Posted on Apr 05, 2011
This is a question we are asked increasingly often. Of course, we always have a ready answer: Exactly what a buyer is prepared to pay for it.
But the more we are asked the question, the more we think about how possible it would be to put all the variables into a matrix (or a computer program) and have an answer pop out. Obviously that is what we already do mentally - weighing up the locality, the size, the age, the parking, the facilities, and about 100 other factors. But how possible would it be to load all the variables into a computer program and have it do all the work?
Firstly, what indeed are all those variables? And ultimately, how much of the answer is subjective rather than objective anyway ?
We understand that residential real estate is much easier to put a price on. The larger numbers of transactions provide a database that can be used as a reasonably valid comparison. There are far fewer transactions that can be used as comparisons in commercial / industrial real estate. And then there are probably more variables. And whilst we do see examples in Penrose being quoted to establish values in Manukau, we believe this is about as valid as comparing an apple and a persimmon. Or even a kumara for that matter !
Adding to the complication with commercial / industrial is that there appears to be a clear formula for valuing investments (there is not of course - but more on that later !) whereas owner / occupiers are likely to pay prices created from an entirely different starting point.
But back to our premise of a matrix. Our starting point is that value arises because buyers see value in it - in other words, there are more reasons for buyers to want it, which means there is a larger pool of potential buyers, or sometimes a smaller pool of stock. Therefore East Tamaki will be worth more than Papakura. But having said that, there will always be buyers for Papakura if the price is right. Then 300 square metres will usually be worth more per square metre than 3000 square metres - as there are more potential buyers for smaller sizes (and smaller $ outlays) than larger sizes. Similarly, new trumps old, street frontage is better than rear unit, and the more car parks the better. At the same time, there is one long cherished measure of value which is being turned on its head, and others which are rarely taken into account - but should be.
It used to be that in assessing value, office space was taken as being worth more than factory or warehouse space. However, we have now turned a corner, and generally find that whilst there may be more value in genuine quality office space (modern fitout and airconditioned etc) this only applies to a certain point. How much office space does a contemporary business need? Beyond a certain point it actually becomes a liability and drags the value of premises down.
But there are a number of very important points which often don't even get a mention : cubic capacity (especially with buildings likely to be used for warehousing, rather than workshop/factory), access, and the state of the building and the state of the roof. These are factors which to our mind add or subtract in a major way to values. Yet very often the value of a property is seen to be a factor of the floor area and little else.
But back to the formula for valuing investments. We cannot argue too much with the viewpoint that if money in the bank earns 5%, then investment in commercial / industrial property will earn 8% (or 7% or 10 % more or less) There are various tweakings to the yield figure to account for length of lease, quality of tenant etc. And we do remain sceptical of the underlying real value of single use buildings when the lease comes to an end. Once the takeaway fried chicken seller no longer wants their purpose built outlet - what else is it good for?
But the oft quoted value indicator we really take exception to is the "yield" on a property with no tenant.
We know that the world has changed dramatically since we wore a school uniform. For a start no one plays super 8 tapes any more. Or uses a slide rule. Although there may no longer be 9 planets, it is still true that when you multiply any number by zero, you get zero ! Therefore, no tenant = no yield.
We know that real estate agents are often accused of stretching the truth - but to us it is downright deceitful to not only imply a yield, but to state one, when that number really is zero.
Even a "notional" yield is a long way off the mark. Whilst even a regular quoted yield does not take into account property management time and expenses, repairs and maintenance, debt collecting and all the other costs which in reality reduce the so-called yield, so too does a notional yield fail to account for the time to lease, the costs to lease, and then the incentives to lease including fit out and rent holidays.
Whilst a notional yield may be a starting point in the absence of any other indicator of value, we see it as dereliction of duty that any agent would quote it with a straight face as being a true indicator of worth.
And so having taken into account all the factors and aspects surrounding a property, we come back to the establishment of value, price and worth.
We understand that agents will very often talk up the value of a property in order to secure a listing. But more often than not this practise backfires on an agent - particularly if they fail to perform in even the most basic of ways.
Just as a kilogram of rice will have different values - at a food wholesaler it is one price, then in a supermarket it is another price, and on a dinner plate in a restaurant it is another price again - so too can a property have multiple values. Well presented and tenanted to a reputable tenant on a long lease represents a different value to vacant and rundown. Very often also time (and timing) plays a major factor in price. It may be that a higher price can be obtained - but how long will it take, and what is the cost of that time?
So back again to our musings on a computer program or matrix to take into account all this multiplicity of variables, and then assess a price. Possible? Yes - but Practical ? No.
We will continue to use our local knowledge and knowledge of the market to come up with value.
And we will continue to provide our frank and honest answers to those who ask us "What is it worth?"