lördag 26 augusti 2006

Landed Gents: fortunes built on bricks and mortar.

In last Sunday’s Observer Business (20 August 2006), Jonathan Russell commented that the (property) industry... “still has a selection of property barons who have made huge fortunes from this sector”, and then goes on to list half a dozen. Of one, it says that “like a lot of entrepreneurs... his buildings were more valuable than the businesses they created”.

Wrong. It isn’t their buildings that were valuable, it was the land they were sitting on. Sites in good locations are often worth more than the buildings that are standing on them. When this happens, it is time to redevelop. That land can be under-utilised in this way is due to bad accountancy - bookeeping practice does not reflect the underlying economics. One would have thought that a Sunday broasheet's business commentator was aware of this.

A cautionary tale
I once knew someone who used to travel from Hove to Catford, where he ran a menswear shop. This was the same journey as I made to work, and we used to meet on the train sometimes and talk about this and that. There was hardly ever anyone in the shop, so he can’t have done much business. One evening, we were discussing this, and he said that business wasn't very good but they got by because they owned the shop. I asked if his accountant charged a notional market rent against the profits – apparently he did not. So my friend did not know if he was just living off the imputed rental income – the rental he would have received if he had let the shop at the market rate. I suggested that he asked his accountant to check this out – it might be that he would have been better off to close the business and let the shop.

Shortly afterwards the shop was closed and re-let, and I met my friend in Brighton. He told me he had retired – at age 35 – and was running a rock band.

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