valuation in a recession craig wilson eric young & co
TRANSCRIPT
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Valuation in a Recession
Craig Wilson
Eric Young & Co
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Eric Young & Co
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Valuation In A Recession
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Valuation In A Recession
When did it all go wrong
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Valuation In A Recession
When did it all go wrong
What are the consequences
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Valuation In A Recession
When did it all go wrong
What are the consequences
How do you find the true value
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When did it all go wrong ?
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Nov 07
June 07
Poor festive period for retailers Dec ‘07
‘Rush on Northern Rock continues’ Sep ‘07
‘government announces that struggling Northern Rock is to be nationalised’ Feb ‘08
‘The International Monetary Fund (IMF)….warns that potential losses from the credit crunch could reach $1 trillion’ Apr ‘08
MFI sold for £1 and repackaged as Galiform Sep ‘06
‘Credit crisis hits the high street as both Next and Debenhams warn of tough times ahead’ Mar ‘08
SearchBusinessSearch
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Jan 09
Nov 08
Jan 09
Oct 08
July 09
May 08
July 08
Woolworths administration confirmed Nov ‘08
‘JJB Sports shops shut as profits plummet’ Apr ‘08
Profits plummet at Kesa and Carpetright Dec ‘08
Threshers owner falls into administration Jan ‘09
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Retail Failures
Jan’08 Feb ’08 Apr ’08 May ’08 June ‘08 Jul ‘08 Sep ‘08 Oct ‘08 Nov ‘08 Dec ‘08 Jan ‘09
• Dolcis, Stead & Simpson• The Works, Elvi, Base• Toyzone, Sleep Depot, Ethel Austin, Internacionale• New Heights, Mk One• Ilva• SCS, Floors-2-Go• Rosebys, Joy• Miss Sixty, Hardy Amies• Mk One, MFI, Woolworths• The Pier, Whittards, Officers Club, Zavvi, USC• Adams, Passion for Perfume, Miller Bros, Viyella,
Card Warehouse, Land of Leather, Threshers
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When did it all go wrong ?
• occupational demand slowed in 2007.• vacancies and thus supply increased
throughout 2007 and 2008.• by Sep ‘08 the economy and financial sector
was in rapid decline. • depending on location/property type, the
critical date could be between ’07 to late ’08 and the measure of the impact varied.
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The Consequences
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The Consequences
Increased available space
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The Consequences
Increased available space
The ‘average’ retail vacancy rate has risen from 4%...to almost 12% now’ July 2009
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The Consequences
Increased available space
The ‘average’ retail vacancy rate has risen from 4%...to almost 12% now’ July 2009
‘Vacant or available retail warehousing has increased from 5.8% in 2001 to 11.3% in 2008 and 11.6% in 2009’ The Definitive Guide to Retail & Leisure Parks - 2010.
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The Consequences
Increased available spaceLess lettings or rent reviews
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Since January ’10 ;-
• 15 nil increase rent reviews
• 49 rent reviews not activated
• 22 rent reviews ongoing
• 3 rents increased at review
rent review dates ranging from June ‘08 to August ‘10.
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The Consequences
Increased available spaceLess lettings or rent reviewsMultiple administrations & CVA’s
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The Consequences
Increased available spaceLess lettings or rent reviewsMultiple administrations & CVA’sRent concessions and lease variations
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Finding the true rental value
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The Challenges
o More vacant unitso Very few lettingso Increase of temporary letso Rent concessions & lease variationso Nil increase or inactive rent reviews
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Finding the true valueThe hierarchy of evidence
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Finding the true valueThe hierarchy of evidence Open market lettings & non lettings
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Finding the true valueThe hierarchy of evidence
Open market lettings & non lettings Agreements between valuers at lease
renewal or rent review
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Finding the true valueThe hierarchy of evidence
Open market lettings & non lettings Agreements between valuers at lease
renewal or rent review Expert Determinations
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Finding the true value The hierarchy of evidence
Open market lettings & non lettings Agreements between valuers at lease
renewal or rent review Expert Determinations Arbitration Awards
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Open market lettings & non lettings
Non Lettings
‘The property recession of the early 1990’s also highlighted the important open market evidence of non-lettings.
The continued availability in the market place of properties similar to the subject property is evidence of market balance….such evidence if properly presented is not hearsay but fact’
Reynolds & Fetherstonhaugh, Handbook of Rent Review
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Open market lettings & non lettings
Lettings
Increased incidence of ;-
1. Substantial rent free periods
2. large capital payments
3. Reduced lease lengths
4. Turnover only rents
How do you analyse ?
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Former MFI, Kingsway West, DundeeMFI were paying c£375,000 p.a., now occupied by Dunelm paying £270,000 p.a. . They received 4 year rent equivalent as a capital payment on a 15 year lease. RV - £431,200.
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Former Megabowl, Clyde Retail Park, ClydebankPrevious rent c£400,000 in 2004. Now occupied on a new 15 year lease at £90,000 p.a., with a 3 month rent free period and £280,000 contribution. RV - £424,000
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Dreams, Cuckoo Bridge Retail Park, DumfriesNew letting. £131,250 p.a., 10 year lease with a 12 month rent free period and a 12 month tenants only break option.
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Rent Agreements renewals and rent reviews
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Rent Agreements renewals and rent reviewso rent reductions at lease renewal
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Rent Agreements renewals and rent reviewso rent reductions at lease renewalo lease renewal or lease variation
following administration
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Rent Agreements renewals and rent reviewso rent reductions at lease renewalo lease renewal or lease variation following
administrationo nil increase rent review agreements
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Rent Agreements renewals and rent reviewso rent reductions at lease renewalo lease renewal or lease variation following
administrationo nil increase rent review agreementso nil increase rent does not equate to the
rental value. It suggests that the open market rent is no more than the passing rent.
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Finding the true value - conclusions
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Finding the true value - conclusions• lettings best reflect the rating
hypothesis.
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Finding the true value - conclusions• lettings best reflect the rating hypothesis.
• Consider the availability of space. That is what the hypothetical tenant would do.
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Finding the true value - conclusions• lettings best reflect the rating hypothesis.
• consider the availability of space. That is what the hypothetical tenant would do.
• lease or rent variations are evidence of a negotiated rent. It reflects market reality.
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Finding the true value - conclusions• lettings best reflect the rating hypothesis.
• consider the availability of space. That is what the hypothetical tenant would do.
• lease or rent variations are evidence of a negotiated rent. It reflects market reality.
• Timing is critical. Rent reductions have been sharp and steep. Historic rents will often be irrelevant.