How to maintain value in a falling market

by Peter Trinder, Director, Central London Investment
T: +44 (0)20 7544 2254 or E: ptrinder@nbrealestate.co.uk

It's all about supply and demand
The property investment market is a curious blend of the tangible – bricks and mortar – with the intangible – psychology. Right now there are some situations where there is a risk that the psychology takes over, creating fear, uncertainty and – for some – a degree of panic. Bankers, shoppers and investors are all suffering from the same malaise – lack of confidence. And at times like these it's essential that we keep our feet on the ground and ensure we are in tune with mechanisms that are driving the markets.

Selling a property in this marketplace is subject to the same market forces as it always has been. If the property you want to sell is in demand, then clearly you should be able to command a premium price – based on today's market pricing. But right now some buyers are seeking to exploit an apparent reduction in buyer demand for good properties. And some sellers are letting them get away with it!

Who holds the power?
But should buyers really have the upper hand? Let's take a look at the market. Deals are being done today by sellers who want to maximise the price and buyers who demand the best properties. This is the reality. Sellers are aware of the value of their properties and buyers are competing for them. There is a balance of power between the seller and the buyer which supports the market pricing.

But this balance of power is a complex arrangement and it’s here that the psychology comes back into play. The value of the property is based on the quality and location of the property, market conditions and the respective needs of the buyer and seller. It is on this basis that negotiations take place and a mutually agreed price is determined.

However, it is at the time when the sale is agreed that the balance of power suddenly shifts towards the buyer, leaving the seller in a vulnerable position. The seller can almost smell the money and is now waiting on the buyer to exchange contracts. This situation is exacerbated by the current lack of confidence in the market, leaving the buyer in a disproportionately strong bargaining position.

It is at this point, that a buyer may introduce "issues" to the table; points of consideration, which have just surfaced and have a bearing on the value and therefore the price of the property. 

These issues typically include:

• Unsatisfactory lease terms
  
• Title issues
  
• Unsatisfactory means of escape
  
• Issues around;
  - Building surveys
  - Service charges
  - TUPE arrangements
  - "Independent" valuations
  - Environmental performance
  - Funding or finance
  
• And just plain market correction

When issues of this type are brought to the table, they serve to reduce the confidence of the seller and bolster the bargaining position of the buyer. The inevitable result is an increasing downward pressure to "adjust" the agreed price in order to compensate the buyer. Psychology kicks in, the vendor panics and the price erodes.

Avoiding this situation involves following a few basic rules:

Keep the elapsed time from agreeing the price to contact exchange to a minimum.
Take the initiative to foresee any potential obstacles to contract exchange before you market the property. This keeps you in the driving seat.

For example; make sure you and the buyer understand the terms of the lease. Also any potential valuation issues in the terms should be understood and notified to the prospective buyers. The registered title including means of escape provision, restrictive covenants on use, development or rights of light and title plan should be understood prior to sale. A copy of the registered title should be to hand prior to preparation of any marketing details.

A comprehensive legal pack should be ready to send out as soon as heads of terms are agreed. Most buyers' advisors offer to exchange on "receipt of a full legal pack". However, this can create "wriggle room" for the buyer as, more often than not, the legal papers are materially incomplete. Your legal pack will help to alleviate this problem. But what should this pack contain?

Well for starters, it should contain standard replies to pre-contract enquiries. This will involve preparation work so it is a speculative cost, but it demonstrates a serious intent on behalf of the vendor to sell the property.

These days the pack should also contain an EPC assessment, a draft contract, copy leases and accompanying legal documents such as any relevant warranties, licences and insurance documentation. Ideally, the pack should also include current local authority searches.

Finally, a clear position needs to be taken from the outset by the vendor on capital allowances so that prospective buyers are aware of the position. This is particularly relevant if the property is relatively new or has been recently refurbished.

Chose your buyer carefully
Make sure you do your homework. Does the buyer have the money, will and ability to complete the deal? Beware the decision making chains that may exist for some buyers as they may create the delay that you are anxious to avoid.

Monitor and coordinate the buying process
Ensure that you retain some cards to play with. Going back to under bidders – some weeks after offers have been made – is never ideal and the prospective buyer knows this. You need to keep on top of the buying process to be alert to any serious issues. Careful monitoring and co-ordination of the buying process will ensure that you are ahead of the game, should you need to revert to Plan B.

Have a Plan B
You should always be ready with a back-up plan. And it can be helpful if the buyer is made aware of this. If the buyer is prepared to speed things along in return for a period of exclusivity to exchange, then all to the good. But they must be prepared to clear all conditions without delay. Above all, the buyer should never feel they are the only player on the pitch. It can leave them wondering why they are the only interested party at the current price and that can lead to nervousness on their part.

Ensure the deal has something for the seller and the buyer
All deals should leave something in it for the buyer and seller. If a buyer is pushed too far, expect a chip back to their comfort zone. Put yourself in the buyer's shoes, it will help you to anticipate problems before they arise.

If you are considering a sale, leave plenty of time for all your advisors to prepare and produce what is necessary before placing a deal under offer. Think of the sales agent as your key co-ordinator in this task. Call me, Peter Trinder, for a preliminary discussion on +44 (0)20 7544 2254, or email me at ptrinder@nbrealestate.co.uk. We are here to make your property deals happen.