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Evan Davis on... commercial property

Updated Saturday, 21st February 2009

Evan Davis asks if you spot a bubble in the making by keeping an eye on the prices of commercial property.

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Something important came out of the discussion on commercial property, and I think it was Deborah Meaden who fingered it. It’s about the relationship between the values of the property and the values of the activity that you do on the property, and is very relevant to the business of holiday parks.

If you can’t use the holiday park land for anything other than being a holiday park, the land really has no value other than the profits that can be derived from being a holiday park, and the value of the land should thus be anchored in the value of the business. And her point, that was very well made, was that there was a period where the values of the land drifted away from the values of the business underlying the land.

Now that, it was that that meant that there was a deal to… it was a good time for her to sell her business. It was that that meant that lots of people were thinking about “how can I keep hold of the holiday park business whilst selling the land and exploiting the high prices of the land?”

But this general financial relationship between the cashflow value of a business and the cashflow value of the asset is a really important one, and one just would always want to see that red flags are flying where you see the value of a business - if you like, the value of an asset - depart massively from the value of the business.

It’s a very strange thing if that’s happening, and it should immediately be alerting people to, perhaps, the potential of a bubble.

 

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