David Speight:
Junk food for thought

Changing trends in junk food consumption and the slump in house prices are among the short-term drivers altering manufacturing plant values and industrial property supply.

Local and global influences exert a micro effect on plant values, in conjunction with the macro influences of ongoing technological advances. Were this not the case, the valuer's work would be easier, and arithmetical formulae would be able to compute reliable values!

Five interest rate increases in 2006 and 2007, followed by the Northern Rock crisis, reduced consumer confidence, which had previously been buoyant.

Subsequent restrictions on credit to domestic consumers meant that homeowners were less prepared to borrow money to spend on major home improvements (had their bankers been prepared to make the loans!) Manufacturers of replacement windows doors and conservatories experienced a reduction in demand for their products, resulting in a number of high profile insolvencies and closures.

As a consequence, plant used in the manufacture of uPVC frames is flooding its market with predictable effects on values.

Predictions of a slump, or stagnation in house prices in most UK regions other than London Prime, Scotland and Ulster, predictably affected the domestic market for other home related products. Consumer reconsidered purchases of furniture and home décor products as part of the slow down in retail spending. Whilst many of these products are now manufactured outside the UK, examination of insolvency statistics shows that monthly administration and receivership appointments in these business sectors more than doubled between January and December 2007. This reduction in sector activity again affected the demand for production woodworking machinery, tile manufacturing equipment, gravure and flexographic printing equipment and other equipment which could not be readily redeployed in other industries or processes.

The expression food is the new automotive was heard on the lips of more than one insolvency practitioner in 2007. There was a number of high profile closures and insolvencies; Northern Foods' closure of its Trafford Park plant, formerly making pies and quiche, and slimming down the Palethorpes sausage and pie plant in Market Drayton, together with appointment of administrators over the Interlink Foods group with bakery

businesses across the UK. All indicate underperformance in an industry that supplies one of the consumer's basic needs. Or does it? Recent figures issued by National Statistics highlight changes in domestic spending over the last 50 years, and note that spending on food has fallen sharply from 33% of the household budget in 1957 to just 15% in 2006 and within this fall, biscuits and cakes fell from 2% of the weekly spend to 0.6% in 2006.

Over the same period, restaurant and café meals and takeaway and snack food, which did not even register in the 1957 survey, comprised 3.7% of weekly domestic expenditure.

This trend may well be restricted to the UK, and it is hard to imagine French, Italian and Spanish families consuming takeaway and snack food in the same quantities. Indeed some manufacturers of baked products have already transferred parts of their production to Eastern Europe, but much of the plant employed within this industry is notoriously expensive to move, and with a declining market, is becoming virtually worthless to the second user market.

In what appears to the lay person to be an exercise giving an apparently random outcome, the values of plant and machinery do follow orderly commercial principles, from which it is theoretically possible to calculate residual values.

External market pressures may then vary the results which this purely arithmetical approach will provide. The valuer's skill lies not only in assessing the appropriate depreciation rate to apply to the assets but also in reconciling these results to market pressures which may well (and usually do) distort the theoretical values.

This is an edited extract of a paper by David Speight, director, specialising in plant and machinery in GVA Grimley's Manchester-based valuation team, entitled 'Asset Outlook: Plant Valuation, Sub Prime and Junk Food'.