Reading the market – easy?

No certainly not. But, as the saying goes, we’re paid for our opinions not our doubts! So valuers do need to pin down that illusive magical number – the value.

Our Institution try to help by laying out what ‘Market Value’ is, essentially willing buyer, willing seller, arms-length transaction, after proper marketing and where the parties act knowledgable, prudently and without compulsion. In the APC interviews I do, we often get candidates to explain the constituent parts of the definition.

As you can see – this is a bit of a black art!

There was a time when it was all about location, location, location. But then we started to get a bit more sophisticated and grandly looked at covenant strength – or how likely was it that the tenant would go pop! Then buildings got a whole lot better – so we had to start thinking about differentials for the qualitative differences. Latterly we have been having a debate about whether green is best – and my joint paper is linked to on this site.

Life has got complicated.

But we are seeing another aspect which is impacting on value – and this is a relatively new phenomena. The relative bargaining powers of the parties is beginning to come to the fore. This is the ‘without compulsion’ bit of the argument. There is no doubt that some parties are acting with compulsion – maybe with their bank behind them. Some people are desperate. They are not necessarily willing sellers. So, whilst there have always been people who must sell or must buy this is now becoming a feature of the market.

And, of course, the difficulty is how do we weigh these things up. In some cases we are letting property where we are paying a tenant – usually as a Rate saving scheme. Does that mean the property has a negative value? Is it worth nothing?

As I said, it’s tricky placing a value on property at the moment!

The values slide – an August phenomena, or the norm?

My Property Data book arrived this week – showing the state of the market to the end of July 2012. It’s become a fairly predictable story – flat, flat, flat.

Transactions are down on the same period last year but better than 2008 and 2009. Overseas based purchasers now are the single largest investors. The office market remains the biggest traded sector – three times that of retail. And nearly 80% of those transactions are in central London. It’s a skewed market in favour of the capital!

But the real story is in the average yields returned from property. I have said before that the average yield is a bit difficult as it covers all sectors and is a little crude but as that’s what you are comparing it to, then it gives quite a good measure. For the last 12 months the yield has been resolutely flat at between 6.27-6.46%. But last month it drifted to 7.08%. Thats quite a shift – over 0.5%.

I know not everyone understands yields – it’s part of a valuers black art (!). But in real money if you had an income of £10,000 pa – your value at a gross yield of 6.27% would be £159,489. At 7.08% it would have dropped to £141,242. A drop of nearly 13%…

So these apparent small shifts in yields make huge differences to the capital values. Imagine now what would happen if it wasn’t a corner shop you owned (paying the £10,000 pa) but a shopping centre owner where the rent roll was £1,000,000 pa. Ouch!

The question we face most days is ‘when will it change’.The answer is we don’t know. The smart money is on a recovery in late 2013 / early 2014 – in the run up to the General Election. And then a return to austerity again. Realistically I think it will be 5-10 years before we see any real growth…

Talking the market up …

The Bankers may have dented the confidence further of thee sector which isn’t good long term. But is there better news looking at the sales results for the last month? In a word – no.

Yields are moving out, meaning that prices are getting worse. According to the Property Investor Bulletin which arrived this week from PropertyData, average yields last month were 6.45%, over three months they were 6.29% and over six months 6.19%.

And,as you can see from the graph, the value of transactions remains down on the equivalent period in both 2010 and 2011. Life is better than 2009! That was the bit of good news, but other than that it’s not pretty out there.

It is a little odd in some ways because there is still a wall of money (not Bank money) chasing property. If you think that the average yield is nearly 6.5% against what you can get for your cash on deposit, it could be a good time to buy. But the warnings – it’s an illiquid investment, the costs of getting in and out are high and, more importantly, the risks of tenant failure just keep rising.

The only people who are selling are those that have to.

People who borrowed back pre- 2007 are almost certainly in breach of their loan-to-value covenants, but in many cases are covering the interest payments. We are seeing more Banks working closer with the lenders to find a way out. Which suggests that the Banks think it will get worse before it gets better.

The end of the tuner just seems to get further away – and at the moment looms rather dim…

I was going to suggest ‘roll on summer’ but after the weather of the last few days, I’m not sure we can all run off into the sun?

Valuation – an art or a science?

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?

It’s budget time….

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…

SET conference 2011 – the big day

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….

Greedy Landlords? The problem of rent!

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.

A valuer goes to clinky!

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??

By Tim Garratt Posted in Nottingham Tagged Aston Martin, fraud, Ian McGarry, Law, Mortgage fraud, , Real estate appraisal, , valuer

The property market – where next?

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…

Introductory offers leading to rip off territory?

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!)