Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell.
Most or all of which may be easier said than done, because investors generally are far more influenced towards poor judgement than they might realise. In this scientific world we have created for ourselves, opinions that are not evidence-based don’t seem to count for much. Yet successful investment is not only about considering the evidence, but also the art of knowing.
Knowing is awareness, about being informed. Knowing is different from knowledge. Facts, information and skills can all be learned and from experience relied upon. But experience may be out-of-date, limited, or not suited to different ways of thinking. Knowledge provides a basis for logic. People are comfortable with logic: it is reasoned so it follows. But, logical thinking is based on past experience, whereas the future is uncertain. Life changes, attitudes shift, people change. That’s why past performance is no guide to the future. No one knows for sure, but that doesn’t mean we can’t predict with a fair degree of accuracy, especially when you know what you’re about. Which brings me to asking you to ask yourself: what are you about? What is it about you that would enable you to appraise an investment with sufficient confidence to be certain of your conclusion. How come you can pick winners?
Successful investment in commercial property includes the ability to be discerning, the more adept you become the more you can gauge at a glance whether the proposition is likely to perform. Performance despite any resistance by the tenant. Why would the tenant resist?
The answer is that you understand the market in which you’re investing. You understand what makes it tick and where it’s heading.
It’s when you don’t understand the fundamental principles that you are likely to come unstuck somewhere along the way. With commercial property, coming unstuck is what plenty of investors do do through fault of their own.
It doesn’t have to be like that.
If through my explaining the principles, you say to yourself, ‘yes, I know all that’ then fair enough. At least we’ve started with the basics rather than charged straight into the deep-end. Jumping to conclusions is what investors in commercial property generally do, only to discover that finding out the hard way can prove an expensive mistake.
Once upon a time, commercial property could be relied upon to adjust to its owner’s mistakes. Never mind if you got it wrong, somehow the market would find a way to bail you out. It’s different now. Where have you heard that before? But it is. The commercial property market is polarising, it has been for years. Every so often another gap appears in the level of understanding whereupon another load of investors falls by the wayside. The credit-crunch, the recession, merely brought it to the surface. Take away the money-supply and the commercial property market is exposed for what it is. Overnight, yields soared, prices fell, loan covenants breached, the banks repossessed. An aberration in an otherwise long-term hedge that is generally interpreted a consequence of the state of the economy, but it wasn’t; at least not in my opinion, it wasn’t. I should know, I act for and against more than enough different landlords to know whose investments have powered ahead despite the downturn, and whose haven’t.
The experts tell us the property market is cyclical, but is it? Perhaps it’s steady all the way. Naturally, life has ups-and-downs, but attitudes are flexible, we can remain in sync. We’re not supposed to come unstuck in times of change. Thinking problems are normal is where people go wrong.
In my philosophy, a problem is symptomatic of a fault in direction: either you are thinking the wrong way for you, or the wrong way for the property, or a combination of both. The wrong way for you could be that you’re not cut out for commercial property, you don’t have what it takes to manage the investment as it should be done. The wrong way for the property is that it is no longer fit for purpose, it has outlived its usefulness.
A cyclical market can become a roller-coaster, bliss “if you like that sort of thing” (to quote the comic actor Tim Brooke-Taylor), but perhaps the norm is when yield is high, commensurate with the risk? After all, when you assess a commercial property investment based upon property fundamentals, as distinct from comparing returns with what you get from cash on deposit, it is unlikely there’ll be that many places where growth would be expected.
Performance is the measure of growth. Whether after allowing for all the costs, and adjusting for inflation, and net of tax you are actually that much better off – and not just in the long-run, but from day one.
The ‘day one’ test is that if you were to sell the property on the day immediately following exchange of contracts or completion then you’d get your money back and more. Even if ‘day one’ is too much like wishful thinking for your taste, whatever longer period of time you’d prefer, the test is whether at any point in time your investment would pass the test of getting your money back and more, regardless of the state of the market.
The property market is composed of owner-occupiers, developers, landlords (also known as investors) and tenants (also known as occupiers).
There are two ways to participate in the commercial property investment market: each has its advantages and disadvantages.
You can invest in commercial property indirectly, buying shares in a quoted property company on the stock-market, or a property investment trust, or real estate investment trust (REIT), or property unit trust (PUT), or property fund or a property bond. With indirect investment, you are entrusting the success of your investment to the skills and judgement of the directors and managers of the company, and your interpretation of the company’s accounts. A key indicator is the net asset value, so why pay more for a share than the NAV. Share prices at a premium to NAV are an expectancy that the NAV will continue to rise, but it may not. The stock may be in short-supply so you may be competing with demand or market-makers flexing their muscles. In any event, NAV is not enough by itself: it’s also a question of who provided the valuation: surveyors vary in their opinions and estimates from the cautious to the optimistic. It’s also a question of the quality of the company’s existing properties and whether if in the market to sell they’d then fetch at least the same as the value in the company’s books. Where’s the money coming from to pay dividends and how come the directors and staff get pay rises and issue themselves with stock options, but the shareholders can’t count on getting higher dividends. Then there’s the ultimate challenge for anyone investing in equities: timing the volatility of the stock market.
You can invest directly in commercial property, either buying an empty property and letting it from scratch and/or developing the property into something more valuable or buying an existing investment; in doing so you are exposed to an unregulated market. To give the impression that the risk of loss would be minimised, the market is dominated by professional advisers: surveyors, lawyers, and accountants, many of whom also advise the banks and other lenders on the value of property.
(Another way, which is nearly the same as buying directly, is to be a tenant, buy the freehold (assuming the owner would sell) and then when you sell your business as a going-concern, keep the property and grant a new lease to the buyer of your business. )
The volume of information on-line and in the media has exacerbated the mass-market influences for how to appraise commercial property for investment but rarely are the reasons for under-and non-performance of commercial property investments highlighted. The reason I suspect is that the emphasis is on getting you to invest and thereafter using the advisers’ services to maximise performance.
Advisers have a duty of care but the duty doesn’t always extend beyond the adviser’s client. For the most part, it’s caveat emptor (“let the buyer beware”). Therefore, if you choose to be on your own, left to your own devices, and take the view that the people who run the market presumably know what they’re doing, then don’t complain when the experts tell you that the state of the market is the reason your investment isn’t performing as well as you expected when you bought it.
For successful investment in commercial property, there are three levels of understanding, all inter-dependent, and none of which should be considered in isolation:
- Property fundamentals
- Technical analysis
Market activity and momentum conveys feelings of comfort and reassurance but, when you go along with what you think others know, all you’re doing is following: buying into investor confidence, what is known as market sentiment. Fair enough if you’re going to cash in and sell as prices rise further, but not if you’re planning to hold long-term for a pension plan. Property dealers trade but, generally, investors buy to hold for at the least the duration of the mortgage.
Wealth warning: sentiment is mostly hot air which makes the market hot and inflates bubbles.
A bubble is a situation where market prices are unsustainable. The life-cycle of a bubble starts with the stealth phase, the smart money. As the market takes off, and institutional investors become interested, the first sell off occurs. With the media attention, that grabs the enthusiasm of public, the mania phase fuels greed and delusion. At the peak is the new paradigm, the shift in thinking. Demand wobbles. A sell off occurs. Rebound. Fear and collapse set in. Despair arrives. As the dust settles, demand slowly picks up and return to the mean average.
At present, the market is booming, apparently it’s a no-brainer not to get involved. Low interest rates, awash with cash from overseas investors, émigrés fleeing equities and bonds, and anticipation of a wall of money from cashed-in pension pots. A leading auctioneer tells me demand for commercial property investment is outstripping supply, especially in London and the South-East. The state of the market is bound to be different this time. It always is, that’s the nature of sentiment, very persuasive.
Having set your sights on what you want to buy, a great deal of time, effort and cost can be expended on the preliminaries, so wondering about changing your mind at the last minute can be put down to pre-marital nerves. If you buy by private treaty then you can’t back out because word would soon get around the investment community that you’re unreliable, your word is not your bond, so you’ll have to exchange regardless, or come up with a plausible excuse.
It’s at times like these when stopping to think is crucial. Never mind the cost of borrowing and the yield that can be bought, the question is where is the demand going to come from to provide capital and rental growth. Why should the tenant want to pay more, when most tenants are struggling as it is or bargain-hunting? And if you think tenants have no choice because the rent review is upward-only then you really don’t understand.
There’s another thing: a difference exists between price and market value. Price is subjective, whatever the seller wants and how much the buyer is willing to pay. Market value is objective, what someone else would pay. If you don’t understand the difference or don’t think there is a difference then that’s where you’ll be going wrong.
Caveat emptor. The first point to remember about price is that when you buy, the seller is wanting to sell you something which, until you’ve bought, you might not discover what it is. With private treaty, ‘subject to contract’. you can take as long as you like for due-diligence, subject to the seller’s patience, but the answers to pre-contract enquiries are only as good as the questions you’ve asked. When you buy at auction, you only have about 6-8 weeks to make enquiries and carry out research, so you’ll have to have your wits about you, which should include someone on your side to point out the pitfalls and ensure any assumptions you may be making are in fact correct.
Commercial property investment involves commercial contracts, which means the parties are deemed to know what they’re doing. It’s one thing to know what you are doing when you do what you know, quite another to know what to do when something goes wrong or more usefully to know how to avoid going wrong in the first place.
The role of professional advisers is to help landlords and tenants to be successful. Professional advisers are know-alls, or at least they should be. We know that landlords become successful when their investments perform. We also know that tenants become successful not just when their businesses are performing well but also when the total property cost commitment is kept to a minimum. In our professional capacity, we’re on the client’s side. But deep down it’s a matter of whose side your adviser is really on, and that would depend upon a host of factors. In private, in our personal political views and ideology, we might be outright capitalist, woolly-headed liberal, or hardened socialist. Caring about the wider-consequences? How far we allow our personal beliefs to influence our professional advice depends upon our attitude, our experience, whether we mix business with pleasure, and our principal source of earnings.
Principal-to-principal, in theory, the relationship between landlord and tenant should be a partnership. In practice, it is not. In practice, there is wariness on both sides and in many cases a deep resentment that, through operation of law, rental valuation, and cunning, often involving skillful advisers, the landlord or the tenant is better off at the expense of the other.
The reason for the difference in achievement is that the commercial property market is not a perfect market which, from an investment perspective, is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market. In an imperfect market, there is no level playing field. Different people, different levels of experience, different approaches to asset management, some passive, others pro-active. As a tenant-client told me “for lessons in how to be stitched up, the shop property market has no equal”. Not just how to capitalise on opportunities but how to create opportunities. It all adds up to know-how.
As a specialist in rent review and business tenancy advice for landlords and retailers, I work at the sharp end of commercial property market, to be precise, shop property. I’m not an agent in the general-public perception of estate agency. My work is almost entirely behind-the scenes. Sometimes investors consult me on whether a proposition would be a good buy, but mostly I get involved after the property has been bought and at the stage when the landlord wants to take a back-seat in dealings with the tenant, for example on requests for assignment of the lease and such like, or at rent review and tenancy expiry/renewal when the relationship between landlord and tenant is more likely to be fraught.
Whether you are a landlord or a tenant, an advantage of your instructing a surveyor is to have a ‘shield’ between you and the other party. When you deal with the matter yourself, personality issues can get in the way and you could end being accommodating and agreeing to things that you wouldn’t otherwise or a surveyor would question. I tailor my approach to suit the client’s objective, the circumstances, the nature of the parties, so on.
The work is demanding and over the years has become more tiring. That is not a feature of advancing years, young surveyors tell me how exhausting the work can be. It would be so much easier if the other side would give in to reason without a fight, without resorting to ploys that can inject fear into cautious landlords and tenants. Socially, I’ll tell people what I do if they ask and if they probe then I say I argue for a living. It’s not ‘New Age’ negotiation “you win, I win, everyone’s happy”, but ruthless ‘I win, you lose’. I use my skills to increase rent for landlords, unless acting for the tenants in which case I’ll do the reverse. It may not be politically-correct to ignore the wider consequences and disregard the layer of socialism that pervades most walks of life, as summed up in the phrase “we’re all in this together” but when I’m being paid for my services, I’m a technician, not a philosopher. I can discuss whether something is a good idea, I can advise on the consequences, I can recommend, but ultimately it’s up to the client to decide.
Frankly, I think many landlords get a raw deal from tenants, especially from some multiple retailers whose surveyors seem to delight in putting the wind-up landlords. Something tenants are good at is selling: selling the idea they can’t afford any more, selling the idea they’d trigger the break clause if the landlord won’t agree. Whatever the ploy, it’s all grist to the mill of reducing property costs and keeping up appearances.
Is it possible for a surveyor to sit on the metaphorical fence, one moment acting for a landlord, the next for a tenant? In my philosophy, there is no need for emotional involvement or attachment. As a vegetarian, I wouldn’t be able to do my job properly if I were squeamish about going into a butcher’s shop. The more cosmopolitan the commercial property market becomes, the greater the diversity in attitude, the more flexible in views, opinions and application of skill one must be to stay on the ball. For me, landlords and tenants fall into two categories: those whose business methods and attitude generally I admire and respect, and everyone else. Over the years, I’ve honed my early warning system. Generally, people self-select. Even so, it’s not that easy to sift the wheat from the chaff: often the truth doesn’t emerge until after the work is underway. Ultimately, it’s about discernment: about helping the sort of people I like, people on the same wavelength.
Shortly after I established my practice, a public property company instructed me to manage a parade of shops and offices. Although I do manage property for a few clients, full management is not a service I offer as a matter of course – mostly I provide assisted-management, for example, the landlord deals with the rent collection, I do everything else. Curious why a plc should want me of all people to undertake full management, I was told that was the only way the company could instruct me to do any work for them and which it wanted to do because it was scared I should act against them!
I am unsure what I did to deserve being described as the ‘most obstinate surveyor in Harrow’ by a surveyor whom I crossed swords with on occasions, but as my reputation began to precede me, it got to the point that an auctioneer said that if it were known I were acting for the tenant then prospective investors could forget any idea of getting a rent increase. Over 20 years ago, having relocated my office to Herefordshire, where away from the noise and stress of London, it’s possible to think clearly, I had a go at mixing business with pleasure (until the novelty wore off and I reverted to my own method of marketing my services). The experience paid off: a tenant instructed me to deal with a rent review. The landlord had had a go himself but the tenant didn’t want to pay so much, so the landlord instructed a local surveyor who turned up the heat. I inspected the premises, read the lease, and told the surveyor no increase. The surveyor’s response that I might be right but if I wanted to get on in this part of the world then I should learn to play the game. I said I was happy to learn provided it wouldn’t cost my client any more. My client agreed with me, the landlord conceded.
Often employed as a troubleshooter, I crop up all over England and Wales but the bulk of my work is in London and the South-East. Dealing with different landlords, different tenants, different types of property, different locations, I have extensive experience of diversity.
Whether landlord or tenant, principals in commercial property market comprise professionals and amateurs. Professionals wouldn’t dream of agreeing to anything without taking advice and tend to stick with their trusted advisers, through thick and thin. Amateurs seem more concerned about the cost of advice than the quality, so shop around. The commercial property market attracts parasites: people that have latched on to property’s popularity and produce glowing reports and blind you with statistics. They take your money for transactions and all the glossy-stuff but frankly they haven’t a clue about life at the sharp end of tenancy management. Blaming the state of the market is an excuse which sounds plausible because investors are conditioned to think like that. Hence, if you invest without taking advice from people who really know their stuff, but instead doing your own research, gathering informations from all manner of sources and from that conclude that it can’t possibly be as complicated as the experts make out then you’d be correct in theory were it not for the difference between what it says in the classroom textbook and what happens in practice.
to be continued…