Even if you’re used to seeing your investment committee every week, it’s always worth remembering that someone, somewhere advised an investment committee to buy a building let to Lehman Brothers
It’s a sobering thought.
Having spent time as both an investment agent and as an assistant fund manager I am in the privileged position of seeing transactions from both sides of the fence. A fund manager needs complete trust in receiving the right sort of information from their investment agent.
Your investment agent should:
1) Be able to seek sound occupational advice
Your investment agent needs to know the local occupational market inside out.
For example, can your investment agent tell you where a building ranks in the local market? If it were available to let today would it be a tenant’s first choice of building? With the last recession a recent memory, no-one wants a property that is low down in the pecking order and hard to lease or sell on when the next downturn comes along.
Against a backdrop of hardening yields, today’s investment committees are naturally very focused on potential for rental growth in order to drive performance. Will a refurbishment or repositioning of the building drive rents forward? It is no good investing in a low-yielding building without promise of serious rental growth.
So your investment agent should be able to tell you categorically where current rents are going. If they are doing their job properly, they should supply detailed information on ERV’s likely re-letting incentives and the length of any potential voids.
Knowledge of the local rental market is where fund managers need to be most prepared for possible committee challenges.
For example, a committee member may have known the local area personally for many years, have opinions on it, or be familiar with the property and have noticed letting boards on it as he or she whizzes past it on the train every day.
2) Explain the implications of any future developments
Knowledge of plans and proposals for developments and infrastructure changes are all well and good, but what are their implications – positive or negative?
The investment committee needs to know every possible eventuality for the property, the impact of whether possible plans go ahead or not, or even the smallest variation to those plans.
3) Really investigate the tenant’s financial strength
Your investment agent must provide in depth insight into:-
• a tenant’s business strategy
• their sector’s trends
• their most recent accounts and where possible track down their forthcoming un-audited accounts.
For example, What does their business strategy include? How will their strategic plans for the overall business affect this particular property? Will sales be moving online or production lines relocating abroad?
Again, watch out for investment committee challenges. For example, if a committee member says, “I read in the paper that the tenant’s automotive light manufacturing is moving to Holland”, could you confidently reply that this is happening only to headlamp production: rear light production will remain in the UK. Your information needs to be this detailed.
4) Give a valid answer as to why a building is being sold and by whom
If the seller is renowned for squeezing every last penny out of a property, your agent needs to give pretty strong reasons why it’s still a good investment. Valid reasons include:
• the owner has changed their investment strategy or appetite for risk
• the lot size no longer suits their needs
Make sure you see evidence of these. You need to know the entire background to the sale.
5) Provide background to whether it’s an on- or off-market sale
If it’s on-market, the property’s market value is relatively straightforward because there should be other bidders. If it’s off-market, you’ll need high quality, succinct evidence that the price is right because the investment committee won’t have the reassurance that others are bidding for it.
6) Convince you that there’s no CAPEX headache
A thumbs up from a building surveyor on a property’s current condition is not enough. Your investment agent needs to demonstrate who the burden of costs will fall to if there is a structural or M&E problem with the property – is the lease on FRI terms? If the lease is near expiry there should also be a comment on dilapidations. Your investment agent also needs to have pored over historic building surveys and be able to vouch for anything highlighted in years gone by.
7) Spot any flood or contamination risks affecting liquidity
Flood risk has increasingly become a major headache for fund managers. Over the past decade flood ratings have changed drastically as 2012/2013 saw some of the worst floods in living memory and insurers have updated their systems in line with this data.
A building that was previously readily insurable could now have a flood rating of 1 in 50 years and as a result pose liquidity problems if the current owner decides to sell the asset on. Quite simply private investors or those who do not have a block policy could be faced with the prospect of not being able to insure it.
8) Provide a comment on title
Although the buyer’s lawyers sign off the legal report on title, your investment agent should have made sure the title is clean and marketable – with any rights of way or clauses, plus their impacts, identified.
9) Provide IRR’s over a 1,3 and 5 year hold
Finally, your investment agent must have a rock-solid view on the property’s Internal Rate of Return with every circumstance and influence factored in. Downsides, upsides and blue-sky scenarios all need to be analysed
If any of your investment agent’s facts or assessments are wrong –you can expect to be caught out by the investment committee at some point. Maybe not immediately but at some later date, you will be found out!
10) Stand Back
Stand back from all the analysis – also trust the gut. Is this a good deal? More often than not your gut feel is right.
Associate, Commercial Investment
Dale is a Chartered Investment Surveyor and Associate within Allsop’s National Commercial Investment team. He advises clients including pension funds, property companies and developers in relation to sales, acquisitions and value-add opportunities across all sectors.
You can contact Dale for commercial property investment advice at firstname.lastname@example.org or call him on +44 (0)20 7543 6796
The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer