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: a diagrammatic representation of an area of land or sea, showing physical features, and the routes marked.
A map is not the same as a plan. A plan is a detailed diagram or proposal for doing or achieving something. To your heart’s content, you can dream and plan every last detail, but whether the plan will work out as you envisage depends upon experience. Experience leads to understanding. Understanding is how we progress.
Investment in commercial property is nothing new. Ever since the dissolution of the monasteries by King Henry V111 in the late 1530s, the start of the property market and when property became a store of value, landlords have had tenants. Originally rent was a product of the feudal system. The obligation of a tenant to perform a service in return for his land holding was quantified into money payment.
The existence of an established commercial property market means that commercial property can be mapped out. To use a map presupposes where you want exists already. What happens if you’re venturing into uncharted waters, not of the market but for you? What happens if you buy a commercial property to achieve a desired outcome, but that outcome does not materialise. What good is a map then?
A map cannot tell you what you can achieve. A map can only tell you what someone else achieved and that if you follow the map then chances are so would you. Chance is not the same as certain. What the map doesn’t tell you is what the experience of the route is going to be like. For that you would have to be mentally and psychologically prepared. Preparation for the future requires a great deal of thought and insight. What you’re after is equipping yourself with know-how on what to do, what to do if something goes wrong, and better still how to avoid going wrong in the first place.
Depending upon what and when you buy depends how long it could take to achieve the desired outcome. It may help to envisage that outcome, but you’d have to know what you want to begin with. Depending upon the nature of influences on your personality from your upbringing, knowing what you want might be phrased in the negative: not what you want, but what you don’t want. The snag with what you don’t want is that the mind only goes forwards: what you do not want will lead to it happening, the mind doesn’t hear the word ‘no’.
The word ‘no’ is not the opposite of the word ‘yes’. In the scheme of things, there is only yes. Going with the flow. No is about controlling the pace at which to go with the flow. Once you commit to a purchase and the investment is yours, you have moved on: there is no ‘stop button’ on the conveyor belt. You can sell up, you can lease and get out, but you cannot go back to how things were. That’s how like works. The past can catch up with you, but you can’t return to how it was.
With a strategy, the starting point is not to focus on the desired outcome, but upon how to get there. That is the difference between a plan and a strategy. To paraphrase Warren Buffett, watch the playing-field, not the score-board. A map cannot tell you how to plan: the only thing for that is a combination of what you are telling yourself and what others are telling you. Listening to yourself is as important as listening to others. If you don’t listen to yourself, then there’s the risk you could be carried away by what others are saying. What others are saying can range from the enthusiastically positive to cautiously negative. The last thing you want is to be dissuaded, but at the same time the last thing you want is to go wrong. How do you reconcile the differences?
Trust your intuition. Unlike whatever others are saying, whatever their motives or agenda, your intuition is your soulmate, your guiding light.
Having committed to the direction you want to take, a map is useful for direction that is routed already. But following a route parrot-fashion is no good: you would need to make adjustments and allowances along the way to take account of your different objective.
A strategy is not a plan. A strategy may feel like a plan, but really it’s step or series of steps for implementing the plan. The plan is the objective, but getting there may require flexibility along the way. Manipulation, even: about getting what you want in a roundabout way. For example, if the plan were to sell the investment property when the time is right, would it be better to leave a rent review outstanding or get it agreed? Depending upon the circumstances, there might not be much of a valuation difference between a reversionary and rack-rented investment. So, at the right time, which would be better: to market the proposition dangling the prospect of an angle for a buyer, or provide certainty for the none too distant future?
Anyone can plan, but a strategy is not for the faint-hearted. The step or steps to take might involving giving up on immediacy in exchange for the prospect of better return in future. Landlords generally like to have their cake and eat it which is why professional landlords, by which I mean investors whose day job is property, tend to be better advised than most. Not only trusting their own judgement, but also paying heed to what their advisers tell them. Amateur landlords, by which I mean those whose day job is not in property, are rarely as well advised. Amateur landlords might trust their own judgement, but are less likely to pay heed to advisers. Consequently, amateur investors are more likely to experience property as a steep learning curve. Without a feel for the market or a degree of involvement, to make decisions and pass judgement without facts at finger tips and listening to all the arguments is prejudice.
Many investors live in a world of their own, ivory towers, without regard for what’s actually happening on the ground and amongst the under-currents. The start of 2015 is approximately 7 years since the aftermath of the sub-prime crisis left the commercial property market reeling from shock. Almost 5 years of 0.5% Base Rate has enabled the investment market to climb back up and in some cases beyond the last peak of prices. Property pricing is on everyone’s lips. In some locations, rental values have risen substantially. A plan considered in 2008/2009 quite possibly might’ve been overly cautious, to have avoided the market entirely, but a strategy implemented in 2008/2009 to capitalise on the prospects at that time would have reaped rich rewards. I am not talking with the benefit of hindsight, but with deep thinking. The end of the world had not arrived, just because the bottom fell out of the market. Then, had you bought common stock (shares) in the global surveyors CBRE Inc at the equivalent of £2.50, by now the share price is about £22.15, a meteoric rise which I venture to suggest is considerably more impressive than direct investment in property during the same period. But by waiting until market conditions and momentum improved noticeably, the mass of investors missed out on spectacular growth and, instead of buying low, bought high and is now stuck with a plan that presupposes the current level of pricing is sustainable.
The main difference between successful investors and the rest is that the successful would never dream of making a decision involving the property without first consulting their advisers, whereas the rest are generally more interested in avoiding extra expense. We professional advisers do not exist to cash in on the prosperity of others; on the contrary, we provide a valuable service for ensuring the client’s plan reaches fruition. Even if we might add nothing new to the client’s thinking, our sounding board is worth-while. A well-advised landlord has no fear of the impact of extra costs on the investment yield, because the value of the advice should easily outweigh any extra fees and charges. Where amateur investors go wrong is not in wanting to save money by doing things themselves, but in not appreciating the value and benefits that professional advice contributes to the investment plan.
For example, the amateur investor who, for a quiet life and accommodating, prefers to wait for the tenant to make the first move is less likely to achieve the desired objective, without a great deal of thought. Speculation over the tenant’s true intentions and hidden agenda will be necessary. Why would the tenant not be honest and up-front? Why indeed!
The answer is to know what’s happening behind-the-scenes. There is a limit to yield compression. The prospects are for Base Rate increases. The fuel for capital growth which is rising rents is faltering in many areas, other than hot-spots. Like the submerged pothole that my car hit at about 22:00 hours yesterday evening damaging the tyre and obliging change of wheel in gale-force wind and heavy rain, the impact of the unexpected can cause even the best laid plans to fail. For investors, the enemy within is tenant-resistance to rent increase. The tenant’s market is not a level playing-field: competition for customers is intense. The market is polarising, consumer spending is not rippling out to enable all businesses to prosper.
You can plan all you like, but without a strategy based upon sound advice and professional know-how the chances of a successful outcome are limited. Investments become dry, with little or no hope of rental increase during the term, and a strong likelihood of lower rent on lease renewal. A long-term plan that results in that reality materialising was short on strategy.