My Property World - The Augustry

Who is Sir Bob Jones?

“My Property World” (2005) Notes

My short preamble

Introduction:

Post-Christmas there is an annual once-in-50-year flood, which is when most of my books were written.
For commercial success read my novels Ogg and Full Circle.
Achieve the financial Holy Grail by unorthodox thinking.
Invariably this advice falls on deaf ears.
Jones on Property (1977) is outdated in any instructional sense, but the underlying spirit still has some value.
Good Management is about anticipating problems, rather than dealing with them as they arise.
Investing is similar – being about trying to predict the future.
Demographic, social, and economic concerns have a huge impact on commercial property investment.
All three are in a volatile condition.
The world no longer labours under highly-controlled economies in which demand always exceeded supply.
An economic structural bias that favoured suppliers, a disaster for consumers, with shoddy and expensive goods and services.
Today it’s the opposite, most of the world wholeheartedly embracing market economies, albeit excessively regulated.
Fierce competition drives supply of labour, goods and services to exceed demand constantly.
Unlike the old days, commercial property is now a service activity.
The hands-off, detached approach of yesteryear is no longer feasible, especially with offices.
Commercial property people are, by necessity, extroverts, imbued with a sense of optimism and good company.

Chapter One: property Activities

THERE IS A DIFFERENCE between Property developers, Property Investors, and Property Traders.
Also land dividing, which seems easy, but in practice is often a struggle and only works in buoyant economic periods.
Land dividing and property trading have the inbuilt flaw that when the goal is achieved by selling profitably you are back to square one.
Similarly keeping money aside for a rainy day follows the same flaw in logic.
When you need it you then no longer have it, but when you didn’t need it the money was wasted through opportunity cost.
Put simply cash flow is the answer to this dilemma of financial security.
Only the investor has cash-flow, one of many reasons why he is superior.
After obtaining an investment property, responsible management and common sense to avoid white elephants will see you through thick and thin.
There’s more to it than that, and investing isn’t risk free, but that captures the essence of the difference.
A good analogy is orchardist vs market gardener.
For the orchardist, once planted, minor crop maintenance will keep on giving fruit, while the trader has to replant crops each season and start all over.
Similarly it’s a good analogy because uncertain times/markets/bad seasons influences both.
All commercial activity bears financial uncertainty, but the investor is more secure due to cash flow.
In property – quality buildings, excellent maintenance standards, and strong tenant relationships will see you sailing through the hard times.
Whenever possible negotiate long leases.
The benefit of supplying to the higher-end is they are more recession resistant.
The appealing factor of commercial property is the huge profits.
Large sums of money are involved, but banks see them as less risky investments.
You don’t actually need much money to get started.
Banks prefer investors as long-term clients because of rental cash-flow.
What is required is market knowledge, and then finding a bargain to create a foundation capital base.
Investing is being mindful of the past while trying to read the future. More so than knowing the market conditions of today.
But why bother when most economic forecasting is wrong?
All human outlook is optimistic, and assumed correct at the time, which is unavoidable, otherwise why do anything?
Forecasting is an iterative process of daily reviewing over time.
An investor can always change his mind.
A developer cannot, which is a great weakness/risk as they are locked in large scale projects for a long time and the environment often changes.
Why take risks when you don’t have to?
Most investors start as traders.
Traders must be familiar with the market, and often specialise in a particular field such as industrial property.
Traders seek undervalued assets, then polish, find tenants, and sell to an investor.
An undervalued asset usually is a cheap empty building, which is perhaps slightly run-down or has extra land.
Securing a tenant is the one timing uncertainty, but the whole process can usually be done inside 6 months with luck.
In that small a period, one has to be very unlucky for an upheaval to send things askew.
This is why most property operators are traders and remain so all their lives.
One only needs readily available current market knowledge e.g. market rentals, lessee demand, building cost, and acceptable investor yields.
Traders mostly deal with certainties, no intellect or imagination required, but it is a treadmill, without the security of cash-flow.
The profits are insignificant compared to the passive and patient investor.
The flaw of traders is perceiving each transaction as a permanently-optimised value position with no potential for further gain, or security.
To be fair almost economic activity is made up of producers and traders (distributors).
Very few are fractionally more efficient than the rest and become rich.
But most make out comfortable yet meagre livings – dignified through self employ.
History proves the vast majority of fortunes are made by astute investors in conventional activities such as property.
Those who choose their particular investment vehicles and stick to them.
Never selling through thick and thin.
Most start as traders, climb a few rungs through energy and hard-work, then see the light.
None are a better example than Warren Buffet.
Epitomised by his “less is more, buy quality and never sell” simplistic approach.
The successful investor must be a historian and a prophet.
Begin mostly as a bargain hunter, and naturally not ignoring anything that falls into your lap, but waste no time seeking bargains out.
Rather concentrate on studying market cycles, paying particular attention to likely future supply/demand imbalances.
If one calls it right and recognises that periodically the entire market is a giveaway, then a relatively generic approach to acquisitions can be applied with a huge pay-off down the line.
Countless times have I heard traders and developers bemoan their foolishness at having sold buildings profitably a few years before subsequent leaps in value.
They never gave such possibility of increase serious thought, so it is no surprise they never saw the higher price potential.
They failed to recognise the cyclical elements of the market economy.
The golden rule of property investment is to buy quality and never sell.

Chapter Two: Investment property Categories

Investment property can be divided into various categories, and further sub-divided into specialist groups.
The most common, though not the worst, as terrible as it is, is residential property.
Residential can be divided into apartments and houses.
The worst is hotels, by far.
Running a hotel is a highly addictive business for persistent masochists.
The old adage is that the third owner makes it work.
Which means the first two owners have gone down the gurgler. The fire sales repeating until the hotel price level is so cheap it finally works.
Hotels are a terrible business even if given away for free.
The three worst possible businesses are forests, airlines, and hotels.

Commercial buildings can be divided into office, retail, and industrial, which can then be further sub-divided.
Office buildings can be categorised by location – CBD or suburban.
Suburban didn’t exist till recently, but now due to city growth and cars are increasing.
This process has created sizeable office centres, these locations have the same merits as CBDs.
Examples include Sydney’s North Shore and Chatswood, Takapuna and Albany on Auckland’s North Shore.
Developers have over the years emulated America and built out-of-town office parks.
Typically they have attractive garden settings and huge parking facilities.
Out-of-town office parks however are mediocre investments.
Mainly because their tenants, regardless of financial strength, are motivated by solely by rental cost.
Invariably an American corporation with their competitive bargain-basement culture.
Cheap because of the comparatively low land values.
Office parks are always bought by investment funds. Investment funds are ticket-clippers predominantly interested in quantity over quality investments.
Office parks have an absence of value growth which has two components.
When the tenancy is filled there is no external pressure to drive up rents. As islands you can’t point to neighbours as examples.
But because the appeal is the cheap rental the tenants will only be interested as long as the rent is cheap. This doesn’t have much future.
The old golden rule is location, location, location, and this is true enough.
The simple rule is to buy office buildings where the bulk of office buildings already are, the same goes for industrial and retail property.

All signs point to relentless continued growth in cities.
Human are social creatures, and enjoy the buzz of dense population.
Unlike industrial and retail property (apart from malls) ownership of modern office towers is no longer a passive investment. It is a service business.
Back in the day one tossed the keys at the tenants and then never went near them.
The first bugger to go in unlocked the doors and the last out locked them.
The functions of buildings today are computer-controlled from our office.
Doors, floor temperatures, and more are managed this way.
Running costs are three times what they once were.
Air conditioning, servicing, security patrols, compliance costs, etc. all add up.
Most industrial and retail buildings don’t have these problems which is part of their appeal.
Malls are a notable exception and is a specialised and expert business.
The market has sorted the sucking of retail away from high streets by malls with their rebirth. The attraction of the activity unwanted in malls, generally offbeat specialists, such as high-quality/ethnic restaurants, art galleries, second-hand book shops, antique shops and the like.
Businesses like cafes and wine bars in particular allow the life and ambience at street level to flourish.
Consumers vote with their feet.
A dreary office building street can become a vibrant hub, all for the good of atmosphere and for financial prospects.
Property growth is about rental growth and thus building enhancement.
Office and industrial building rentals rise for reasons unrelated to the occupants activities. But not so with retail.
The better retail does the more valuable their location, and higher the rental rises.

Lastly there are industrial buildings and their many sub-categories.
First there are factories, which used to sometimes be upgraded by the tenant which tied them financially by the tenant.
Most products now merely require a whole operation machine that can be ordered where the raw materials go in one end and the finished result, packing and all, pops out the other.
Anyone nowadays can be a manufacturer as long a they don’t mind being permanently impoverished.
Such business is doomed in the face of low-labour cost nations like China.
The wise investor avoids factories, with their price-taking occupants, usually little better than wage-slaves.
The standard industrial building is effectively a big shed with an attached office mostly used for warehousing.
In good times demand will drive up land values but essentially such buildings offer poor growth outlooks compared with offices.
The one exception is inflationary periods, which are unlikely to recur in a competitive environment, despite the misplaced worry of central banks.
Such elementary structures are easily knocked up by hyper-active developers.
Most warehouse occupants, like manufacturers, are price-takers. They are in the short-term cut-throat competition of distribution and are not the most desirable tenants from a rental growth perspective.
One industrial building category is top-quality however, showrooms, which are located by necessity at the fringe of CDBs.
Such activities are generally price-setters and as more goods are imported, their numbers will grow, so will demand for buildings.
Unlike factories and warehouses which can shift a mile down the road to cut costs with no other change, fringe CBD showroom space is prescribed.
They can’t go up, because like shops, they work best at ground level.
They have the added virtue, as cities spread outwards, of eventually evolving either a residential or office building/high-rise use, redesignation which compounds the land value.
This merit may explain the interesting fact of showroom building’s singularly high percentage of owner-occupants among commercial property.
Once this was true of most shops and industrial buildings, which is more about shopkeepers and industrialist no longer being an affluent class, rather than any investment merit.

Most investors specialise in one of the three categories mentioned, but prudence is to maintain a mix of all three, preferably the better-quality end of each.
There are a few other rarer categories like central-city parking buildings for example, which are super investments in every respect.
They offer maximum capital and income security, plus steadfast value growth, and as crude structures have no maintenance or management issues.
But they are so few and so tightly-held as to not be worth mentioning.
The most successful value growth-pursuing investors are those who abandon early bargain-hunting and instead move to market trend analysis.
One should readily pay a premium to acquire a prime property. History shows that all too soon the entry price looks a bargain.
One has not paid too much but paid too early, in other words.
In central city locations and especially corner sites, there is an element of almost monopoly in the ownership, every capitalist’s dream.

If a man wants his dreams to come true he must first wake up.

Chapter Three: Property Seminars

One of the most appealing aspects of private commercial property investment is the liberty to turn off (for fancy or prudence) without loss of income.
Few other commercial undertakings have this freedom, especially in economic downturns most businesses become more demanding.
The treadmill-like pressure of public companies to outperform disincentivises taking your foot off the pedal year to year, even when sometimes restraint is the wiser course.
Misanthropy and envy are the driving force of left-wingers. For all their virtuous talk, every one of them is obsessively materialistic.
Grey shoes are evil.
Never trust a beard.
Someone might claim I am to blame for pioneering business seminars, but that responsibility falls squarely on Henry Newrick.

Chapter Four: The Seminar Bunrush*

*That’s how it’s printed

The commercial agent is the investor’s life-blood.
There’s an old adage that people only really value what they pay for.
There’s another adage that if you can’t do it, then you teach it. This certainly holds true with sports trainers, they have greater empathy for their pupils than do past champions, who rarely make it as coaches, presumably due to a great deal of natural talent underlying their success.
Such logic does not carry to financial advice.
It’s amazing how many ex-bankrupts choose financial advice as a resurrection career.
Even more amazing is how many silly buggers line up to pay for their wisdom.
The only reason people try to sell property in another country is because they can’t sell it at home.
Conference-attending is a massive international business which deserves a sceptical view.
Beyond perhaps introductory courses which are of only minor value.
Most however property courses are aimed at residential investment which is a mug’s game for the financially naive.
Any decent commercial property organisation should already have the kind of knowledge presented.
Conferences are just excuses for paid trips, and in the case of Academics and Government Officials (who are especially inclined to these) trips using other people’s money.
Many people have an inexplicable and inexhaustible appetite to listen to other people lecture and hector them and often pay ridiculous sums for the privilege.
What minor benefit you might otherwise get from ‘how-to’ sources is better gotten from becoming an inquiring mind – the root of success which follows from wide knowledge and imagination in a total sense.
A successful investor in any field must attempt to be a prophet anticipating the future.
To do so, wide knowledge, best gained through extensive reading is the best formula.
In my opinion the all-important daily newspaper is a place to start.
Such success applies to every walk of life not just property or commerce.
‘Bawling in to cellphones, wasting time staring at computers, listening to the radio in the car, flopping in front of the television, instead of quiet reflection, reading and thinking, are what Joe Average does.’
If one wants exceptional outcomes then logically one’s behaviour must be different from Joe Average.
‘The rich are not like you and me, the rich are different’ to quote F Scott Fitzgerald.
Of course they are, wealth is just the by-product.
All American bookstores carry huge stocks of ‘how-to-do-it’ books.
If a book really has a magic formula, then the author would obviously apply it himself rather than reveal all.
Furthermore given that this revelation is now shared with thousands, the information hardly elevates the reader above the mob since the mob has access as well.
Yet these books keep appearing and are accorded so much space in bookshops, especially in the US, which tells us the market is indeed enormous.
Americans are huge consumers of self-improvement books, which frequently top best-seller lists.
The standard methodology of all is to present aphorisms that have a neat appeal, or six or eight purported golden rules, or reinvent the language in advancing otherwise age-old truisms.
Edward De Bono became extremely rich and famous from the ludicrous claim that he invented lateral thinking, which most successful people do naturally, as they always have, and rather only invented a perfectly apt descriptive term for sensible approaches to thinking.
The most famous self-improvement book still is Dale Carnegie’s How to Win Friends and Influence People, which apparently ranks with the Bible and Atlas Shrugged as the books Americans claim most influenced their lives.
If so, then plainly books can affect one’s behaviour and outlook.
It must be conceded if a book is platitudinous and states the obvious, all too often the obvious is only so when pointed out.
“How-to-do-it” is not really possible, one size doesn’t fit all.
Investment decisions are based on logic, knowledge, and correct forecasting, but also must fit an investor’s temperament and emotional make-up, plus considerations such as age, needs, means, background, competence, etc.
Meaningful investment drive cannot be imparted to strangers.
Everyone must track their own way to the rainbow’s end, we are all different.
Invariably most advice I have ever given, when pressed, had an overly-cautious, conservative approach.
I myself don’t know anything about the salient facts of any but a handful of areas.
But the first question should always be ‘why do you want to buy something?’
Being a lessee of a building or next door to it are hardly reasons to purchase it, although these are among the most common given.
Decisions are evidently often made for whimsical reasons.
Proffering investment advice is always a losing proposition.
Getting rich through investing ain’t easy. It just looks that way, especially during booms.
It’s hard not to score when everyone seems to make a fortune, but anyone with a few decades experience is alert to the certainty that booms are always followed, if not necessarily by busts, then certainly significant downturns, sending the over-geared under.
The one characteristic seasoned investors share is a conservative restraint
This is likely why they’re hesitant when asked for advice.
Investment is a big picture business
One doesn’t learn this type of thinking from seminars and books, you work it out for yourself.
Would you really not buy an office building because the toilet doesn’t flush or you didn’t check the roof?
No seminar or book or CD is a cure for problem of not thinking clearly. Only the age-old self-improvement method of any activity, by doing it themselves, can.
To be a good thinker, throw the stupid bloody cellphone into the sea and start practising.
Most people are bored of their own company and its implicit need to be contemplative.
There are so many opportunities to think in day to day life, yet most folk forfeit them by introducing extraneous substitutes to fill what one can only assume are empty heads.
In any technical sense I actually know very little about buildings.
Lots of property people, especially developers and traders, are enormously knowledgeable about details, but I have never met any among the category that is seriously rich.
Investors can never have too much of the right knowledge but can certainly have too much (usually technical) irrelevant information, which clutters clear perspective.
Seeing the woods for the trees is the trick in ascertaining what knowledge is important and in trying to predict future market trends.
I’m was told by an agent there’s a strict co-relationship between amount of details sought and successful purchasers.
The most knowledgeable and successful buyers ask the least questions.
Other than imagination and wide knowledge of human affairs, the essential requirement to succeed in commercial property, corny though it is, is the most useful tool of “networking”.
Never hesitate to grill the most humble new chum about “what’s happening” and get information that helps complete the ever-shifting jigsaw of knowledge.
Useful knowledge can emanate from the most improbable of sources.
Helen, the wife of Muhammad Ali’s trainer Angelo Dundee, once remarked over dinner that making money out of property hardly required brains. As explanation she said “My mother is a supremely silly woman, but she’s made a fortune from property investment. I know nothing about property, but I do know my mother has two golden rules. The first is to never sell and the second is to only buy corner buildings.”
I understood the never selling part, but corner buildings! It was so obvious, but had never occurred to me, despite having 16 years in the business under my belt at a high level.
The virtues of corner buildings are self-evident due to the factors of all-important natural light and high profile.
Ever since, with the exception of free-standing towers, which have similar four-sided lighting merits, all my acquisitions have confined to corner sites, even with industrial buildings.
The caveat being in the southern hemisphere always northern corner, preferably north-eastern corner, to maximise all-day sun. The reverse in the northern hemisphere.
Never buy a south facing building due to inherent and almost palpable negative character, which impacts tenant appeal.
Tenants intuitively sense positive vibes from well naturally lit locations as the sun is the source of life.
In the event of an office market collapse, as periodically happens, corner buildings have the special attribute of readily lending themselves to apartment conversion.
As the old adage goes – You never know where your sales lie.
Similarly you never know where valuable information may stem from.
Pearls of wisdom, once learnt, seem so glaringly obvious.
Never stop learning.

Chapter Five: residential Property Investment

Residential property investment is a mug’s game.
Yet every ordinary masochistic bugger barrels along and does it anyway.
The primary reason for it’s ghastliness is simple – the people involved.
The returns are poor for all the tenancy hassles.
But that said, it’s a far better idea for most ordinary folk than any other alternative like the stock market.
Current replacement cost are always the basic measure of value outside of hotels, retail, or special use buildings.
Residential value booms, probably more than any other economic stimulus, cause a great bourgeoning of economic activity.
This is because economic activity stems from consumption, which stems from confidence.
Confidence is boosted by residential property value more than anything else.
Economics is a behavioural discipline, many intangible considerations matter, not the least being emotional ones.
There is immense social benefit and stability factor from a stakeholder society.
The collective performance of (the self-interested) sharemarket fund managers over any reasonable period of time is less than the index (and the index isn’t that spectacular).
Even if your average plumber, teacher, etc. invested in shares why would they expect to outperform the ‘experts’ who despite specialised knowledge still come out behind?
All booms ultimately end, but not necessarily in a crash.
In property booms mostly sink a little initially, then plateau for 4 or 5 years before climbing again.
Whereas sharemarkets crash spectacularly all the time, at least once a decade.
This gets labelled euphemistically as ‘correction’ while residential property is always a ‘bubble’ bursting.
It is a time-honoured fashion for the market to do the opposite of whatever a politician assertively declares is likely the future trend.
Residential property is less volatile day to day.
Instead of saving for retirement Mum & Dad are better off investing in residential property for peace of mind.
Everyone understands housing.
In a healthy economy (unlike with offices) residences never go into serious over-supply.
In countries where the majority own homes most tenants are young singles or no-hopers.

Chapter SIX: Commercial Real Estate Agents (and cellphone addiction)

It used to be lawyers that were the most important professional to deal with (and they are still very important).
Now by far the most important professional the investor relies on is the real estate agent, as it is they who offer new buildings, give advice, and even find tenants if necessary.
They cannot however provide prudent investment advice, but when making a new acquisition ask their advice all the same.
Cost-saving by avoiding their fees is fool’s gold.
Their lubricating negotiations makes transactions more likely and easier – especially in difficult times.
Paying them means something good has been achieved.
Always pay the middleman.
Their service is effectively costless because they will obtain a better deal for you than you can.
It’s easier to argue someone else’s case than your own.
People are more comfortable dealing with middleman brokers.
The obsession with cellphones is a terrible cause of inefficiency and rudeness.
(In self-interest) Leave your office where it is and actually spend some time there working.
Cellphones are marvellous for an emergency, not in business.
Reliance on cellphones leads to unthinking, sloppy behaviour.
Organised thinking is abandoned in lieu of an attitude that anything can be done instantly when it arises. It can’t.
Confining commercial activity to the office, and more importantly letters, leaves a paper-trail.
A paper-trail is a huge advantage in disagreements.
The most effective agents are the ones that say little.
Business success stems from a mix of commonsense, knowledge and imagination, plus the all-essential enthusiasm and hard work elements. An MBA offers none of that.
So far (in 2005) any demise of office work due computers has been replaced with occupancy by computer companies – despite what the doomsdayists have said since the early 1990’s.
A virtue of globalism has been the heightening of standards.
Many office buildings are foreign owned and use local real estate agencies as building managers.
This has turned them in to a competitor of sorts for tenancies.
But commercial property management divisions are all spectacularly inept.
The juice for agents is in the sales.
At any given time in a particular city, one agency will dominant in personnel numbers and sales.
Such supremacy never lasts more than five or six tears due to complacency.
It is extremely rare for commercial agents to comprehend the all-important subtle nuances of property investment, even though they sell such assets as a living.
Investors deal mainly in intangible and reflective considerations, speculating about the future.
Agents focus on the hard facts of today.
If they wanted they could become traders, but never investors.
Thus investors and agents complement each other.
Excellent relationships with commercial agents is a prerequisite for success, never more so than boom times, when available good properties are scarce and there are lots of buyers seeking them.

Chapter Seven: Professionals (and associated ramblings)

The property investor deals with a wide range of professionals including lawyers, accountants, architects, city planners, structural engineers, and valuers.
The most critical is the lawyer.
A good solicitor should always be a deal-maker and never a deal-breaker, sensibly negotiating and solving problems with the other side’s lawyer.
As most, say, large office tower vendors are institutions – there can often complicated hoops and hurdles to work through, especially numerous documents being a mess and not represented in sales material (or outright erroneous/non-existent).
The essence of property investment is a complex set of interweaving contracts, starting with the ownership title, then tenancy leases, mortgage and service contracts.
Where contracts exists, arguments will inevitably arise about interpretation.
The best lawyers are leaving the battery-hen, big-firm environment to form their own smaller partnerships.
The trend is small and medium-sized practices are just as competent as their big-firm peers. But charge half as much and provide a more personal service.
When buying in a new city a lawyer isn’t necessary until the deal is instigated.
The top commercial real estate agent you are dealing with will know who to recommend.
Chances are it is a senior partner of a medium-sized firm already acting for many other property investors.
Much the same as above can be said of accountants, though they play less of a direct role.
With any commercial activity tax advice is critical.
But lawyers, not accountants, are more often the most knowledgeable in this regard beyond the basics.

Then there are architects and structural engineers.
Even as an investor, not a developer, buildings are forever being altered, extended, or upgraded.
Construction is invariably fraught with dismaying surprises.
Architects are all excruciatingly dull with few exceptions.
This means there is high demand for the few competent and personable ones.
But even they are belligerent about design, though will eventually acknowledge a good idea.
Building owners should always study their proposals, as outsiders, they will often see solutions to dilemmas the professional cannot.
This is equally true with lawyers and legal issues.
A caution, architects understandably try to relieve their tedious existence by being creative, innovative, and seeking to make a mark.
This often leads to impractical ideas that have disastrous consequences if clients accept the proposals without studying and thinking about them.
As an investor, you acquire existing buildings rather than build your own.
Most buildings will have glaringly bad design features.
All investment options being equal, if there is renovation solution, then do so.
The most common design fault is the location of lifts.
In the southern hemisphere they should always be at the (dark) southern end of the building.
With very large floor area square buildings, say > 10,000 square feet, a case can be made for central core lifting, but few buildings under 20 floors qualify.
Under-lifting is the worst design fault.
Seek higher standards, e.g. one to every 20,000 square feet of office space (maybe at a stretch 25,000) compared to the industry average of one per 30,000 square feet.
Lifts in one corner make possible floor sub-division difficult.
Don’t assume architects know what they are doing.
Other mistakes include windowless masonry facades on the north and/or west instead of the reverse, inadequate air-conditioning, and open office plans.
Open-plan offices put a strain on lifts and air-conditioning.
Light and space should be given priority design emphasis.

Lastly there are valuers.
All professional investors in any medium, no matter how wealthy, apply a gearing factor through debt to maximise income and capital returns (leverage).
Call the shots wrong, however, and one’s income and capital losses are correspondingly magnified.
Debt leverage should always be kept at sensibly moderate levels.
Lenders require a professional valuation report to satisfy their lending rules regime.
Investors commission the valuation and request the draft for comment.
This can lead to furious debates.
Valuers are slow to acknowledge rising value.
Valuers are price historians.
They are not romantics or risk-takers, and are nervous because they can be sued.
Sometimes valuers are just straight out corrupt
Some are intimidated by the typical boisterous and extroverted personality of property types, likely peaking when under financial pressure.
But all said, it’s rare for astray valuations to be simple incompetence
Valuers normally report two figures – current replacement cost and current market value.
While necessary for insurance, the replacement figure is useful for demonstrating potential value growth, if market value is a significantly lesser sum.
Current market value is solely what lenders acknowledge.
For large office buildings there’s always room for multiple opinions.
No two buildings are alike and the market is always changing.
Valuers tend to take a sensibly conservative approach, to them, but to the investor a ludicrously understated and cowardly one.
While price historians, valuers customarily make future value forecasts based on anticipating supply demand changes and interest rate shifts. These factors have considerable bearing on investment properties’ values.
Valuer’s two-to-three year forecasts tend to be fairly accurate.
This is quite the feat.
Almost all economic forecasting is invariably 100% wrong.
This is a sub-plot in the book Ogg.
The likely reason for the valuer’s accuracy is the rare circumstance of their perhaps actually having simple and adequate total information.
Investment property values are never stable, but as a general rule they move upward over the years, in line with increasing population and prosperity.
Value growth however is rarely steadfast, and usually occurs in leaps and bounds over a year or 18 months of rapid increments.
After this rise demand temporarily outweighs supply, then value plateaus for three to five years, before climbing again.
An astute property investor’s function is to anticipate those prices spurts and get his hand up for as many acquisitions as possible beforehand.
If forecasting correctly he can afford to initially gear higher than normally prudent, as debt level will quickly diminish during value surges.
There’s a lot of head-shaking and tut-tutting about ‘markets gone mad’ when prices surge, even despite supporting rationales and evidence.
Valuers are especially guilty of this revealing their lack of imagination and inability to understand market forces.
Half a dozen sales at the new level quickly acclimatises everyone to a new norm, and in due course the process starts again.

Chapter Eight: Why Developers go Broke

The only escape for developers is early (accidental) death.
Developers are the ultimate optimists.
When cleaned out, after a pause all seems forgotten and they start over again.
They never learn from past failures because they are doers, not thinkers.
They put past disasters down to bad luck.
Often economic downturns are blamed, perceived as aberrations.
In reality these are inevitable as seasons being part of the clockwork of economic cycles.
I am often defamed by sloppy journalists by being described as a developer.
Developers are the investor’s mortal enemy.
They increase supply while investors seek shortage of space.
Yet the financial lunatics persist in delivering oversupply, despite their awaiting fate.
(The exception being when they convert offices into apartments.)
But anyone interested in cities must commend developers.
They are responsible for the constant enhancement and grandeur of our cities.
This is why they are held in such esteem in countries outside NZ, despite their persistent failure.
No example more self-evident than the crass self-publicist Donald Trump.
His companies constantly go into receivership.
But his brash bravado leads a sizeable proportion of Americans to view him as some sort of role model.
So why do developers go broke?
In short, like most puzzles about irrational conduct, it’s natural human behaviour and absence of thought.
Consider the hypothetical evolutionary history of the developer.
Perhaps he started by knocking up a small two-flat property.
Such an exercise is small, the numbers elementary, and critically, the time-frame is short.
The market (on which costs are calculated) doesn’t change between start and completion.
Let’s assume he makes a good profit, so comes the first human behavioural factor that seals his downfall.
It would be most extraordinary if he then walked away and returned to ‘________’profession and left it at that.
Instead the natural and, indeed, logical human reaction is to repeat the exercise.
Again assuming all goes well, this leads to the second (normal) behaviour ensuring his demise.
It would be totally unnatural conduct, unprecedented in human history, to repeat this all a third time.
No, now infected with the dangerous infallibility virus the developer ups the ante.
(No one is immune from this disease when all continues to go well.)
So he tackles a six-flat development, still possible in a reasonable time-frame.
This going to plan, the infallibility virus now firmly has its hold.
Now he wants scale.
Next it becomes a 10-storey 80-flat deal and the unwitting road to ruin.
The developer enters the danger zone of the unknown time-frame.
A property trader can find a undervalued building, renovate, and flick it on for a profit.
This can all be done within a time-frame in which all the market conditions are known.
But building a multi-level apartment complex takes an enormous amount of time.
In the age of government busybodyism and red tape, obtaining planning permission can take longer than the construction time.
And construction time is long enough for a large building.
The old cliche ‘time is money’ applies to developers more than any other activity.
A large development can take years, even just planning, and delays are costly.
Yet within a few years markets have a habit of changing unexpectedly.
This threat is compounded as developers don’t by nature consider the shape of the economy a few years hence.
Developers are practical people with a passion for building things.
Bellow-into-cellphone-in-waterfront-restaurant-types, not contemplative thinkers.
I have yet to meet one that doesn’t believe today’s market conditions are carved in stone.
Their thoughts are bound up with technical design issues, of which they are extremely knowledgeable.
Driven to cut costs through different approaches and materials.
This pings the safety police, who delay approval and look over every detail for unsatisfactory standards.
Just as time is the investor’s friend, it is the developer’s foe.
But let’s again assume all goes well.
(Large scale projects never, ever, go as well as the original projection.)
There are too many ‘go wrong’ factors that arise with multi-level buildings.
Maybe exchange rates fall, affecting prices of imported materials.
Or exchange rates rise, and construction quotes go up as builders lift their profit margins.
Or the weather is erratic (a fact of life that developers, with their sunny outlook, always ignore) and causes delays.
Or interest rates rise, affecting the bottom-line profit projection or end-purchasers’ market.
Since the advent of the cellphone buildings take a great deal longer to construct.
Half the work force stand around bawling on them instead of whatever else they should be doing.
Developers are mostly funded by high interest rate lenders because banks are alert to the risks of development.
Despite the best-laid plans, delays inevitably arise and eat up the intended profits in interest costs.
Banks will still lend to some developers out of desperation to build their loan book.
But there are still ultra-careful and will advance only, say, 65% on a project.
I knew a banker that would only entertain projects with a 50% profit margin.
Experience had shown that, on average, after all the mishaps, expect at max 10% profit.
The highly-conservative developer is the ultimate oxymoron.
Back to our hypothetical 80-flats developer, the sheer size of the development will mean no turning back.
If the original intended, say, $15 million profits is only $3 million, he will call that a success.
The profits turn out dangerously little, given the total project costs and corresponding risks.
A few more snags and it could just as easily been a $3 million loss.
Here developers then make their first big mistake, few being immune.
(The infallibility virus having destroyed its target – the logic component of the brain).
The developer looks at his costings and notes the amount they spent on outsourced professionals.
Then he’ll employ his own in-house architect for example, and often his own construction team.
As this gets further and further out of control the liquidators start rubbing their hands.
The burden of payroll liability defenestrates rationality and motivates taking on more and more projects.
The developer loses any sensitivity to ever-changing market conditions.
All developers behave this way, insofar as every phase is on an even-larger volume scale.
To an extent we are all like this, the explicable human conduct of when things going well.
The difference is that as an activity, development, more than any other, allows no room for error.
To compare, an investor might splurge on acquiring office buildings, believing the value will increase.
But whatever the diverse reasoning he might be wrong, or unforeseen problems arise as they often do.
In the worst case scenario the investor is just left owning some high-yield buildings.
Not so for the developer, with his ever-expanding, debt-ridden modus operandi.
One market misjudgement will wipe the developer out.
Simply because each successful phase of activity leads to the next at larger scale.
Everything being on the line each time.
Otherwise the developer would still be knocking up flats one at a time.
No developer in history has behaved this way or ever will.
Such behaviour would be perverse to human nature.
Having watched this pattern of behaviour for half a century they all cop it, no exception.
There may be some exceptions if development is but one part of a diverse operation, and/or the completed buildings are kept.
The trials and tribulations of property development would turn a nun into an axe-murderer.
Development only works in financial good times of rising value.
The effort of the developer compared to the investor is the age-old story of thinkers winning over doers, or brains over brawn.
The main weakness of the developer is reliance on high debt at high interest rates, which allows little room for mistakes and adding to the time-vulnerability.
Study any nation’s rich list and you will find a predominance of property activity, but rarely any developers because it is a license to lose money, not a source of wealth. Worse, developers are usually losing other people’s money.
An investor is like a casino owner, a developer a big time backroom gambler. The gambler may win big, but he’ll be back the next night until he loses big.
While uncertainty and risk is characteristic of all commercial activity, the difference between development and other activity is the human factor that drives each phase of grander scales.
Regular failures are evidence of a properly functioning system, anything else reflecting a monopolistic character.
If failures aren’t occurring then an economy has become rigid and lost its most desirable feature – flexibility to cope with the ever-changing environment.
Developing is an addiction that always ends in spectacular tears, and a long line of irate creditors because of the amount of other people’s money involved.
Creating leasehold titles and retaining freehold only makes sense if one intends to live forever.
It’s a market fact that leasehold titles are a put-off to most investors, even though emotionally based, and at large scale reducing the potential market is playing with fire.
Purchasers will always discount the freehold value if downgraded to leasehold.
Developers are the vanguard of new price levels, as building and land prices and ever growing compliance costs rise persistently.
This is why they see no profit in permanent retention, since to their eyes no further value can be added to the asset’s permanent optimum worth.
They ignore history.
This is understandable because they are only engaged with today, not past or future.
The ignored dichotomy they face is that decisions today, because of time-scale, are actually applicable to the unknown tomorrow.
This age of hyper-liquidity and low interest rates cannot be assumed to remain the case.
But keeping assets and financing would have made many developers immensely richer.
Developers prefer the certainty of dealing in hard known facts of today.
Permanent investment, which deals with the hypothetical, is beyond their comprehension.
Building a new CBD office tower is infinitely more complex than a new warehouse or industrial building which are effectively a large shed.
Despite developers being like spectacular falling stars with a trail of burned creditors in their wake, we should be grateful because their legacy of leaving better and brighter cities.

Chapter Nine: Debt Leverage

To come

A bit drier than Jones’ original text