Income Analytics Aiming to Shake Up Real Estate Valuation
Income Analytics’ INCANS Score dashboard aims to transform real estate valuation by making income, rather than cap rates or rent multipliers, the key factor. Will it succeed, asks Property Week.
After 30 years, several books and many papers and presentations, Oxford professor and real estate expert Andrew Baum believes the penny may have finally dropped for valuers that analysis of income is more important than capital values.
The perfect storm of a global data revolution, increasingly short leases, increased operating leverage, growing ESG concerns and the impact of Covid have accelerated the need to understand the risks associated with a commercial real estate portfolio.
“The current situation is more likely to bring significant change than any situation I’ve seen in the past three decades,” says Baum, formerly professor of real estate management at Henley Business School, University of Reading.
So are we – as Baum hopes – witnessing a sea change in how building values are assessed?
Historically, investors focused on simple metrics to determine value: the capitalisation rate or the gross rent multiplier. The risk of failure attached to a portfolio’s cashflow was not factored in.
However, as Matthew Richardson, co-founder and chief executive of cloud-based financial information platform Income Analytics, points out: “Understanding income risk is crucial for investors, lenders and other real estate professionals if they want to make informed decisions that are driven by data.”
"Understanding income risk is crucial for real estate professionals"
- Matthew Richardson, Income Analytics
In December, Income Analytics – in which Baum is an investor – formally launched a dashboard called INCANS Score, which gives real-time analytics and ratings on income risk in commercial real estate. The product is designed to increase transparency, improve operational efficiency and ultimately reduce costs for real estate professionals, investors, and lenders.
In June, it was announced that Savills and MSCI plan to embed INCANS Score in their valuation services. They join many others, ranging from investment brokers to local and central government, already using the service.
This is not the first attempt to collect information on tenant quality. Previous efforts have included lease event reviews run by IPD, backed by Strutt & Parker; MSCI’s IRIS; and OPRent, a start-up Baum was involved in and which was shortlisted for Property Week’s 2003 Innovation of the Year award.
None stuck, but shorter leases and a greater focus on income have made the market more receptive this time around and a new generation of tech tools has greatly improved user experience.
The property industry is famously slow to embrace change, but INCANS Score’s backers are confident that the increasing adoption of tech and data by the property sector will help.
Income Analytics co-founder Matthew Hopkinson admits it is only in the past few years that the technology has been available to enable the company to help make the global commercial real estate investment market more transparent and efficient.
“We could not have built Income Analytics before, because the models we have in the background are just so massive – they are crunching millions of rows of data,” says Hopkinson, who is also co-founder of the Local Data Company.
Nick Knight, executive director, valuation services, at CBRE, says the sector has become much more open to the idea of embracing tech to improve the accuracy of valuations.
Big data benefits
“There’s a recognition that big data machines have potentially significant benefits for the valuations industry,” says Knight. “[Change is] coming, and I think we knew it was coming and it’s probably been accelerated, but I’d like to think that as practitioners, we understand how technology can benefit what we do.”
Savills director Charlotte Aschan adds a word of caution: “We need to be careful we are not just [people] churning out data. I don’t think it’s a danger in the commercial space, but I could see it in residential, where it’s a much more similar product, as in if you were buying a flat in a building [where there are many similar properties].”
However, Hopkinson argues that the market needs to change because valuers are currently looking at static capital values.
“According to MSCI, around 70% of the long-term total return from UK property comes from the income component,” he says. “And how do you measure that? People do a credit report before they get a tenant in, but what’s that going to tell you? How do you know if the tenant is going to be around for the duration of the lease? You don’t know.
“If I wanted to sell the idea that you should invest in commercial real estate above equities and bonds, I would need to be able to go to the market and say what the quality of my income on this is, in the same way that you look at a corporate bond and see it is triple-B-plus.
“You are getting triple-B-plus here, but instead of getting a 2% return in the bond market, I’m giving you a 6% return, and on top of that we own the assets and if the tenants go bust, we can put a new one in. That becomes key.”
Another issue, Hopkinson says, is the difficulty landlords with multiple tenants inevitably have keeping track of them all.
“If one goes bust, how’s that going to impact the landlord?” he says. “Do they know? Who really understands the ownership structure behind each one?”
James Smith, senior portfolio surveyor at Aviva Investors Real Assets, believes the need to understand income has grown in importance in the past 12 to 18 months and will continue to grow in importance post Covid.
He adds: “The importance of the income links back into the wider property scenario and that whole point about the lease structure, how the occupier wants to pay their rent and the challenges the sector has got.”
The general push towards shorter leases has also thrown cashflow into the spotlight.
“What does that mean to your income growth, to depreciation, the risk you are having to account for, and what does it then mean for the multiplier, which is moving around as lease lengths get shorter and risk gets greater?” says Baum.
With INCANS Score, Income Analytics aims to be the go-to product for these ‘other data points’ and Baum is unabashedly bullish in his determination to make it the market standard, ahead of cap rates.
Whether or not systems like INCANS Score can revolutionise the market will ultimately be down to the valuers. “I’d say there’s a 50/50 chance valuers will overhaul the way they do things,” says Baum. “It’s a difficult thing to be massively confident about, but I really hope so.”
Read the full article HERE
Property Week: Noella Pio Kivlehan
MSCI on Calculating the Risk to Real Estate Income
In this month's PERE publication René Veerman from MSCI Real Estate writes about how Covid has shown the need for data tools that enable investors to understand the risk that tenant defaults pose to cashflows and hence why MSCI Inc. has invested in Income Analytics and is providing access to the INCANS tenant income risk dashboard to its global client base.
MSCI Issue INCANS Dashboard Proposition
Check out this fantastic new video by MSCI Real Estate MSCI Inc. on our partnership and 'how and why 'this is such an exciting and important partnership for the global commercial real estate industry.
Why The UK's Supply Chain Crisis Could Be A Mega-Headache For Landlords
Exclusive data provided to Bisnow by Income Analytics shows it likely means more bad news for landlords, some of whose tenants may now fail to make it through the vital pre-Christmas trading period.
Real Estate’s Income Risk in the Wake of COVID-19
In this blog by MSCI, the relationship between the MSCI UK Indices and the INCANS scores is analysed delivering some fascinating insights
Power of Data Podcast
Matt Richardson, CEO Income Analytics, is interviewed for the Dun & Bradstreet Power of Data podcast series by Nick White, Head of D&B Accelerate.
Why We Need To Talk About Your Risky Tenants
The founders of a new proptech venture that has just won backing from MSCI and Savills said UK commercial real estate needs to rethink its approach to cashflow.
MSCI and Savills Lead Funding Round into Income Analytics
MSCI and Savills have led a funding round into Income Analytics, a data technology firm that provides investors with proprietary global rental default risk measures on commercial real estate income (the INCANS Scores) at tenant, asset, fund and portfolio levels
Less Subjectivity Please! Issues With Framing & Subjectivity in Global Real Estate Markets
Real estate investments vehicles are categorised in risk terms according to familiar yet subjective style labels such “core”, “core +”, “value add” or “opportunistic”. What empirical evidence supports the use of these labels?
The Financialisaton of Global Commercial Real Estate Markets
Over the last 30 years institutional investors have come to dominate the real estate investment markets in North America, Europe, Australasia and much of China and SE Asia. But this was not always the case. Prior to the mid-1980s, most real estate investment liquidity was generated domestically from local investors — usually through syndication networks and major real estate families. Insurance companies and side-arms of local banks also invested but almost always directly into specific properties.
Welcome to New Starter Tom Carruthers
Today we are delighted to welcome Tom Carruthers as our new Research Analyst who will be work with our Data Science and Quants team to help deliver our exciting analytics product roadmap.
"Income data transparency key to unlocking billion-dollar inflows of institutional capital into commercial real estate", says property data firm Income Analytics
Commercial real estate could attract billions of pounds of passive capital in the way fixed income and equities do if the sector reported income data more accurately and transparently to investors, according to Matthew Richardson, the chief executive of property data firm Income Analytics.
Welcome to New starter Chris Elliott
We are delighted to announce that Chris Elliot has joined us today as Head of Sales. He has great experience in supporting clients through innovative data solutions and is a great addition to our growing 'best in class' team.
Welcome to New Starter Hayley Blackwell
We are delighted to welcome a new member to Team INCANS this week. Hayley Blackwell has joined as Research & Data Manager and comes with extensive experience of working in commercial real estate with one of the UK's largest property agents. Hayley is part of a best in class team that we are building here at Income Analytics Ltd to support our clients and further enhance the world's first Tenant Income Risk scoring and monitoring system on over 420 million companies worldwide.
IPSX and Income Analytics: Asset Report Overview
IPSX has partnered with Income Analytics Ltd, the Global Tenant Income Risk data platform, to provide comprehensive risk scoring and reports
Income Analytics Launches Income Risk Indices and Ten-Year Forecasts for Commercial Real Estate Market
Income Analytics, a PropTech company based in London, has launched a new set of indices and benchmarks for quantifying real estate income risk.
Tenant Risk Is Everything Today, And These Startups Are Helping You Measure It
It is the question on every property owner’s mind right now: Are my tenants able to keep paying the rent?
The Importance of Income Streams When Investing in Commercial Real Estate
In this webinar, our panel of experts offer their views on the different sectors that make up real estate and the differences that we are seeing in income generation. Three different examples of assets are explored to understand these points of differences and how it can affect value.
Sky News - Impact of Arcadia and Debenhams demise on the High Street
Listen in to Sky News playback from today at 1730 to listen to Matthew Hopkinson discussing the fate of retail and the High Street post the latest news on Arcadia and Debenhams and that analysis of income risk shows that it has been on the cards for some time.