Valuation in a Recession

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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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MFI sold for 1 and repackaged as Galiform Sep 06
Rush on Northern Rock continues Sep 07
Poor festive period for retailers Dec 07
government announces that struggling Northern
Rock is to be nationalised Feb 08
Credit crisis hits the high street as both Next
and Debenhams warn of tough times ahead Mar 08
The International Monetary Fund (IMF).warns
that potential losses from the credit crunch
could reach 1 trillion Apr 08
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JJB Sports shops shut as profits plummet Apr
08
Woolworths administration confirmed Nov 08
Profits plummet at Kesa and Carpetright Dec 08
Threshers owner falls into administration Jan 09
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Retail Failures

• Jan08
• 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 space
• Less 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 space
• Less lettings or rent reviews
• Multiple administrations CVAs

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The Consequences

• Increased available space
• Less lettings or rent reviews
• Multiple administrations CVAs
• Rent concessions and lease variations

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Finding the true rental value
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The Challenges

• More vacant units
• Very few lettings
• Increase of temporary lets
• Rent concessions lease variations
• 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 1990s 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, Dundee MFI were paying
c375,000 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,
Clydebank Previous rent c400,000 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, 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.
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Rent Agreements renewals and rent reviews
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Rent Agreements renewals and rent reviews

• rent reductions at lease renewal

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Rent Agreements renewals and rent reviews

• rent reductions at lease renewal
• lease renewal or lease variation following
  administration

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Rent Agreements renewals and rent reviews

• rent reductions at lease renewal
• lease renewal or lease variation following
  administration
• nil increase rent review agreements

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Rent Agreements renewals and rent reviews

• rent reductions at lease renewal
• lease renewal or lease variation following
  administration
• nil increase rent review agreements
• 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.