Independent property adviser GVA is advising landlords of secondary property to take a more hands on approach to secure the maximum value of their assets.
According to a new report by GVA entitled “Secondary Property – A Users Guide”, the market for secondary property will not make a notable recovery for some time, so for landlords, sitting and waiting on existing stock will no longer work as a sound investment strategy as its value continues to corrode.
Lending margins for secondary property have increased significantly in the last 12 months and loan to value ratios have fallen further. Since the crisis started, banks and equity providers have been reluctant to lend against anything other than prime assets to minimise risk.
GVA, the UK’s largest independent commercial property specialist believes the market will continue to flat-line for at least another 24 months. This follows the Governor of the Bank of England’s stark warning over the summer that trading conditions would not improve for several years to come.
This presents a dilemma of how to be proactive for both landlords and investors especially in terms of opportunity cost. It also presents a clear opportunity for those with a competitive advantage and a “who dares wins” mentality says GVA.
Richard Howell, director in the investment team at GVA in Cardiff, comments, “It’s become clear that sitting and waiting can no longer work. Secondary property, by its very nature, requires a hands-on approach to avoid further value erosion. With an imminent recovery before 2015 now unlikely, there will be continued downward pressure on values, so the only effective option is to start working these assets. Also, legislative changes to the Energy Act which are due to take effect in 2018 will increase the downward pressure on secondary property values further.”
GVA’s report illustrates major opportunities that now exist for both purchasers and landlords. There are a number of game changers that could present improved conditions for secondary investment. These include more realistic pricing, new empty rates legislation, increased finance availability, new planning legislation and improved occupational markets.
Richard continues, “Pricing of opportunities is becoming more realistic. Vendors and advisors are now waking up to the fact that not all secondary property should be valued at 10% Net Initial Yield.
“Where properties are subject to vacancy and purchasers are liable for vacant service charge and empty rates, valuations by way of traditional net initial yields can be very misleading. Far more pertinent are IRR, “Triple Net” Running yield and capital value analysis, and more often than not a combination of them all.
“Investors need to track mispriced stock and be brave enough to selectively invest over the next 24 months to successfully implement asset management plans that lead to excellent and well deserved returns.”
The report goes on to state that if a secondary asset is in a distressed position in terms of debt financing and nothing is being done to add value to the asset, its value will either stagnate or depreciate until it approaches either vacant possession value or worse. The report also states that in these volatile times vendors should streamline their sales processes to contain risk.