Liquid property

News

02 May 1987

A major change could be taking place in the way in which property is financed, Mr Finn believes. The principle of “unitisation” is becoming established. Once a liquid share market is formed in single property units, the performance of those properties will be a key factor affecting the value of the shares, Mr Finn says. Performance will be reflected in a number of ways, including certainty and regularity of income flow, location and general buoyancy in the sector of the property market concerned and knowledge of the likely cost of maintaining the expected income. “Comparison with other forms of investment will be inevitable as owners of shares are able to switch easily from one form of investment to another. Just as companies issue interim and full year results with appropriate predictions, so the managers of unitised property will need to do likewise in order to demonstrate both the past prosperity of their building and the growth anticipated in the future.”

Recent lease terminations on 1960s buildings have highlighted the depreciation of the building asset and and demonstrated the considerable capital investment needed to generate a new income, Mr Finn says. “Fortunately, a constantly rising rental market (particularly in London and the South East) has camouflaged the over-valuation which had been attributed to these buildings over recent years. The position is not so buoyant, however, in other parts of the country where rental levels are much lower. The major assumption of continued rental growth is suspect. It may have proved right in an era of high inflation, but nowadays when the performance of property is being closely compared with other forms of investment, additional considerations must be made.”

The performance of property relative to other forms of investment will suddenly come under the searchlight of comparison, Mr Finn concludes. Only properties which can demonstrate past performances and certain future growth will be attractive in the liquid unitisation market. “The tenants of commercial buildings — particularly offices — are becoming more sophisticated; arguably they are also more prepared to pay high rents for ideal premises.

“Emphasis, therefore, must switch from simple considerations such as size and location to quality of accommodation and efficiency of building maintenance. This will have a marked effect upon the construction industry, which must be ready to meet the demand for better quality, better maintained buildings together with faster refurbishments of outdated space. A building which reflects these attributes will be successful in the unitised property market.”

(*) Michael Finn is a partner in Drivers Jonas, 16 Suffolk Street, London SW1Y 4HQ.

The creation of a liquid market in property shares is bound to change the traditional way in which property has been valued, managed and refurbished. This is the view of Michael Finn FRICS in a paper given at the 1987 Building Industry Convention last month.(*) A major change could be taking place in the way in which property is financed, Mr Finn believes. The principle of “unitisation” is becoming established. Once a liquid share market is formed in single property units, the performance of those properties will be a key factor affecting the value of the shares, Mr Finn says. Performance will be reflected in a number of ways, including certainty and regularity of income flow, location and general buoyancy in the sector of the property market concerned and knowledge of the likely cost of maintaining the expected income. “Comparison with other forms of investment will be inevitable as owners of shares are able to switch easily from one form of investment to another. Just as companies issue interim and full year results with appropriate predictions, so the managers of unitised property will need to do likewise in order to demonstrate both the past prosperity of their building and the growth anticipated in the future.” Recent lease terminations on 1960s buildings have highlighted the depreciation of the building asset and and demonstrated the considerable capital investment needed to generate a new income, Mr Finn says. “Fortunately, a constantly rising rental market (particularly in London and the South East) has camouflaged the over-valuation which had been attributed to these buildings over recent years. The position is not so buoyant, however, in other parts of the country where rental levels are much lower. The major assumption of continued rental growth is suspect. It may have proved right in an era of high inflation, but nowadays when the performance of property is being closely compared with other forms of investment, additional considerations must be made.” The performance of property relative to other forms of investment will suddenly come under the searchlight of comparison, Mr Finn concludes. Only properties which can demonstrate past performances and certain future growth will be attractive in the liquid unitisation market. “The tenants of commercial buildings — particularly offices — are becoming more sophisticated; arguably they are also more prepared to pay high rents for ideal premises. “Emphasis, therefore, must switch from simple considerations such as size and location to quality of accommodation and efficiency of building maintenance. This will have a marked effect upon the construction industry, which must be ready to meet the demand for better quality, better maintained buildings together with faster refurbishments of outdated space. A building which reflects these attributes will be successful in the unitised property market.” (*) Michael Finn is a partner in Drivers Jonas, 16 Suffolk Street, London SW1Y 4HQ.