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Never ask a barber if you need a haircut.” This old cowboy proverb was scrawled on a note passed by one developer to his neighbour after the former was advised to start buying property by Knight Frank at a presentation on Tuesday. Our cynical scribbler was also told by the property agent that rents on his offices may fall like a stone.
These two seemingly contradictory viewpoints were served up along with a full English breakfast at the Dorchester to 300 Knight Frank clients. All were suitably grateful for the sausage, bacon and scrambled eggs.
But the audience was even more grateful to have someone tell them with polished conviction what the hell is going on in a market where half the participants think that it is going to get better and the other half think that it can only get worse.
The good news for those who own office blocks in the south-east is that prices have stopped falling and, for the really good stuff, they are starting to rise again. Yields that were at 5.5% in June 2007 and 8.5% in December 2008 are now down to 7.5%.
That means those prepared to pay nearly 20 times the annual rent for an office block in 2007, but under 12 times in December 2008, are now happily buying at a multiple of more than 13 times the income.
“The stand-off has stopped,” said Knight Frank investment partner Jeremy Waters. “Deals are being done. This was not happening in 2008.”
The bad news is that Knight Frank reckons rents around the M25 will have fallen by a quarter from their 2007 peak by the end of this year.
Emma Goodford, the feisty woman who runs Knight Frank's south-east office department, says the effect will be “catastrophic”.
A landlord's catastrophe is of course a tenant's delight. Occupiers in Uxbridge, Maidenhead and Slough can expect to negotiate a reduction of around a third in their rent bills if they have a lease break coming up.
As the capital value of a property is simply a multiple of the rental income, it is not hard to imagine just how far prices are going to fall on blocks where the rent has plunged by a third.
Take a block where the tenant was paying £1 million a year and is now paying £666,000. At a multiple of 15, a block that was worth £15 million is suddenly worth £10 million.
Remember, this is on top of any general fall in values. So, it was no surprise that Britain's biggest property company, Land Securities, remains gloomy.
This week chief executive Francis Salway announced a 34% fall in the value of company assets to £9.4 billion in the year to March. In support of Knight Frank's thesis, Salway did say that the price of £1 billion of those assets had now stabilised, or had started to rise.
But he remains glum. No wonder. Imagine what further big rental falls might do to Land Securities' already-shrivelled asset values.
So, why on earth is Knight Frank recommending clients to buy now? Is this the advice of a barber recommending a haircut? Not if the rent is fixed for at least four to five years.
But even that advice needs a health warning: the recommendation is predicated on the view that rents in general will have recovered before the lease in question ends.
If that does not happen the tenant will be able to negotiate a lower rent and so slash the value of the block for another buyer.
It is all a question of how long it will take for the market to recover. So let's leave the Knight Frank show with another old cowboy proverb: “timing has a lot to do with the outcome of a raindance.”
Quality streets? Nice idea but we won't hold our breath for blossom
To the National Theatre on Tuesday where not one, but two Cabinet ministers turned up to promote a brochure called World Class Places — The Government's Strategy for Improving the Quality of Space.
Happily there is no space here to elaborate on the dull detail. But, hey, Culture Secretary, Andy Burnham, lent his leading-man good looks to the show. Hazel Blears scuttled in late and contributed her ever-bright smile. She then scampered off, presumably to sign that cheque for £13,332.
But let's not be too sceptical. Architect, Carolyn Steel, poetically captured the essence of “quality space” when she told the audience it can just be the simple need to “sit under a cherry tree” or “glance up at a balcony that captures the evening sun.” Lovely.
Let's hope this strikes a chord with Mayor Boris Johnson who is due shortly to promote quality space in London. The smart answer is to use public and lottery money to get in quick and buy out the development rights on stalled schemes. How about the three empty and currently very cheap acres on the Middlesex Hospital site, north of Oxford Street?
Will cherry trees blossom in Fitzrovia? Dream on. By the time the politicians and planners stopped arguing about how the idea might work, the price of the land will have soared again.
Could bold call by Leslau be a tad too early?
Nick Leslau called the top of the market two years early, in 2005. Has he been a bit previous in calling the bottom?
That is the question jealous rivals will be asking after reading this week's news that the 49-year-old entrepreneur plans to raise £200 million on the stock market and then spend that — plus £400 million of borrowed money — buying mainly subprime property.
Max Property is to be floated on the Alternative Investment Market on 27 May. Leslau will spend £20 million on shares in the new company.
An American hedge fund with the peculiar name of Och-Ziff is investing £35 million. The rest of the shares are there for anyone with the nerve to back the well-liked co-owner of Saracens rugby club.
Leslau's existing property company, Prestbury, will do pretty well out of the deal. First of all, there is the £625,000-a-quarter management charge for running Max Property over the seven-and-a-half year life of the business — nearly £19 million.
Then 1.75% of the asset values go to Prestbury for managing the bought properties. The company also gets a fifth of the profits made by Max over and above 20%. Not bad.
The chairman is to be Aubrey Adams, the former chief executive of Savills who built the agent into a formidable force before retiring with perfect timing in the summer of 2007. But the most interesting hire is Mike Brown, former deputy chief executive of Helical Bar, who toiled in the larger-than-life shadow of chief executive Mike Slade.
Leslau wrote in Property Week a week ago that “to make money out there today, you need to have brains, balls and have access to lots and lots of cash but, if you've got the first two and not the third, you are not going very far.”
In today's issue. he says “if we're wrong, we're not going to be very wrong.” He may or may not be wrong.
