Valuation in a Recession Craig Wilson Eric Young & Co

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

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 vacancies and thus supply increased throughout 2007 and 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

 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

The Consequences  Increased available space  Less 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 space  Less lettings or rent reviews  Multiple administrations & CVA’s

The Consequences  Increased available space  Less lettings or rent reviews  Multiple administrations & CVA’s  Rent concessions and lease variations

Finding the true rental value

The Challenges o More vacant units o Very few lettings o Increase of temporary lets o Rent concessions & lease variations o Nil increase or inactive rent reviews

Finding the true value The hierarchy of evidence

 Open market lettings & non lettings

Finding the true value The hierarchy of evidence  Open market lettings & non lettings  Agreements between valuers at lease renewal or rent review

Finding the true value The 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, Dundee MFI 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, Clydebank Previous rent c£400,000 in 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, Dumfries New 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

o rent reductions at lease renewal

 Rent Agreements renewals and rent reviews o rent reductions at lease renewal o lease renewal or lease variation following administration

 Rent Agreements renewals and rent reviews o rent reductions at lease renewal o lease renewal or lease variation following administration o nil increase rent review agreements

 Rent Agreements renewals and rent reviews o rent reductions at lease renewal o lease renewal or lease variation following administration o nil increase rent review agreements o 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

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.