A Guide to Institutional Property Investment

350 Pages·1985·27.554 MB·English

by  Angus P. J. McIntosh, Stephen G. Sykes (auth.)

A GUIDE TO INSTITUTIONAL PROPERTY INVESTMENT
Over the last two decades there has been a revolution in the
ownership of property in almost every town and city in the United
Kingdom. Many office buildings, shops, shopping centres, ware
houses, industrial units and even agricultural holdings are now owned
by large institutions such as insurance companies, pension funds and
property unit trusts. A staggering £2 billion p.a. has been invested by
these institutions in recent years. Yet there is relatively little informa
tion available for those who are professionally involved in making the
decisions to buy property and how to manage them.
A Guide to Institutional Property Investment fills this gap. It is a
practical book for anyone directly or indirectly investing in, advising
on, or involved in managing institutional property. It provides
informative, progressive and critical guidelines and will be of use to
surveyors, accountants, bankers, architects, lawyers, estate mana
gers, large-fund managers, insurance companies, valuers, auctioneers
and the investors themselves.
Property management has traditionally been concerned with day-to
day management rather than strategic planning. With the growth of
property investment portfolios there is a need for a new type of
expertise. This new kind of management requires financial appraisal
and performance monitoring techniques, both of which are discussed
by the authors in detail.
Angus P J Mcintosh BA (Econ), MPhil, ARICS, is a property market
analvst with Healey and Baker, international surveyors, valuers and
auctioneers. He was the Assistant Investment Surveyor for Provident
Mutual Life Assurance Association until1982 and has been a Senior
Lecturer at the School of Surveying, Kingston Polytechnic and a
Principal Lecturer in the Department of Surveying, Portsmouth
Polytechnic. He has gained wide experience of this field by holding
several posts in the British Rail Property Board. He has had articles
published in Estates Gazette, Journal of Valuation and International
Real Estate Journal.
Stephen G Sykes BSc, CDipAF, is an independent investment
analyst and computer systems design consultant, retained by a
number of major investing institutions and other organisations. He
was previously a property analyst with stockbrokers Rowe and
Pitman, international property consultants Richard Ellis, and latterly
chartered surveyors St Quintin, being responsible for developing new
and comprehensive computerisation in the areas of property valua
tion, analysis and commercial agency. More recently he established
his own consultancy, Stephen Sykes Associates. He has had articles
published in Investment Analyst, Journal of Valuation, Appraisal
Journal, Pensions World, Estates Gazette, Estates Times, Chartered
Surveyor Weekly, Property Business and Investment Markets.
A GUIDE TO
INSTITUTIONAL
PROPERTY
INVESTMENT
Angus P.J. Mcintosh and Stephen G. Sykes
M
MACMILLAN
© Angus P .J. Mcintosh and Stephen G. Sykes 19H5
Softcover reprint of the hardcover 1stedition 1985 978-0-333-36613-4
All rights reserved. No reproduction. copy or transmission
of this publication may be made without written permission.
No paragraph of this publication may be reproduced. copied
or transmitted save with written permission or in accordance
with the provisions of the Copyright Act 1956 (as amended).
Any person who does any unauthorised act in relation to
this publication may be liable to criminal prosecution and
civil claims for damages.
First published 19H5 by
MACMILLAN PUBLISHERS LTD
(Journals Division)
and distributed by
Globe Book Services. Ltd
Brunei Road. Houndmills
Basingstoke. Hampshire RG21 2XS
British Library Cataloguing in Publication Data
Mcintosh. Angus P. J.
A guide to institutional property investment.
I. Real estate investment 2. Commercial buildings
I. Title II. Sykes. Stephen G.
332.63'24 HDI393.55
ISBN 978-1-349-07156-2 ISBN 978-1-349-07154-8 (eBook)
DOI 10.1007/978-1-349-07154-8
To Patricia, Jonathan and Rebecca
Janine and Francesca
Contents
Preface ix
List of Abbreviations X Ill
Introduction XV
PART I HISTORICAL PERSPECTIVE
1 The Financial Institutions and Their Expansion
as Urban Landlords 3
2 The Growth of Institutional Property Investment 19
PART II ORGANISATION AND INVESTMENT
METHODOLOGY
3 Institutional and Other Property Investment
Organisations 45
4 Taxation and Institutional Property Investment 62
5 Leasehold Investments and Other Rent Sharing
Arrangements 91
6 The 'Institutional Lease' 109
7 The Location and Design of Institutional Property 130
8 The Marketing of Investment Property 174
PART III ASSET VALUATION
9 Freehold Investment Valuations 187
10 Leasehold Investment Valuations 208
PART IV INVESTMENT MANAGEMENT AND ANALYSIS
11 Active Portfolio Management 221
1? Portfolio Analysis and Property Performance 231
13 Valuatton and Performance- the Uncertainties 273
14 Risk and Investment 287
vii
Vlll Contents
Epilogue: Some Personal Views
Appendixes 309
I Implied Rental Growth Rate 316
II The 'Rent Adjustment' Factor 318
III The Town and Country Planning
(Use Classes) Order 1972 320
IV A Property Unit Purchaser's Check List 322
References and Further Reading 325
Index 333
Preface
The UK commercial property market is astonishingly devoid of texts
relating to the practice of investment and evaluation. Despite the
enormous real estate holdings of the financial institutions and the
rapid acceleration in monies channeled into direct property acquisi
tion and development in recent years, the institutional property
investment world remains singularly insular. Yet ironically the results
of such investment of the general public's savings are creating and
changing literally the very fabric of our urban environment for
anyone to see.
Property is a complex business and as a medium of investment for
the institutions it involves a whole spectrum of problems and
solutions not encountered in the equity and gilt-edged markets.
A factor contributing to the often simplistic, even offhand manner
in which commercial property investment is treated by many invest
ment advisers must lie firmly at the door of the property market itself.
It has generally relished the apparent secrecy and so-called mystique
surrounding its activities. Nearly two decades ago Oliver Marriott's
book The Property Boom offered a fascinating insight into the
post-war property world. However, much has changed since the
1960s. Institutional investment in property was then only embryonic,
but it is now the dominant force in the field of commercial property.
The idea for this present book was borne out of a requirement to
fulfil three rather diverse needs. Firstly to offer guidance to the
non-property professional investor/adviser who nevertheless is in
terested in, or may be required to have some knowledge of, the
institutional property market. Secondly, because of the enormous
scope of the property market itself, it was felt that a text dealing with
the more important aspects of commercial property and portfolios
would prove useful as a source of reference to the property specialist.
Thirdly, the important area of property investment appraisal has
been very much neglected. Rather than merely show the usual
simplistic measures which are invariably undertaken, we have ex-
lX
Preface
X
plored in some depth analytical techniques covering the assessment
of both performance and risk in a practical manner to assist invest
ment decision taking. However, it is not our intention to justify
property as a suitable investment medium for Institutional monies.
That is a matter of judgement on the part of the investor, and is
entirely dependent upon circumstances. As with any form of invest
ment, the specific risk/reward characteristics will be more suitable to
some investors than others.
Overall responsibility for the content of the first two sections of the
book lies with Angus Mcintosh, whilst that for the last section dealing
with analytical approaches lies with Stephen Sykes. The middle
section which looks at aspects of asset valuation is essentially
collaborative and indeed the entire text has been 'edited' jointly. We
would like to express thanks to Norman McFarlane, David Clinch
and Chris. Mellor for offering useful comments in certain specific
areas. However, responsibility for the content, tone and accuracy of
the book lies entirely with the authors. We also wish to acknowledge
that certain sections of Parts III and IV are based on original papers
previously published by the authors in The Investment Analyst, the
Journal of Valuation and The Appraisal Journal. So far as we are
aware, all statistics quoted are correct at the time of writing.
A considerable amount of the last two sections of the book which
deal with the valuation and analysis (appraisal) of property, relates to
ideas and techniques used and/or originated by Stephen Sykes in
recent years and published elsewhere (including the journals men
tioned above) in separate papers. We hope these ideas, and their
interrelationships, may aid property investors and form the basis for
further research into the problems encountered in property invest
ment analysis.
In addition to being a source of reference, we have endeavoured to
offer personal views on many aspects where appropriate. In view of
the broad nature of the property market, we have necessarily been
somewhat selective in certain areas. Nevertheless, our aim is that the
book should be seen to provide not only a guide but an informative,
progressive and critical insight into the workings of the institutional
property investment market.
THE BUDGET 1984
In his budget speech on 13 March 1984 the Chancellor of the
Exchequer put forward a number of proposals. As the text of the