggested, in the first issue of QC, that the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. It's what makes sense at the time and you can only draw conclusions from information if you are able to adopt a broad view. It is not the result of research which provides a span of information, but the questions that gut-feelings invite you to ask.
The danger with published research, particularly when originating from a source actively participating in the market, is that the media picks upon the conclusions, which make news, without giving sufficient attention to the data. The effect is to institutionalise generalisations. Loose mention that secondary shop rents have grown at 9% per annum over the past 5 years, combined with the prediction that rents will rise 7% per annum above inflation up to May 1985 and 3% per annum in real terms thereafter is inviting inexperienced investors to assume that it is applicable to all secondary areas. The effect of predictions of this nature will be to force secondary yields even further lower and many retailers, in secondary positions, will be unable to reconcile actual profitability with expectations of their landlords. If major firms intend to use research for public relations, they must also recognise the harm they can do to the relationship between landlord and tenant.
Welcome
01/09/1984
Many people know that I am a regular contributor to the correspondence columns, so circulating a commentary of this nature to Clients must look like an ego trip to a captive audience - it has crossed my mind that you may not read it!
The objective is to keep in touch with Clients (past and present) and their legal advisers on a regular basis and to offer a commentary designed to stimulate and keep you informed of the latest developments.
As a potential forum in which to air one's views, a quarterly commentary inevitably suffers from the disadvantage that ideas can be quickly out of date so I shall not be imitating the style of others. Large agencies issue periodic reports on market trends, but most seem to concentrate upon the top end of the market and the recent discovery by Hillier Parker May & Rowden that secondary shop rents have increased at a rate of 9.2% per annum since 1979 simply enhances many people's awareness that the larger agencies, and the property media, are addicted to prime.
It is common knowledge that only relatively few advisers really understand secondary property, despite the fact that it constitutes at least 90% of the market. A noticeable absence of commercial sense amongst many assistant surveyors, working for the larger partnerships, is startling and one wonders whether the modern concept of professionalism removes initiative. Few surveyors, whom I meet in the course of negotiations, display much individuality; most appearing to act as up-market messenger boxes, shielded from their own feelings and decisions by the supervising partner. This cannot possibly benefit the Client who, in instructing a name is entitled to expect the service and attention which the reputation behind that name commands. Since I introduced the concept of specialisation into rent review valuations, there have been many imitators who unfortunately maintain the money for old rope image. Direct personal attention at partnership level on all aspects is the least that every Client deserves - he rarely gets it and strangely enough, seems prepared to accept it!
The objective is to keep in touch with Clients (past and present) and their legal advisers on a regular basis and to offer a commentary designed to stimulate and keep you informed of the latest developments.
As a potential forum in which to air one's views, a quarterly commentary inevitably suffers from the disadvantage that ideas can be quickly out of date so I shall not be imitating the style of others. Large agencies issue periodic reports on market trends, but most seem to concentrate upon the top end of the market and the recent discovery by Hillier Parker May & Rowden that secondary shop rents have increased at a rate of 9.2% per annum since 1979 simply enhances many people's awareness that the larger agencies, and the property media, are addicted to prime.
It is common knowledge that only relatively few advisers really understand secondary property, despite the fact that it constitutes at least 90% of the market. A noticeable absence of commercial sense amongst many assistant surveyors, working for the larger partnerships, is startling and one wonders whether the modern concept of professionalism removes initiative. Few surveyors, whom I meet in the course of negotiations, display much individuality; most appearing to act as up-market messenger boxes, shielded from their own feelings and decisions by the supervising partner. This cannot possibly benefit the Client who, in instructing a name is entitled to expect the service and attention which the reputation behind that name commands. Since I introduced the concept of specialisation into rent review valuations, there have been many imitators who unfortunately maintain the money for old rope image. Direct personal attention at partnership level on all aspects is the least that every Client deserves - he rarely gets it and strangely enough, seems prepared to accept it!