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The Property Market, Joint Ventures And Types Of Acquisition Contract Notes

LPC Law Notes > Advanced Property Law and Practice Notes

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ADVANCED PROPERTY LAW AND PRACTICE WORKSHOP 3 Revision Notes: The Property Market, Joint Ventures + Types of Acquisition Contract

THE COMMERCIAL PROPERTY MARKET

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Technically, in the UK, the Crown owns all the land in the country and citizens (or subjects) merely own an interest in the land, which can be either:

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Freehold = lasts for an indefinite period | Leases or Licenses = last for a specific period

Real Property:
= land and buildings

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What Investors Want Out of the Property Market
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Why is Property So Important?
!For many companies property assets form the major item on their balance sheet, this is turn determines how much money they can borrow using their property portfolio as security.

[?] Property as an Investment and a Resource

! The industrial use of commercial property increases its value because its use is linked generation of profit and the creation of wealth.
! toFortheretailers, leasing property is a good idea (as opposed to purchasing property outright) as it does not tie up capital that can otherwise be used by the business to create wealth.

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What do Investors Want Out of the Property Market?
!Investors generally want 3 main things out of the property market:
! income return
! capital growth
! risk diversification
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Return
! 1.TheIncome type of property is critical to depending on whether to invest or not. Income return often depends on location and use and can be split into the following categories:
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Prime Sites These pose the least hassle to an investor and best chance of good return:

* these are let to a single occupier with a strong covenant on a long term FIR lease with upward-only rent reviews

* the property itself will be built to a modern specification and be in good repair

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Secondary Sites This type of property is less attractive to an investor and involves a large degree of active management to ensure things run smoothly:

* these are often let to a number of occupiers with weak covenant (e.g. difficulty in paying rent) on short term leases where the investor has to shoulder the burden of repairing and insuring the property

* property itself may have a dated specification, be dilapidated, or need of repair

* there may even be parts of the property that are un-let Core Properties These are the least hassle to an investor and give the best chance of good return:

* these are usually prime location properties in one of 3 main sectors:

* offices, or

* industrial, or

* warehouse Core+ Properties These are like core properties but have a deficiency because of location or covenant strength:

* these are secondary properties in one of 3 main sectors:

* offices, or

* industrial, or

* warehouse Non-core Properties These present more risk to an investor as they have a more variable cash flow:

* these are more specialist in nature, such as

* health and fitness clubs

* hotels

* self-storage facilities

2. Capital Growth There are various factors which might determine whether a property is a good investment or not:

* rental growth is linked to growth in capital so the higher the increase in rental potential the higher the likely capital growth

* any shift in yield or return on investment may be a deciding factor

* asset repositioning by major players can affect the value of investment properties

3. Risk Diversification This is basically making sure you don't put all your eggs in one basket. Generally, in investment terms, the higher the yield the higher the risk, so the idea is to offset risk by having a mix of:

* high yield, high risk investment, and

* lower yield, lower risk investment

The Life Cycle of a Typical Property

!The property market is cyclical and goes through periods of boom and quiet:
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Phase 1 Initial targeting of the site
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The development surveyor will identify sites with development potential:
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* considering: financial, legal, planning and practical considerations

* what occupiers will be interested in the final development?
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Phase 2 Site purchase to completion of the contraction
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A team of professionals will be to be put together, including:
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* architects, quantity surveyors, engineers, building contractors etc.
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Phase 3 Finding an occupier
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be done whilst the development is still ongoing if necessary:
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* estate agents will usually be used to help with this
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Phase 4 Maintaining the building throughout its life
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A building surveyor/facilities manager often will overlook this.
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Phase 5 Demolish, refurbish or redevelop --- (cycle starts over again)
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