Tag Archives: Valuation

January 20, 2012

Valuation – an art or a science?

By Tim GARRATT

I think I know the answer to this. It is a (black) art. But it does have a bit of science (maths) behind it. It is not a precise science.

When I was doing some research last year with the University of Nottingham, I was surprised about how they scrutinise quite scientifically their work. They test, test and test again. They want to find precise answers. It is a very scientific approach.

Valuation is not.

My Institution have announced that in 2013 they will issue a re-written Red Book. The Red Book is our bible – which applies mandatorily to much of the valuation work I undertake. It is prescriptive to the extent that it covers the process of valuation and sets out some key principles. It is useful in setting a standard.

But the latest changes could be interesting. There is a suggestion that the Banks are unhappy that we didn’t spot the crash – or at least alert them to the fact that the market was over-heated. It looks like the ‘new’ Red Book will ask for more commentary and more scenario building. Future value prediction could be asked for. And this is what I am worried about.

I am not a mind reader. A valuation is a snap-shot. It is an opinion on a given date. There are lots of assumptions. Quite a lot of our reports are taken up with them. Some clients ask me why the reports are 20 pages long – they want the 2 pages with the description and ‘number’ on. The rest is academic! When I started out, we used to provide a 2 page ‘valuation certificate’. I’m not suggesting that we return to those days, but our reports are going to get longer. The only true value is when a property sells – willing buyer, willing seller et al. On other occasions we are giving an opinion.

My concern is that we are moving away from opinion. As I have said before, people pay me for my opinion – not my doubts. Somehow, I think such change might raise lots of doubts?

1 comment   |  tags: , , , | posted in Business, Nottingham

December 13, 2011

It’s budget time….

By Tim GARRATT

It’s that fun time of year when we set our budgets for next year. We now have our results for 11 months of 2011 and they were pretty good despite a poor market. It’s my Boards Away Day today…

Budgeting for next year is going to be a whole different ball game. Has anyone any idea what is going on in the World?

I blogged about retailing yesterday – and judging by Christmas shopping experience at the weekend – they are not going to have a great time. There are lots of vacant shops in Nottingham, estimated to be 15%, but I think it is more. We have 2.3m square feet of offices vacant in the east midlands main towns – Nottingham, Leicester and Derby. That figure is likely to worsen as Local Authorities downsize. Industrial properties are probably holding their own due to the relative equilibrium of supply and demand.

These sectors provide us with work. We buy, sell, lease, survey and value this stuff. Lack of transactions hits the business hard. Our professional services are critical in these times – Building Surveying and Management teams are always busy. Our Rating team is too – as they try to get down liabilities. We have seen an upturn in work looking at Service Charges – where people are scrutinising Landlords charges – I have just saved someone £10,000 through technical errors in demands.

The lack of confidence is going to be a big part of 2012. It’s not all about big new deals. We rely on ‘churn’. Even downsizing generates work! People sitting on their hands doesn’t. We have plenty of people doing just that.

So, I need to somehow, come up with some figures to tell my Partners where I think the billing will be at over the next year. I’m not enjoying thinking about it. The only thing that makes me feel better is that they too will be scratching their heads…

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September 8, 2011

SET conference 2011 – the big day

By Tim GARRATT

Day three of the conference in Istabul – and the big one for me.

Back in January I was discussing with my friends at Nottingham University the fact that we weren’t seeing premium prices for sustainable buildings – which was odd really. In fact, in the commercial market the opposite is true – the ‘market’ appears to be applying a discount to sustainable buildings! In the residential sector the issue is that there is a lack of clear data.

And so an idea was born – I was challenged to ‘prove’ my assumptions. This is not as easy as it sounds – the resultant paper was jointly written – and was quite difficult. The reasons is that whilst the University are well used to writing papers with hard facts and peer-tested data, the market doesn’t work like that. It’s an imperfect place most of the time.

But the paper was written and it should be on a sperate page now at the top of this site. It is quite long – so you might need to print it (not very sustainable). Since the paper generated a lot of discussion, we have decided to do some more work on the data. So this is very much work in progress.

And I guess that fundamentally we hope that the results turn around – soon….

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July 12, 2011

Greedy Landlords? The problem of rent!

By Tim GARRATT

Last week my good mate John Lyle published a blog about the influence of the internet on retail shopping. You can read it here – and particularly the updated section – which adds a well timed upper-cut to landlords. I did comment, but also thought the situation deserved a bit more analysis and comment.

The market at the moment is pretty tough; values are flat-lining. There is little rental growth, values are holding up -where deals are being done. Deals are difficult to do. There is little in the way of debt finance available and where it is offered it is often on quite stiff terms.

Landlords holding vacant property are not exactly celebrating – Rates at 100% payable after 3 months for shops and offices, 6 months for industrial. Then there is Insurance, which can attract a top-up premium for vacant property. In some cases you can’t get Insurance cover. Security costs are increased and vacant property tends to need a little tlc – repair, heat etc. to keep it from decaying.

I often hear a statement about ‘greedy landlords’ taking down retailers. Somehow the rent paid is the root of all evil.

But there is another side to this.

Rent paid is usually set between grown-ups. Often people running businesses. No shot-gun is usually involved – either party can walk away. But often they don’t and a deal is struck. One party offers a sum which the other accepts – it is a true bargain. Then the market changes and the injured party feels hard done to.

On the flip side, whilst the market is booming, I rarely find tenants running to landlords offering cash, presents or other goodies.

The other issue is the much mis-understood ‘upward only rent review’. This usually means that at review the rent won’t go down. In the days of very long leases (25 years sometimes) and long patters (5 yearly) it is possible that the rent payable is above the market level. But the average length of a lease is now around 6 years – and they often have breaks. So the amount of over-rented property is decreasing.

In my experience where tenants are genuinely struggling – and are prepared to ‘prove it’ with accounts landlords are taking a commercial view.

5 comments   |  tags: , , , , , | posted in Nottingham

June 27, 2011

A valuer goes to clinky!

By Tim GARRATT

The property industry was all of a chatter last week about a bad boy in our ranks. Ian McGarry was sent to Prison for seven years for his part in a £49m mortgage fraud last week. He is reckoned to have pocketed over £1m in bribes. His reasoning was the ‘poor bonus structure’ at his firm, Dunlop Heywood.

The fraud was relatively simple – his (also bent) client bought a property and then re-sold it to a related company for a higher price. In one instance it was suggested that the initial purchase price was £1m, which McGarry then valued at £19m. This is a little bit away from our margin of error.

The rICS have introduced some new regulation in the last few months – which is designed to improve public confidence in valuation. I have become a Registered Valuer – which I blogged about here. Whilst I don’t necessarily disagree with this sort of regulation – my concern is that if someone intends breaking the law, they will often find away.

You can’t legislate for every bad apple. And, if you are not careful, the burden of regulation just adds more bureaucracy to perfectly good law-abiding firms. The measures taken need to be proportionate.

I think this case is very much a one-off. The judge described McGarrys actions as ‘rampant greed’. Cash, property and an Aston Martin are usually outward signs that something isn’t right.

You can’t help but wonder if his bosses noticed all of these goodies??

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June 15, 2011

The property market – where next?

By Tim GARRATT

In the last couple of months I have been feeling a little bit better about the state of the market. Whilst I wouldn’t suggest that the market is booming (it isn’t) – but it seems to be a bit better than it has been. Enquiries are up; some stock has sold. There seems to be a little more interest in property.

My monthly round up of the market arrived last week from PropertyData. May was a good month with the average yield down at 5.67% – the lowest it has been for some time (low yields = higher prices!). But the longer term view shows a market that is resolutely flat – in fact the average property yield over the last three, six and twelve months is shown as 6.08, 6.08 and 6.09% respectively. It doesn’t get flatter than that.

The main issue remains Bank lending. Although there is some, it is the exception rather than the rule – and much of the lending is re-financing rather than new lending. There is certainly no speculative lending going on. If you have an idea, but no end user, you probably can’t make the finance model work…

We have struggled for nearly three years now. 2007 saw a very frothy market which needed correction. It did correct and I can’t help wondering if this flat-lining we are seeing is going to be with us for a while? We are still seeing some of the Comprehensive Spending Review cuts. Money is cheap but is far from plentiful. There is an air of caution locally. Perhaps we are going to have to grow used to a lower level of transactions – we are at about 50% of the levels seen in 2007.

Although this makes a valuers job easier, it does nothing for the vacant sites around the town…

Leave a comment   |  tags: , , , , | posted in Business, Nottingham

April 29, 2011

Introductory offers leading to rip off territory?

By Tim GARRATT

As a property consultancy business we consume lots of information – we rely on it. The internet has allowed information to be disseminated widely, but is not infallible.

Deal information is a necessity in much of the valuation work we do. Valuers are always looking back at what has happened – as the saying goes, “we don’t make the market”. We simply report on what the market is doing.

Last year we were approached by “Focus” who are a company who set out to collect and report on this sort of information. We were offered an introductory offer of £2,000 per annum to try the system. By all accounts it is good. We have used it as part of a number of information aggregators – but we still talk to other agents and professionals to make sure we have the ‘right’ information. This is especially important in expert witness reports.

So we were happy to renew the subscription. Until we hear heard the price – £24,000pa. I had assumed my Partner had mis-heard. A twelve fold increase?

Apparently this was not a typo, nor a mumble. It was a clear price.

This sort of thing irritates me. I am all for introductory offers – but they need to have some reference to the ‘full price’. This just smacks of ‘rip off’.

As I blog I understand that we may have agreed an increase – but not in the tens of thousands of pounds range. And the story is the same across a number of our competitor firms (we do actually talk to each other!)

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April 7, 2011

Valuation – beautiful simplicity?

By Tim GARRATT

You probably already know that I value buildings as part of my job. And I have an interest in green buildings – particularly the relationship of ‘greenness’ and value.

Valuation can sometimes be complex, but on occasion there is a simplicity which can be quite stark. I drew this picture above to a group of people at the conference I was at in Shanghai. Whilst I ‘think’ in pictures, many of them didn’t, but immediately spotted the issue.

There is a difference between the cost of a building and its value. We measure buildings differently for each. For cost we generally take the external dimensions. For value we take the internal measurements. If in my simple buildings above suggest £200 per unit to build and £325 per unit of value, the calculations will be 12x12x200 = £28,800 for cost to build and the resultant value is 10x10x325 = £32,500.

One of the big ‘easy’ solutions for buildings is to improve insulation. We are told that this single element could reduce our carbon footprint by the most significant amount.

So my ‘green’ building on the right has walls twice as thick – allowing for extra insulation.

The calculations – as you can see – build costs are the same but the value is 8x8x325=£20,800. Not only is this £11,700 less, but the builder loses £8,000!

I accept that I have simplified the calculations, but you can see that simply increasing the insulation depth has a significant effect on value.

We still have a lot to do in trying to increase the thermal efficiency of a building – whilst making sure that the usable space delivers value.

Simple really!

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February 28, 2011

I need your help!

By Tim GARRATT

I have blogged a few times about values with specific reference to green buildings. Professionally this is an important subject for me – as you might imagine!

Currently, the hard evidence on the relationship between values on ‘green’ and ‘not-green’ buildings is sketchy at best, but perplexing at worse. It seems that (generally) a premium is being paid for ‘green’ residential property, whereas a discount is being applied to commercial property. The real problem is that it is very difficult to pin this down – and valuers love that saying that ‘we practice an art not a science’. Sometimes it looks like a black art.

I need some help…

I am working a paper with Nottingham University which firstly, tries to identify if the supposition about premiums and discounts is true and identifiable (no mean task). But if this is the case – why?

So, if you can help please get in touch.

If you just have a view as to why a green commercial building would be less appealing than a non-green building I would be interested to know. Even if you are not a surveyor or valuer…

I look forward to the comments – if you don’t want your comments to be ‘public’ feel free to email me at tgarratt@innes-england.co.uk

8 comments   |  tags: , , | posted in Business, Green stuff

February 17, 2011

The market – flat-lining?

By Tim GARRATT

My monthly data book from Property Data arrived last week and it’s a great way of taking an overview of the whole market – in one place.

So where is the market? Well, according to the figures published, it is pretty flat. The data shows average yields – for one month, 3, 6 and 12. And the figures – 6.26%, 6.28%, 6.23% and 6.27% respectively. As near as it gets to being as flat as a pancake!

There was a bit of cheer that there had been a return to a large amount of money pumped into property in January – especially as compared to previous years. Around £3.1bn was transacted in January, compared to £1.5bn a year ago. At the peak of the market in 2007 we saw £3.6bn in deals done. But the figures are slightly misleading. The January figure was dominated by a single sale – The Trafford Centre in Manchester was sold for a cool £1.6bn.

What is being observed in the market is that buyers are looking for long lease lengths – thus securing their income stream. Short lets attract higher yields (high yields = lower prices). The difference can be quite stark.

Once upon a time you might have heard location, location, location as being the three key factors in determining value. For a while we shifted to covenant strength x 3 and now it looks like lease length x 3.

Of course the real elephant in the room remains bank borrowing – there are very few Banks lending on commercial property at the moment. Most are trying to reduce their exposure to the property market. Some, however, are keen to tell us that they are actively seeking to lend.

It really is a very mixed picture. I put two properties under offer last week. Both around £1m in value – one had been on the market for eight months, the other for 24 hours…

So, try to read something into that!

3 comments   |  tags: , , , , , | posted in Business, Nottingham

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