Varecon 01

Ltd

I have recently been examining a number of propositions on a crowd-funding site that provides short-term bridging-finance secured on property assets. Although the high interest rate on offer reflects the relatively poor utility of capital in a bridge-financing arrangement, in particular the uncertainty of when the money will be repaid and whether a new lending opportunity will be available at that time, the fixed pricing of the debt does not reflect property-specific risk or even the different loan-to-value ratios. Therefore, it behoves the lender to carry out his/her due diligence, as far as possible, with the information available so as to achieve the lowest-risk lending. The key piece of information provided is a full valuation, and this is worth reading in full to gain an understanding of the proposition. For experienced property professionals, certain pieces of information will send warning messages, although I am not sure that these will be picked up by less experienced lenders, which should be of concern to us all. I would not rely on any property valuation that had not been signed off by a registered RICS valuer, and my preference for larger firms of valuers is not because they are necessarily better at valuing, but because they have very standardised systems that are not likely to be influenced by the client’s objectives or requirements (outside the instructions themselves) and also have the resources available to provide a lot of background information, such as research. Sometimes, however, specialist property is best valued by specialist valuers with local knowledge, although in such cases, I also carry out my own research to ensure that the local market is not saturated by several owners/developers all offering to service the apparent demand. Equally importantly, an understanding of the nature, in economic terms, of the different types of local markets provides guidance on which are inherently riskier than others. Dynamic markets where demand is, or should be, good and there is at least a sufficient range of buyer or occupier demand to support the capital value or rent are prerequisites should the borrower default. In other words, if there is a default, I would want it to be not due to market conditions, but to the inability of the borrower to manage the asset or his/her own finances. Most recently, I reviewed some ‘prime’ central London residential properties which were being offered as security. On the face of it, these should offer excellent security. The values of individual apartments were in the range of, approximately, GBP1m to GBP3m, where there is generally good demand, despite some falls in values at the upper end of the range in the last 12 months due, in part, to increases in taxation and stamp duty. The comprehensive valuations provided some interesting information on the central London markets, particularly in intelligence gained from the comparable evidence (other similar market transactions). The evidence was all of secondary market sales, reflecting the ages of the properties being offered as security. This is a rather different market than that of new-builds, which are usually sold off-plan and very often to foreign buyers who are disinclined to spend time physically searching in the market. Assessing values by purchasers in new builds is, I would argue, rather easier than that of older properties in the secondary market, and I believe that buyers of the new properties take some comfort in the demand being expressed by their fellow buyers for what is virtually identical stock. The buyer of an older secondary property is, however, very much on his/her own in terms of assessing whether he/she is paying a ‘fair’ price for a unique property. None of the comparable evidence provide any indication of what length of time the properties had to be marketed before a sale was achieved, which seems to me to be a critical piece of information, but: 1. There was some reference to apartments that had been put on the market, reduced in price, further reduced in price and then withdrawn. Some of these were later put back on the market but still failed to sell. The reductions were not insignificant, perhaps 20%, in a market where prices were rising by maybe 15% or 20% p.a. There was nothing reported as being defective with these properties. Maybe they were just unlucky or too demanding to start with. 2. The valuations of the subject properties were on two bases: a sale to completion within six months, and a sale to completion within three months. The latter is to represent a ‘forced sale’, particularly relevant is the lender needs to sell the asset to recover the capital and to minimise interest costs, which might not be recoverable in full. The difference between the two figures is what I would describe as a very significant 15% to 17%. Bear in mind that this is in what is probably the most sought-after market in the UK. The conclusion that I draw from this is the central London market may not be as liquid as many commentators would have us believe. This accords with anecdotal evidence that I have gleaned in my analysis of the market. Many properties take a couple of months to find a buyer, only for the buyer to subsequently withdraw or require a reduction in price – and the process is often then repeated. Six months may not be an unreasonable period in which to secure a sale to completion in such circumstances. The high discount being applied to a three-month requirement may, therefore, not be unreasonable. The gap between the three and six month sale prices is also a boon for a central London ‘refurbisher’. It appears from the comparables that refurbishing (only the apartment interior, of course) can add very significantly to the price obtained, perhaps by 25% or 30% (on high value properties), even if the typical refurbishment amounts to little more than redecorating, a new bathroom suite, and new kitchen units. But it is also likely that the refurbisher is buying properties from sellers who have become frustrated by the withdrawal of buyers and is effectively providing purchasing certainty at a ‘three-month price’ (or shorter, perhaps much shorter) rather than a ‘six-month price’. He/she may then be willing to wait out for the longer period to achieve a sale if necessary, although if you accept the above figures, the refurbished price premium above the ‘six-month’ value is not that too great. It does raise the more general question as to what is the ‘true value’ of these properties. Is three months a reasonable period in what is supposed to be a ‘good’ market, but for those buyers willing to wait longer (six-months) for the ‘right’ buyer to appear, there is a premium price? Is there significant liquidity pricing differentials? This is not just an academic point, as it is the six-month price that is the one quoted as current value/pricing, and this might be giving a false impression of the market.

Central London market may not be as liquid as many commentators would have us believe.