THE PROPERTY MARKET
(1) DEFINITION OF PROPERTY
What is meant by ‘property’
• Oxford English Dictionary definition
o ‘Property’ = ‘condition of being owned’.
• We usually ‘own’
o Land
o Property
o Possessions
• Can be ‘tangible’ or ‘intanglible’.
o Copyright - intangible
o Patent designs – intanglible
o Land – tangible
o Buildings – tangible
o Possessions – tangible
• Who can own property?
o It can be ‘real property’ (land & buildings), or
o ‘personal property’ (
o In our unwritten constitution all land is owned by the ‘Crown’ – from the feudal
system introduced by William the Conqerer
o We own ‘legal interests’ in land which can either be very extensive or limited.
Freehold – lasts for an indefinite period
Short-term lease – lasts for only as long as the lease.
(2) WHY IS PROPERTY SO IMPORTANT?
In the terms of a country’s economy there are 3 main factors that create wealth:-
1. People
2. Money
3. Property
UK’s commercial property is worth as much as half of all the companies traded on the London
Stock Exchange and was double the value of all Government stock.
For many companies, PROPERTY ASSETS are the main item on their BALANCE SHEET.
This in turn determine how much the company can borrow on the security of their
property.
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(3) PROPERTY AS AN INVESTMENT AND A RESOURCE
Property can
1. Make money as an investment and
2. Can be used as a resource in business.
The industrial use of commercial property increases its value as it is linked
1. to the generation of profit, and
2. the creation of wealth.
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INVESTMENT PROPERTY
Investors are looking for a return of their investment through
Income return
o Potential Income return depends on :-
Location , and
Use.
• Property can be divided into
o ‘Prime’ use
Let to a single occupier
With a strong covenant
Least hassle and best Long term
chance of a good Full repairing
return for an investor Full insuring lease
Upwards only rent review clause
Property built to a modern specification
Property in good repair
o ‘Secondary’ use
Less attractive to Let to a number of occupiers
investors Short term leases or licences
Involves a large degree Investor has the burden or insuring and repairing
of active management to May be a dated/period property
ensure things run In dilapidated condition
Or in need of repair
Occupiers may be weak covenants
• who have difficulty paying the rent or
• may deter other occupiers
parts of the site may remain unlet
o Core
Prime properties
In one of 3 sectors
• Office
• Industrial
• Warehouse
•
o Core+
Secondary Properties
Like core properties but with diffiscencys such as
• Location and
• Covenant strength
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o Non-Core Properties
More specialist in nature
Higher risk for an Health and fitness clubs, hotels or storage facilities
investor –
-More variable cash
Capital return – Higher rental
growth = the more
o Is a property a good investment? valuable the
property = higher
Potential for rental growth growth in capital
• Rental growth is linked to growth in capital value in the property.
Any shift in yield or return on investment may be a deciding factor
• The potential for a tenant to break the lease may lead to a period
where the property is vacant before a new tenant can be found.
Asset repositioning by major players in the property market can affect
investment properties’ value.
• Popularity of one sector or another with a large property companies
may persuade lesser players to sell one type of property and switch to
a different type.
One of the keys to the
Risk diversification property investment
market.
= not putting your eggs in one basket/
Yield
Risk
There is a trade off between the yield from a property and the risk involved.
The higher the risk
The higher the yield
Most investors have a mix of high yield/high risk and low yield/low risk investments,
therefore:-
o Any losses on the high risk investments are borne out by the low risk investments.
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CYCLICAL NATURE OF PROPERTY
The property market is cyclical and is subject to times of boom or bust.
Typical life span of a property
(1) Targeting the Site
Surveyors will have to consider whether a development of a property is:
o Financially viable, and
NOW – planning authorities
o Legally possible, and
make developers agree to
o Whether the site is physically appropriate;
provide services (swimming
o Planning considerations pools etc) and low income
What planning is likely to be consented housing before agreeing to
What structural requirements are necessary a development -
o Assess what occupants will want to use the development
Cambourne
o Whether finance can be obtained to
Buy the site, and
Fund the development
(2) From site purchase to completion of the construction
Requires a team of professionals.
1. Architect – to design the building
2. Quantity Surveyor – to cost the scheme
3. Lots of engineers overseen by a project manager.
4. Main contractor – to build the property usually the architect or the
quantity surveyor
5. Sub contractors
Ensures the project
If the property requires part letting during development:
runs to time and to
1. Letting or Sales Agents will
budget
a. Negotiate ‘heads of terms’
Then left to the Solicitor:-
1. To draft the legal documentation
Building surveyors will look after the
1. Repair, and
2. Maintenance
3. During the life of the building
A facilities manager is often instructed to ensure
1. The services to the building are working properly
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Valuation surveyors will monitor both
1. The physical and
2. Financial performance
By providing regular financial valuations.
At the end of the occupation the owner will have to decide whether to:-
1. Demolish
2. Redevelop
3. Refurbish , or
4. Sell the property
Here, the development surveyor (No 1) re-enters the scene and the cycle starts again.
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WHY CLIENTS BUY PROPERTY
Why would a client want to acquire a commercial property?
Because:-
1. For their own use
a. In their own name or
b. In the name of a group company
2. To make a profit
a. Profit developers
b. Developer will be hoping to
i. Buy cheap land
ii. Construct some buildings
iii. Let the buildings to high quality tenants
iv. Sell the completed development for more than they spent.
c. Property investor
i. Acquire a property
1. Which gains in capital value over time
2. And produces a steady rental income in the time being
ii. Could be looking for a property in a specific location, or
iii. A specific type
d. Or a combination of purposes
i. Multi-national bank –
ii. looking for a prestige building –
iii. for their headquarters, may decide
iv. the only way they could get precisely what they want is to
v. carry out a new development
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WHY CLIENTS WANT TO BUY PROPERTY WITH A THIRD PARTY
1) share the risk
2)reduce the risk
3)
Joint Venture
1. No specific meaning in UK law, but widely defined to describe:-
a. An arrangement between two or more separate commercial organisations
2. A property Joint Venture may be formed for the specific purpose of purchasing
a. An existing property, or
b. A portfolio of properties, or
c. To create a new property by developing under-utilised land.
3. A Joint Venture allows
a. Risk to be shared and hopefully reduced
i. Property development carrys risk and no matter how well managed
b. To raise funds
i. Some can just be funding relationships
1. Where a developer requires finance and the pension funds wants to
participate in a development,
c. To gain a greater level of expertise.
d.
1.
MAIN METHODS PROPERTY CAN BE JOINTLY ACQUIRED
HOW PROPERTY ACQUISITION IS FINANCED.
