95% of determinants of market value fall outside construction development phase

? Copyright 2016, Donald Evan Gilbert, Australian Lease & Property Consultants Pty Ltd

Don Gilbert is a Specialist Retail Valuer (“SRV”), a 3D Economist and an Arbitrator. He provides independent, impartial advice to tenants, landlords and prospective investors. He does not provide legal advice, nor does he act as an agent on a client's behalf.

Our Case Studies are often a short precis of the events that have taken place to illustrate a point. In effect every case is different, each with its own peculiarities. Independent advice should always be obtained from Informed Professionals, eg. lawyers who practice in the field of leasing, etc.

TITLE

“95% of determinants of market value fall outside construction development phase”

TARGET AUDIENCE

Retail Tenants, Landlords, Investors, Financiers, Valuers & Property Professionals and other professionals

SUMMARY

In my quest to achieve perfection (and we know it is not possible) in the appraisal valuation profession, this article seeks to tease out and debunk the theory and belief that the development cost / construction cost, plus income stream increments is and can and does produce market value!

BACKGROUND

Studying valuation theory, and in practice, the development method involves numerous hypotheticals.

Does / did the land acquisition plus development cost stack up when capital value multiples are applied to tested net rental income streams once the property became occupied?

As the topic suggests, I believe that for 95.0% of a property’s life, the determinants of market value arise from actual economic social supply demand catchment technological obsolescence push-pull factors including the internet business.

The original cost development justification may or in all probability may not be relevant.

Ironically, valuers appraisers are now starting to query their relevance as service professionals. Really; who else is there to value value? Perhaps valuers appraisers are not delivering value?

What is more important I believe, is that Australian Property Institute have this on the agenda! It is a debate that is long overdue …………..

DETERMINANTS OF MARKET VALUE

Leases signed up, and once a property’s useful life commences, might be found to have businesses aka tenants paying above or below current market rent.

The determinants for leases and rents in the retail environment are intrinsically linked to the success and functioning of retail property, are inextricably linked to the success and functioning of tenancy mixes, parking, access egress, market acceptance, consumer confidence, 94 months of ZIRP (‘Zero Interest Rate Policy’) and TARP (‘Troubled Asset Relief Program’) aka financial engineering which is now unprecedented and or the consequences of same, when Interest Rates are ‘normalised’ and real ‘value’ is again properly explored!

The factors to consider here are as long as your arm ………. including the dysfunctional lease renewal practices, ridiculous tenure, silly lease structures with now equivalent ratchet mechanisms.

Many leases are financial instruments; bits and pieces of paper unmatched to the reality binding the “business” to the property!

Commercial and industrial leases are less susceptible to these things and tend to be more predictable. None-the-less I believe that more flexibility is warranted in the setting and evaluation of rents in these categories of real estate.

Now once a property’s construction phase is over, leases and rents might be justified (Or not), but certainly over time there are many many reasons for market rents and market value not to stack up; and many of the pointers link back to the economy and other external (or environmental i.e. the external) influences.

Lets list a few:

• ·        Change in business cycle;
• ·        Reversion to sensible interest rate policies;
• ·        Change in tenancy mix;
• ·        Catchment and demographic change over time;
• ·        Physical change in shopping centre eg. Centre of “gravity” due to extension redevelopment;
• ·        Change in traffic eg. New road bridge, new road, traffic movement, etc;
• ·        Business or centre obsolescence;
• ·        New innovative competition/category killer;
• ·        Poor or good management;
• ·        Lease structures, rent reviews, security of tenure matched to many many factors;
• ·        Change in consumer behavior, etc.

These obviously are real events that influence the push pull factors in regard to the businesses and the leases. Operating separately or synergistically, one or several can easily exceed and or cause variation to the leases negotiated and or whether the lease and rent match the market.

95.0% of these factors are operating 95.0% of the time outside the development phase of a property. And where do the ques come from? The negotiation of leases assuming arms-length transactions between fully informed landlords and tenants aka at market rent.

POSSIBLY THAT VALUERS APPRAISERS ARE BECOMING EXTINCT

It is possible for any business, business model, profession to become irrelevant and extinct.

Businesses that are less likely to become extinct are reinventing themselves all the time. They are providing products and services that the consumer needs and want. Market or marketing orientated businesses and business models are acutely aware that they must provide the right product at the right price at the right place and make a profit.

Part of becoming irrelevant might be/some solutions might be:

• ·        Production line opinions (of market value); with little brain or thought power; consumers are acutely aware of these kinds of reports i.e. 8.0 reports a day; let the Banks do them;
• ·        Valuers appraisers standing outside the square metre and peering in who offer no “value”; perhaps one might get into the square metre and understand all the possible influences literally attacking the rate per square metre aka ($/M2) all the time eg. the productivity level of the retail rate per square metre, from which market rent and market value flows from that;
• ·        Valuers appraisers taking a “position” are becoming irrelevant; redundant. Those valuers I suggest are menace to those who are using their services;
• ·        “Old School” thinking; bringing the profession down and obfuscating innovation;
• ·        Old School appointment of valuers;
• ·        A profession that keeps internalizing with the same “old blood”. I believe we should do what the Canadian Institute did. They turned the “Profession” on its head; “Old School” became less and less relevant as new blood filtered in from a variety of industries and professions eg. engineers, teachers, architects, accountants, lawyers, came in on accelerated two-year courses with new and wider skillsets;
• ·        A massive massive “cultural” change and to “roll” the culture of the Old School out of the mix; why were they conspicuous by their absence at the recent discussion forum hosted by API in Brisbane? Not only is their thinking (and experience) important in the mix; to change and make oneself relevant may also be necessary. Dr. Michael McCullum with his broad Kiwi accent really left one thinking. I immediately saw great opportunities due to the narrow view of our financial institutions;
• ·        The Profession has learned very little in my time in Australia; the restructuring of API is a big step forward; now real change from “new blood” aided by the Executive is necessary;
• ·        Valuers/ appraisers will only become MORE relevant when they know their relevance; redefine target markets, realise that no “added value” reports and opinions with real thinking reasoning logic when production-line are just that; production-line value;
• ·        Even if reports are written better; garbage in i.e. no added value logic reasoning conviction to evaluate “value” is garbage out;
• ·        Valuers appraisers intending to “engineer” their determinations, or who have conflicts of interest, or believe “Oh if I use this method, I can engineer this answer”. Well no matter how one dresses it rubbish is still rubbish; it is not worth the paper it is written on; the result is not a result.

This list is endless …………….. the results are still the same.

But like the motor industry (I suggested it would become obsolete in S Australia in 1995/96) this profession could become obsolete; accountants are not valuers/appraisers and valuers/appraisers are not valuers/appraisers until WE CHANGE from within.

95.0% OF DETERMINANTS OF VALUE …………..

The above precis tells a story. Currently the “Profession” via culture, deed, bias, engineering, recycling limited skillsets, lack of strategy, failing to step out of comfort zones, not engaging multi-talented multi-skilled persons, etc. are all contributing (in my opinion) to valuations determinations opinions that assumes that the paying public (investors, financiers, landlords, tenants, franchise industry, etc.) must just suck it up and swallow it. And pay for it!

In other words, the initial 5.0% development period plus cost, plus 5.0% increases under leases, irrespective of incentives, increases infinitum, without the other 95.0% of influences on “value” on an investment property aka CBA shares @ $80.00, Rio Tinto at $65.00, BHP at $45.00, Centro at $10.05, Westfield at $22.00, GPT, Lend Lease, etc. will go up for ever!

That is NOT our role, valuers/appraisers with this skillset are devaluing the Profession by seeking to preserve value; not to evaluate value on the FACTS!

Conclusions

API/RICS together with IVSC I suggest is in a good position to ensure that we as a Profession embrace change; that we “add value” to the work we produce. And that is NOT to “engineer” value. We evaluate value and interrogate the numbers no matter how we upset the people who we seek hard evidence from!

Part of this process I believe will see marginal “dead wood” old school valuers appraisers making themselves “redundant”.

A pretty dressed up report with garbage in it is just that. A production line regurgitated no grey matter analysed interrogated evaluated opinion, is not worth the paper it is written on.

I cannot wait for the banks financial institutions to “dress up value” themselves, by “stealing” valuer’s Intellectual Property and data to justify their lending, without external checks and balances (knowledge experience; real grey matter; demanding reports at lower at below cost) and crashing their balance sheets ……………..

For far far too long our Central Banks have been pandering up to Wall Street, the Wall Street ROBO traders, the financiers, development lobby, our politicians and bureaucrats subsidising and engineering “value” via tax deductions, who have caused and are causing over-supply, when valuers appraisers need to interpret value.

And provide valuable independent impartial objective advice with authority.

A new skill-set of retrained 30 – 40 year olds, sick and tired of being engineers, lawyers, teachers, economists, accountants, etc. should be welcomed into the Profession to make way for some old crusty boring valuers appraisers who refuse to upskill and get better. And usurp for example the appointment of capable Experts to determine market rent for example by Divisional Chairs, etc. And keep taking a “position”.

Embrace change; or admit one is extinct like the Australian motor industry, 1960’s style management; refuse to listen to the consumer!

If those associated with bricks and mortar do not want change, business capital will simply shift to more internet based business models. Eg. there are 180.0 second tier newsagents in tenancy mixes in Queensland alone have closed since January 2016. Across Australia that might be five times that!

We need multi-skilled problem solvers. 

Donald E Gilbert ? 2016