Valuation in a Recession

Craig Wilson

Eric Young & Co

Eric Young & Co

Valuation In A Recession

Valuation In A Recession

When did it all go wrong

Valuation In A Recession

When did it all go wrong

What are the consequences

Valuation In A Recession

When did it all go wrong

What are the consequences

How do you find the true value

When did it all go wrong ?

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

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

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

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.

The Consequences

The Consequences

Increased available space

The Consequences

Increased available space

The ‘average’ retail vacancy rate has risen from 4%...to almost 12% now’ July 2009

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.

The Consequences

Increased available spaceLess lettings or rent reviews

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.

The Consequences

Increased available spaceLess lettings or rent reviewsMultiple administrations & CVA’s

The Consequences

Increased available spaceLess lettings or rent reviewsMultiple administrations & CVA’sRent concessions and lease variations

Finding the true rental value

The Challenges

o More vacant unitso Very few lettingso Increase of temporary letso Rent concessions & lease variationso Nil increase or inactive rent reviews

Finding the true valueThe hierarchy of evidence

Finding the true valueThe hierarchy of evidence Open market lettings & non lettings

Finding the true valueThe hierarchy of evidence

Open market lettings & non lettings Agreements between valuers at lease

renewal or rent review

Finding the true valueThe hierarchy of evidence

Open market lettings & non lettings Agreements between valuers at lease

renewal or rent review Expert Determinations

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

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

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 ?

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.

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

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.

Rent Agreements renewals and rent reviews

Rent Agreements renewals and rent reviewso rent reductions at lease renewal

Rent Agreements renewals and rent reviewso rent reductions at lease renewalo lease renewal or lease variation

following administration

Rent Agreements renewals and rent reviewso rent reductions at lease renewalo lease renewal or lease variation following

administrationo nil increase rent review agreements

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.

Finding the true value - conclusions

Finding the true value - conclusions• lettings best reflect the rating

hypothesis.

Finding the true value - conclusions• lettings best reflect the rating hypothesis.

• Consider the availability of space. That is what the hypothetical tenant would do.

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.

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.