The relationship between the UK property market and the London Stock Exchange is close, both markets heavily depending upon money-supply liquidity and credit provided by the banks and money-markets. Considering their respective importance as stores of assets and regarded as barometers of the economy, it is interesting that whereas the Stock Market is regulated, the property market is not.
In the Stock Market, dealings in stocks and shares take place within a framework that is monitored and supervised. Regulation subjects financial institutions to certain requirements, restrictions and guidelines, aimed at maintaining the integrity of the financial system. Objectives of financial regulation include maintaining confidence in the financial system, contributing to the protection and stability of the financial system, providing a degree of protection for the consumer, and reducing financial crime.
Both the Stock Market and property market are dynamic. Activity in stocks and shares is abbreviated using indices of representative companies, and measured by trading volume that can rise and fall during trading hours and after close. A propensity amongst investors for thinking up and more, not down and less, means that falls such as the more than £60Bn wiped off the FTSE 100 on 24 August 2015, known as ‘Black Monday’ (not to be confused with 8 August 2011), can alter the fortunes of investors, shockwaves rippling to other stock markets globally. That not everyone gains from rising prices tends to be overlooked during periods of volatility. Many investors and traders profit only when prices fall. Were it not for the different aspirations amongst buyers and sellers, market activity would grind to a halt.
Unlike the Stock Market, the property market as a whole is unregulated. Its sectors, such as residential, commercial, and agricultural, are subject to legislation and the residential market, approximately eight times larger than the commercial property market, is considered more deserving of consumer protection, but the commercial property market is largely unregulated.
Unregulated markets are not controlled or governed. With commercial property, between landlord and tenant, a business tenancy is a commercial contract, which means the parties are deemed to know what they are doing. No matter how unfair terms and conditions of a lease of commercial property might be, the law is loathe to interfere. The Landlord and Tenant Act 1954 Part Ii stops short of guaranteed security of tenure: once the statutory procedure for ending a tenancy is implemented, a tenant must apply to court to claim renewal rights and even an extension of the date were requested of the landlord, a landlord does not have to agree.
When a financial market like the Stock Market can be manipulated despite regulation and only found-out after the event, whereupon perpetrators are fined or imprisoned, the victims possibly compensated but generally losing out, makes one wonder what goes on in the commercial property market where buyers and sellers are left to their own devices.
Even though the commercial property market is unregulated, the system is transparent. Advisers aim to provide a semblance of respectability for the players in the market: investors, landlords, occupiers, tenants. Professional bodies have codes of conduct but, since the organisations exist to provide a source of revenue for their members, any teeth they might have is limited to gnashing at their own. There is nothing to prevent anyone from becoming involved and setting up in the market.
An unregulated market does not mean that the market is not regulated. Regulation takes place naturally because like-minded participants in the market tend to stick together. In practice, there are numerous communities comprising trusted folk who do business amongst themselves. It is not impossible for an outsider to do business with them, it all depends upon respect and integrity that the outsider commands, but it does mean that outsiders are less likely to be privy to whatever is going on within a ‘closed’ segment of the market.
In an unregulated market, outsiders are a source of rich pickings for the experienced. For example, auction: a method of selling that has overtaken private treaty for popularity. The process by which a winning bid is procured starts when the seller and trusted advisers evaluate the marketability of the proposition. Assuming no unlawful misrepresentation, what the successful bidder cannot do after exchange of contracts is override caveat emptor: let the buyer beware. Unlike the Stock Market where companies are not allowed to dupe investors without fear of reprisal, a seller of a property investment is not obliged to disclose the true reason for selling; a tenant of a commercial property not obliged to communicate its intention to the landlord. A property let to an investment covenant for which the buyer has paid handsomely could go down in value if the tenant were to assign, go bust, not renew, or a lower rent than previously. Lost money is a situation that many an inexperienced investor in property has found themselves in.
All assets rise and fall in value, but only the Stock Market provides a second-by-second indication. In the commercial property market, the value of commercial property investment is often inflated because the value of the actual and estimated rental income is added to the value of the property. The true value is unlikely to be realised at a valuation date, because valuation surveyors allow up to 6 months for completion of the sale, during which time anything could happen. Actual value might not matter when there’s no mortgage, but investment is about the future, becoming better off than you were. With banks breathing down necks, landlords are sandwiched between indebtedness and cost-consciousness. Demand can be fickle so, since control of the direction of the market is in the hands of buyers and tenants, any feeling that the market is changing direction should be acted upon at the time rather than waiting for evidence, by then it could be too late. In an unregulated market, there’s no telling how overpriced a commercial property really is.
The Rent Review Specialist