Despite the future being naturally uncertain, we live in an age, fearful of change, when wanting or needing to know in advance what will happen has become a social norm. To know what will happen is beyond the bounds of logic, no amount of reasoning can outweigh what makes sense. Whether what makes sense does so in all honesty depends upon emotional detachment from vested interest in a preconceived outcome. Confidence based upon a reinforced view is often a recipe for getting it wrong, any feelings expressed that differ from the logical are likely to be disregarded or discounted.
In the run-up to 23 June 2016 and the UK referendum, Brexit, the opinion polls predicted ‘Remain’; the bookmakers favouring ‘Remain’ since February when the June referendum date was set shortened the odds; professional investors bid up the £GBP and share prices; the ‘City’ breathed a sigh of relief at what was expected to be a foregone conclusion. ‘Leave’ was a shock only to those that voted ‘Remain’.
For whatever reason polls misread the signs, to think that bookmakers did too would be wrong. The amount bet on ‘Remain’ was a reflection of those into the status quo. Bookmakers are not in the business of determining outcomes, but to make money out of bets: that’s not going to happen when paying out winnings would be disproportionate. The shortening of the odds should not have been interpreted as if the bookmakers were more able to predict the outcome of the referendum, but an indication of their concern at the size of payout should the result be unfavourable to the bookmakers.
A shock to the system causing a plunge in property company share prices is an opportunity for the shrewd. An advantage of stocks and shares over direct investment in property is liquidity for trading in capital gain. Property is an illiquid asset whose liquidity depends upon finding a buyer at the price wanted by the seller. Unlikely the stock market whose activity, during market hours, is measured in seconds, it usually takes some time to trade property: exchange contracts and completion same day is rare. For that difference in time, the risk is factored into the price; one reason the yield on property investment is higher.
Over a long period of time, property has taken on the role of becoming a store of value. A gamut of confidence hinges on property as an investment medium. The property and legal systems have developed in a sophisticated fashion. Despite the commercial property market being unregulated, logically, it makes sense to invest in property, despite the risks. It only makes sense, however, in the context of understanding the fundamentals. Property has a reputation as a long-term hedge against inflation. When the fundamentals are overshadowed by sentiment, for example, yield compression or initial yield, whether a purchase price can withstand market corrections depends upon the particular proposition. Usually, in uncertain times, there is a flight to quality, which suggests that the property funds, a product of the financial services industry, whose asset values were reduced to deter redemptions do not convey as much confidence in the quality or security of the assets as their marketing-hype would suggest. Which is perhaps why valuers took the opportunity to adjust their opinion of Net Asset Value (NAV).
Asset values are the opinions of informed valuers. The commercial property investment market has been overheated for at least a year possibly longer, but that hasn’t stopped overvaluation. Comfort for opinion is drawn from the auction markets because even though auction prices are not representative valuers have decided they are. Auctions having overtaken private treaty as the route to selling. Also, valuers can’t really go out of a limb even when they might want to because their clients would get miffed. Instead of down-valuing, opinions have remained unchanged or nominal increase. Fund managers are okay with that.
Quoted prop-co interests are valued mostly by the same small band of valuers that do the property funds. Since prop co results are usually half or yearly, investors have wait longer for any bad news to emerge. Assuming the same fate is beckoning, the fall in property company share prices reflected investors dumping property stocks in readiness, the rebound a combination of the inexperienced thinking they’ve bought bargains, and the shrewd only buying bargains.
Passive investors, however, often none the wiser, and largely dependent upon the experts, are reassured that the demand for commercial property investment outstrips supply. Auctions immediately post-Brexit are cited as evidence of confidence unaffected. If nothing overt changed then that is because initial yield is keenly sought. But initial yield is only one of the fundamentals: initial yield will not save an investor from a market coming to its senses.
Elsewhere on Landlordzone, I have written about overheated prices and how the smart money has been getting out by selling propositions that stack up on paper, but won’t perform. Cheap money has talked the market up. When the purchase price is overheated, the potential for growth requires sustainability. To assume the purchase price would at least keep pace with inflation is risky in any event, it all depends upon judicious choice of proposition. When tenants are intent upon reducing property costs and minimising liabilities, the scope for rent increase and capital appreciation can be limited, security affected. The question then arises why, apart from a feeling of being in control, the investor would be better off owning the property direct when, all other factors remaining constant, the likelihood of growth is remote, quite possibly non-existent. Since buying property direct depends upon what’s available at the time, appraisal for the long-term becomes critical. It’s also a question of where the quality assets are to be found. The ways things are going, a share of the best of the professionally-managed quoted property companies would seem a better bet.
The Rent Review Specialist