Property Journal July-August 2016 by RICS

Property Journal INC OR P ORAT I N G t h e com m ercia l prope rty J O URNA L, reside ntial prop e rt y journa l an d P e rs onal P ropert y Journal

Homes for all

How can the UK government make it happen? PG.

COMMERCIAL

RESIDENTIAL

Personal property

Student housing

Indemnity cover

Fake and looted art

Why investors dig student digs

Whatâ&#x20AC;&#x2122;s happening in the insurance market now?

Advice on staying vigilant and responding to issues

PG.

July/August 2016

rics.org/journals

THERE’S NOTHING MORE EXPENSIVE THAN CHEAP HOME INSURANCE.

Don’t take our word for it. Over 98% of Hiscox customers surveyed who have made a claim would recommend us. RICS members save 12.5%. Call 0800 840 2349 or visit www.hiscox.co.uk/rics.

HISCOX HOME INSURANCE. EXPERTLY COVERED Data obtained from Insight Now, 179 surveys, Dec 2015-Feb 2016. Hiscox Underwriting Ltd is authorised and regulated by the Financial Conduct Authority. Terms and conditions apply. For full terms and conditions see www.hiscox.co.uk/rics. The Royal Institution of Chartered Surveyors is an Appointed Representative of Hiscox Underwriting Ltd which is authorised and regulated by the Financial Conduct Authority. For UK residents only. 16038 06/16

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5 The employment experiment

Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org Advisory group: Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Milton McIntosh (Excello Law), Nigel Sellars (RICS), Martin Francis (BNP Paribas), Simon Hooper (Edward Symmons), Fiona Haggett (RICS), Vivien King (Malcolm Hollis) RESIDENTIAL

Tarrant Parsons looks at the potential economic consequences of the National Living Wage

6 Update 8 You should have asked me first

Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org

Breaching the Landlord and Tenant Act 1987 can have potentially drastic consequences, writes Olivia Tassell

Advisory group: Mike Basquill (RICS), Andrew Bulmer (RICS), Paul Cutbill (Countrywide), Graham Ellis (RICS), Chris Rispin (BlueBox Partners), Philip Santo (Philip Santo & Co)

10 It’s not fog, it’s cloud

p ers o nal p r o p ert y Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org Editorial advisor: Nigel Sellars Property Journal is available on annual subscription. All enquiries from non-RICS members for institutional or company subscriptions should be directed to: Proquest – Online Institutional Access E sales@proquest.co.uk T +44 (0)1223 215512 for online subscriptions or SWETS Print Institutional Access E info@uk.swets.com T +44 (0)1235 857500 for print subscriptions To take out a personal subscription, members and non-members should contact licensing manager Louise Weale E lweale@rics.org Published by: Royal Institution of Chartered Surveyors, Parliament Square, London SW1P 3AD T +44 (0)870 333 1600 T +44 (0)24 7686 8555 W www.rics.org ISSN: ISSN 2050-0106 (Print) ISSN 1759-3395 (Online) Editorial and production manager: Toni Gill Sub-editor: Matthew Griffiths Designer: Nicola Skowronek Advertising: Emma Kennedy T +44 (0)20 7871 5734 E emmak@wearesunday.com Design by: Redactive Media Group Printed by: Page Bros

Journals online Increasing numbers of members are choosing to view their journals as downloadable pdfs, instead of paper publications, by changing their member preferences on the RICS website. Regular emails inform members when the pdfs of the latest journals are available. While helping RICS to reduce its carbon footprint, viewing the journals online provides you with the same technical information in a format that is quick and convenient to read on screen.

Colin Wales dispels some of the myths about cloud computing

12 In equal measure

Robert Jackson provides an update on the adoption of international standards in the Middle East

14 Reviewing the situation

Online customer reviews should be an important consideration for any business, according to Rosemary Rogers

15 Legal Q&A

Legal experts answer common queries

16 Health in mind

Jane Fielding and Rebecca Jones explain why building managers need to consider their responsibilities to occupants with mental health needs

18 Taxing times

Robert Walker outlines the implications of the recent increase in stamp duty land tax on additional residential properties

CO MME RCI A L

20 Grid rights and wrongs

28 Growth potential

23 Improving standards

30 A risky business

24 Room for manoeuvre

32 Out of sight, out of mind

Most surveyors are unaware of opportunities worth millions in the rapidly evolving power sector, says Hugh Taylor

A new credential for building valuers in the USA has international implications, writes Steve Choi

Cathy Harris explores how project-specific clauses can be inserted into the NEC3 Term Service Contract

Sara Wilkinson introduces RICS guidance to familiarise members with the benefits and challenges of green roofs and walls

Jessica Lamond and Namrata Bhattacharya-Mis look at the impact of flooding on businesses

Infrared thermographic surveys offer a valuable way of identifying problems with roofing, says Stewart Little

26 Top-class investment

Student accommodation has become a popular choice for investors; Stewart Womersley reviews the risks and opportunities in the market

To change your preferences, visit www.rics.org/mydetails

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upfront c o n t en ts Property Journal IN C O R PO R ATIN G THE C O MME R C IAL PR O PE RTY JO UR N AL, R E S IDE N TIAL PR O PE RTY JO UR N AL AN D THE ARTS S URVE YO R

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36 Crisis? What crisis?

42 Nothing lasts forever

38 Breathe a little easier

46 Home truths

Paul Mallion explains how the German Passivhaus standard can result in fuel savings and greater comfort compared to more traditional designs

40 Time will tell

Emma Vigus discusses the state of the insurance market

PG.

COMMERCIAL

RESIDENTIAL

PERSONAL PROPERTY

Student housing

Indemnity cover

Fake and looted art

Why investors dig student digs

What’s happening in the insurance market now?

Advice on staying vigilant and responding to issues

PG.

July/August 2016

rics.org/journals

Front cover: © Getty

RES I DENT I AL

In the first of a new series, Jeremy Blackburn summarises RICS residential policy

Homes for all

How can the UK government make it happen?

pe rso na l pro pe rt y

Michael Parrett considers how building defects can contribute to damp problems

Tony Mulhall examines what ‘policy-compliant’ means when deciding affordable home numbers

50 Taking a closer look at art funds

The changing legislative environment provides opportunities for RICS-registered valuers, says Andrea Amadesi – but members must be clear on their liabilities

52 Not the real deal

Becky Shaw scrutinises the law around looted and forged items, and what buyers should do if they have purchased one

Property Journal is the journal of the Arts & Antiques, Commercial Property, Dispute Resolution, Facilities Management, Machinery & Business Assets, Management Consultancy, Residential Property and Valuation Professional Groups While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. RICS cannot accept any liability for any loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. All rights in the journal, including full copyright or publishing rights, content and design, are owned by RICS, except where otherwise described. Any dispute arising out of the journal is subject to the law and jurisdiction of England and Wales. Crown copyright material is reproduced under the Open Government Licence v1.0 for public sector information: www.nationalarchives.gov.uk/doc/open-government-licence

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OPINION Tarrant Parsons looks at the potential economic consequences of the National Living Wage

The employment experiment

A After being unveiled in the July 2015 Budget, the National Living Wage (NLW) came into effect on 1 April 2016. Its introduction provided the largest annual increase in the UK’s minimum wage for over a decade as the hourly rate rose 50p (7.5%) from £6.70 to £7.20, at least for those over the age of 25. This makes the UK’s legal wage floor the ninth highest in the world. Even so, this year’s increase was only the first step towards the government’s aim of lifting the NLW to 60% of median earnings by 2020. Reaching this target will require a mandatory minimum wage of more than £9 by the end of the decade. Since the legal wage floor was first introduced in 1999, the Low Pay Commission (LPC) has been

responsible for determining an appropriate rate at which it should be set without damaging employment levels. Overruling the LPC and introducing the NLW is a radical change in approach and will see the value of the minimum wage, in relation to median pay, rise by as much over the next five years as it did in the previous 16.

Possible impact The Office for Budget Responsibility (OBR) estimates that a full-time worker previously on the national minimum wage will earn £4,800 more between now and 2020 thanks to the policy. By the end of the decade, nearly three million employees will be receiving the NLW. Moreover, this will likely have knock-on effects for those higher up the wage spectrum, as appropriate pay differentials will need to be maintained to compensate roles with greater responsibility. When such effects are considered, OBR calculations suggest as many as six million employees’ pay will be affected. Given the sheer volumes involved, it is little wonder

that firms in labour-intensive sectors paying a high share of their workers the minimum wage have warned that jobs could be lost as a consequence. The OBR’s central projection points to 60,000 resultant job cuts by 2020. Nevertheless, this translates into a rate of unemployment just 0.2% higher than would otherwise have been the case. However, certain professions or trades are certain to be more severely affected. Reducing headcounts is just one way firms may attempt to offset higher wages; the government is hoping, perhaps optimistically, that businesses will make more effort to boost productivity. In principle, having to pay staff higher wages creates an incentive to invest in training and other methods to make labour more productive. But enhancing efficiency could prove harder in practice than anticipated and the scope for improving productivity in parts of the services sector is extremely limited, particularly in the short term. Alternatively, firms may opt to reduce working hours – the OBR expects almost four million will be lost – employ a greater share of under-25s, or see a squeeze in profits. Some businesses could attempt to pass extra costs on to consumers by raising prices, although competitive pressures may deter this in many sectors.

Feeling the squeeze In sectors such as facilities management, as well as hospitality, retail and

restaurants – where a large share of workers are at the lower end of the pay scale, profit margins are thin and fierce competition impairs firms’ capacity to raise prices – the NLW will be quite a burden. Interserve, a FTSE 250 support service and construction company, warned investors that profits may be hit by up to £15m in 2016 because of the policy. Smaller businesses, without a wide base across which to spread costs and with less room to secure efficiencies, will be affected further still. Sharp increases in the minimum wage could potentially freeze some people out of the labour market completely. When higher costs begin to outweigh the benefits to a firm of creating or retaining a job, they simply will not do so. This problem will be further exacerbated if the economic backdrop worsens. Of course, it may be entirely possible for this year’s rise to £7.20 to be absorbed by businesses. But with each future increase, a greater number of firms will start to feel the bite. A cynic might suggest that the policy was devised more with a view to lowering the level of in-work benefits as part of the Chancellor’s strategy to close the deficit. To that extent, it is likely to be judged a success. How it plays out in terms of employment, however, remains to be seen. b Tarrant Parsons is an economist at RICS tparsons@rics.org

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UPDATE RenoValue training material launched After two years of intensive work, RICS Global Head of Sustainability Ursula Hartenberger launched the RenoValue training package in May at the RICS Cross-Border Valuation conference in Brussels to an audience of valuers, valuation users and representatives from across the EU, the USA and Africa. RenoValue is a capacity-building project for valuers on factoring sustainability considerations into future daily valuation practice, a project funded by the EU. Apart from RICS, project partners included CBRE, construction and development company Skanska, Dutch valuation firm Troostwijk, the National Energy Conservation Agency in Poland, the Polytechnic University of Milan and the Centre of Real Estate at

Member’s Syrian heritage project Palmyra’s Arch of Triumph was recreated in London in April. Unveiling the model in Trafalgar Square, the then London Mayor Boris Johnson said the marble replica, made by the Institute of Digital Archaeology (IDA) and based on 3D photographs of the original, was an arch of “technology and determination”. The Culture Through Making project is eventually seeking to restore rather than recreate damaged ancient monuments. It is a skills training programme created by arts consultant Claire Grindey MRICS in partnership with the charity Syria Relief. Ancient works of art and interior decorations and fittings, many of significant national importance, have also been destroyed in the

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Karlsruhe Institute of Technology (KIT), as well as project coordinator Business Solutions Europa. Drawing on market intelligence and feedback from surveys, workshops and pilot training sessions in 10 European countries, RICS and KIT have been driving the development of the training course, which consists of slides that can be used by members and stakeholders for face-to-face training sessions and an interactive set of e-learning modules. Both of these are free and will eventually

Syrian conflict. Compounding this is the loss of valuable craft skills that cannot necessarily be replicated by technological processes. The programme is therefore seeking to provide sustainable ways of making an income that all reflect the cultural identity of Syria. Working as a social enterprise, displaced Syrians in Turkey will create a range of products to be sold through channels both in the UK and online. The first educational pilot scheme is now under way in a school in Aleppo. Children are decorating tiles based on designs from the Tawrizi mosque, the most important extant group of early 15th-century tiles. The templates were designed by Amber Khokhar, renowned for the carpet made for a commission by Buckingham Palace. In the long term, Syria will need to have its housing rebuilt and not just its

be available in eight languages. The package also includes a list of further reading and an overview of EU energy performance certificates. The full set of slides can be downloaded from the RenoValue website (http://bit.ly/22IwIFh). The e-learning course is hosted on the RICS Online Academy (http://bit.ly/1t0RjrV). E-learning course participants will be credited with CPD hours and a RenoValue certificate. For further information, please contact n uhartenberger@rics.org

ancient monuments, as well as reviving the skilled trades that can enable all of this rebuilding. n http://bit.ly/1Xa78YL

Images © Alamy; Shutterstock; iStock

In brief...

Competition warning to estate agents The Competition and Markets Authority (CMA) has written an open letter that warns estate agents that agreeing with rivals as to the property portals on which to list may break competition law. The move comes after the CMA became aware that some estate agents may be making joint decisions to sign up to OnTheMarket and remove their business from competing portals, rather than reaching these decisions independently of one another. The CMA has contacted some agents that it suspects may have been directly involved in such activity. The CMA is also working closely with the National Association of Estate Agents, the Property Ombudsman, Ombudsman Services: Property and the Property Redress Scheme to raise awareness of this issue. Ann Pope, CMA Senior Director Antitrust, said: “The online portals on which properties are listed are an important aspect of competition between estate agents, and the choice of portal must be decided independently and not agreed with competitors. “Estate agents that are found to be breaking competition law in this way could face significant fines.” The open letter (http://bit.ly/1rpUiK2) highlights three important points about competition law and the potential consequences of breaking it, as well as relating a previous case in which the CMA took action. 1. Agreeing with your competitors to restrict which suppliers you will deal with

The Art Business Conference 2016 London, 1 September Industry experts will share advice and insights on running a commercial art or antique business or collection with presentations, panel discussions, question-and-answer sessions and

is likely to be unlawful. The decision as to whether an estate agent will or will not use the services of a particular property portal must be determined by that estate agent alone, or by its parent company, and must not be determined jointly between competitors. 2. The CMA continues to monitor the conduct of estate agents. This follows its decision in 2015 that an arrangement on the advertising of estate and lettings agents’ fees breached competition law, which prompted the CMA’s subsequent competition law compliance work with the property sector. 3. The consequences of breaking competition law can be severe. Estate agents found in breach can be fined up to 10% of their annual worldwide turnover, while directors of infringing firms can be disqualified from UK company directorships for up to 15 years. In addition, individuals involved in particular kinds of cartel activity – such as agreements between estate agents to fix prices or allocate markets – may face prosecution under criminal cartel offence legislation and could go to prison for up to five years and/or have to pay an unlimited fine. The CMA is keen to assist estate agents and other property businesses in ensuring that they understand what they need to do to comply with the law and can recognise where they may be at risk of breaking it. n http://bit.ly/1mZpNG1

workshops. Topics will include doing business in the Middle East, the Convention on International Trade in Endangered Species of Wild Flora and Fauna, preventing damage to items and consignment issues. RICS members can purchase tickets at a discounted rate. n theartbusinessconference.com

RICS guidance Rights of Light, 2nd edition This new edition guidance note deals solely with easements known as rights of light and the approach to be taken by surveyors. It is mainly aimed at those who may not be specialists, though it is hoped that all chartered surveyors will find it useful. The note has been fully updated with case law, best practice and an expanded section on the intricacies of rights of light spatial measurement using three-dimensional modelling, assessment through Waldram diagrams, ‘loss’ evaluation and compensation. Enlarged sections on appropriate procedures, legal issues, research, instructions, insurance and alternative dispute resolution align it with other dispute-related titles. n www.rics.org/rightsoflight

Health and safety for residential property managers, 1st edition This guidance note offers practical advice on the health and safety management of most residential properties. It aims to help those responsible to ensure that properties and facilities management services meet all statutory obligations, though you will still need to check relevant legal requirements. The note also sets out good practice advice. n www.rics.org/resihealth

Service Charge Residential Management Code, 3rd edn This code is now effective for landlords, leaseholders, managing agents, managers and occupiers of leasehold property. It aims to:

bb improve general standards and promote best practice, uniformity, reasonableness and transparency in managing and administrating long leasehold residential property bb ensure all documentation is issued in a timely fashion bb reduce the causes of disputes and guide on how to resolve them. n www.rics.org/servicecharge

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You should have asked me first Olivia Tassell considers the potentially drastic consequences of breaching the Landlord and Tenant Act 1987

t is always tempting to consider residential and commercial property as entirely separate commodities. Indeed, they do often present very different, sometimes competing, issues. Perhaps for this reason, many property professionals choose to limit the scope of their expertise to one kind or the other. However, in every town or city there will always be a large number of buildings in mixed use, from the typical high-street shopping parade of ground-floor shops with flats above to large new developments incorporating restaurants, hotels, apartments, gyms and convenience stores in one site. Mixed-use buildings such as these often mean that residential and commercial property issues need consideration side by side – sometimes with unexpected consequences. It is important to remember that mixed-use properties may be governed by legislation designed to protect the interests of residential tenants and occupiers that would not affect a property solely in commercial use.

This right of pre-emption can seriously hamper a landlord’s ability to deal with their investment interest. The qualifying criteria under the act are very detailed and must be considered on a case-by-case basis. In broad terms, they will apply where more than 50% of the relevant building is in residential use and that building contains two or more flats held by residential “qualifying tenants”. If the legislation does apply, a landlord must, by way of formal written notice, offer the interest being disposed of to the qualifying residential tenants in the building – on the same terms as those agreed with a third-party purchaser – before contracting with that purchaser. The tenants then have two months in which to accept; if they do, the acceptance must be by more than 50% of the tenants. Where a valid acceptance notice is served, the landlord must withdraw terms from the third-party purchaser and sell to the tenants instead. A landlord may only proceed with a sale to a third party if the two-month notice period has elapsed without a valid acceptance notice being served. Even if all the tenants respond

Landlord legislation One such piece of legislation is the Landlord and Tenant Act 1987 (the act), which confers a pre-emption right on residential tenants in certain residential and mixed-use buildings. This right of pre-emption operates in a negative way, prohibiting a landlord from making a disposal to a third party without first offering it to its residential tenants. A disposal in this context is very widely defined: the most obvious and common example is the sale of a landlord’s reversionary interest, but even the grant of a lease of some of the common parts of a qualifying building can be covered. 8 J U LY/A U G U S T 2 0 1 6

negatively within the first week of the offer notice, the landlord cannot proceed until the full two months have elapsed. While the delay is unpalatable, involving uncertainty and potentially wasted costs for both parties, there are serious sanctions if the legislative requirements are not met, both for the landlord’s selling entity and a purchaser acquiring the landlord’s interest. If a landlord makes a disposal in breach of the legislation without serving notices or waiting the requisite two months, they – or, if a company, the directors – will have committed a criminal offence. The risk for a purchaser is that the residential tenants have the ability to undo the transaction carried out in breach and acquire the landlord’s interest at the price paid by the purchaser.

Case sets costly lesson

The Landlord and Tenant Act 1987 confers a pre-emption right on residential tenants in certain residential and mixed-use buildings Images © istock

The recent case of Artist Court Collective Limited v Khan [2015] PLSCS 313 offers a relatively unusual example of litigation involving the act. It has received a high level of publicity for a county court decision as it illustrates the potentially drastic consequences of breaching the act. This case involved a mixed-use building in east London consisting of three commercial units on the ground floor with eight residential flats above, sold off on long leases. In 2011, the freeholder landlord transferred his interest to a

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m There will always be a large number of mixed-use buildings in every town or city

A landlord who makes a disposal in breach of the legislation without serving notices or waiting the requisite two months will have committed a criminal offence newly incorporated company under his control for a price of £225,000. Khan made this disposal without first offering it to the residential tenants, in contravention of the act. In fact, no attempt was made to inform the tenants of the change of landlord; they only became aware of the transfer in mid-2012, when the opening of a fish and chip shop in one of the commercial units prompted them to look into their rights. Having discovered the breach, the majority of the flats’ owners formed a company and served a notice on the new owner, seeking to invoke their right under the act to have the freehold transferred to them for the same price. On receipt of this notice, Khan sought to rectify the position by reinstating the original situation, transferring the freehold from the name of the company back into his own name, this time for no consideration. However, he again failed to offer the interest to the residential tenants, breaching the act for a second time. As a result, the court held that the residential tenants were entitled to acquire the freehold interest on the same terms as the second transfer for no consideration. In practical terms, the tenants acquired, and Khan lost, a valuable freehold interest for nothing. The example of Khan provides a salutary reminder to landlords of residential and mixed-use buildings that the requirements of the act are not to

be taken lightly. Furthermore, residential tenants and their advisors are clearly becoming more aware of how they may use the legislation to their advantage. The owners of the flats, provoked into action in protest against an undesirable use of one of the retail units below, ended up acquiring control of the whole building. This included the right to income from the commercial units, without having to reach into their own pockets.

Ascertaining compliance Where a group of residential tenants are considering a claim for collective enfranchisement, for example, or otherwise want to get their hands on the management of their building, it is worth checking first whether any transfers of the landlord’s interest are revealed at the Land Registry; if so, did these comply with the act? A few simple questions to the landlord, or more formally, the service of an information notice under the act can ascertain compliance. Indeed, the tenants themselves would know whether notices were served, as they should have received them. There is no time limit for serving purchase notices following a disposal carried out in breach, so it may be possible to undo a transfer carried out several years ago at a price much less than current market value. However, this will only ever be achieved if a sufficient

majority of the tenants work together; with large blocks of flats it may prove extremely difficult to ensure that a majority of participants are willing, and even more difficult to coordinate them. On the other side of the coin, landlords of qualifying buildings will often seek a way round the unpalatable delay associated with the service of offer notices. This may sometimes be possible by making use of exemptions in the act; for example, by transferring properties between associated companies and/or selling the shares in a landlord company, rather than disposing of the property interest itself. However, the exemptions are limited and it will frequently not be possible to find an alternative to following the notice procedure and waiting the requisite two months. No matter how frustrating this is, those who are advising landlords should have no trouble convincing their clients of its importance – now they have the story of Khan to relate. b

Olivia Tassell is a partner in the property team at law firm Boodle Hatfield otassell@boodlehatfield.com www.boodlehatfield.com

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It’s not fog, it’s cloud

Colin Wales dispels some of the myths about cloud computing

ife would be very different without the cloud. It has become so integral to our everyday lives that most people use it without even realising. In fact, life without the cloud would be unthinkable for them: there would be no Facebook, Twitter, Gmail or Spotify. Estimates vary widely on the worldwide spend on cloud services. However, they do seem already to run into billions of dollars, and the figures are expected to increase hugely by 2017 as public and private organisations invest in cloud services as the foundation for new, more efficient business systems.

What is cloud computing? Simply put, cloud computing is computing based on the internet. Whereas in the past, people would run applications or programs from software downloaded on a physical computer or server in their building, cloud computing allows people 1 0 J U LY/A U G U S T 2 0 1 6

access to the same kinds of applications through the internet. It is growing in popularity, especially among SMEs in the private sector. There are a number of advantages to deploying systems from the cloud. By replacing local servers, there is an immediate saving in terms of hardware, depreciation and replacement costs. Servers need back-up and, if this is intended to provide business resilience, then yet more are required to ensure that a second disaster recovery can be initiated if the main server fails. Servers do have a shelf life, probably three or four years at best, and need replacing; operating systems change and routine maintenance is necessary for patches and upgrades. Cloud-based delivery can handle all such operations. Any changes to optimise speed of use or apply upgrades all take place in the background and do not require systems to be offline for days or hours at a time. By freeing technical resources from the mundane tasks associated with keeping the machinery running, more time can be Image © Shutterstock

made available to work on the things that really change the business – the website, self-service transactions and the way that the technology can be used to market services more effectively. There have been many studies confirming how useful this can be, and businesses that use the cloud were reported as being able to resolve issues in an average of 2.1 hours – nearly four times faster than those that did not (http://bit.ly/1PDMDSH).

Working together To unlock the real value of the cloud, organisations need to consider how their systems work together and whether legacy systems actually get in the way of a more efficient operating model. Moving existing systems to cloud storage does save time and money, but to put that into some sort of context, consider the fact that simply moving your car from your driveway into your garage does not fundamentally change or improve your driving experience. There are small advantages: it is better protected from rust, less likely to be broken into and might

u p front TECH NO LO GY start a bit better in the morning, but it is still the same car. If you want a better driving experience, better fuel economy or more bells and whistles on your daily drive, you probably need to change the car itself.

On the move This is where cloud and digital platform technology combine to make organisations fundamentally more efficient and business easier to conduct. Arcus Global uses Salesforce, a platform that provides browser-accessed systems that can be reached from any device, in the office, at home or on site. While there are occasions when there will be no internet connectivity and live system data will be unavailable, if these occur 10% of the time, this is still a huge improvement on what most organisations can achieve today. By providing offline forms on devices – essentially apps that allow data capture – it is still possible to record details of an inspection once and upload it into the live system as soon as the connection is restored. And why might that become even more important? There is a shift from office-based work to working on the move. IT research firm Gartner predicted that in 2015, a total of 320m tablets and almost 2bn mobile phones – of which 70% would be smartphones – would be sold, as opposed to just 316m laptops and desktops (http://bit.ly/1r8j1Nw). The cloud gives greater flexibility: no longer do you have to wait for the release of the next version of software, which may potentially be in a year or two, or for IT to schedule an upgrade and take down the system for a period of time. Changes can be made as background tasks and users need simply to log out and log back in again to see them on their screens. The BBC News app would be rather less popular if it showed you last week’s news until someone got around to updating it.

A report in the May 2015 issue of Computerworld UK states: “The latest research from the Cloud Industry Forum shows the overall cloud adoption rate in the UK now stands at 84%, with almost four in five (78%) of cloud users having adopted two or more cloud services. ... half of all respondents expect to move their entire IT estate to the cloud at some point, with 16% intending to do so as soon as practically possible – double the same figure from 2014.” Overall, cloud computing also uses less energy than a distributed hardware model. Businesses employing cloud computing only make use of the server space they need, and Salesforce estimates that using the cloud results in at least 30% lower energy consumption and carbon emissions than using on-site servers. According to Salesforce, this could benefit SMEs by as much as 90% (http://sforce.co/1WYKkMC). Most private retail businesses have already made the transition to cloud and platform technology because it is more efficient and provides more flexibility, scaleability and access to data for customers and staff alike than the legacy systems infrastructure ever allowed. Figure 1 shows Salesforce’s growth since 2003 and demonstrates the rise of cloud computing in the business environment.

Security So why is everyone not making the transition if it is secure, cheaper in the long term, less energy-intensive and more flexible, as well as allowing more automation of business processes? In December 2015, another major security breach of sensitive customer data hit the headlines, this time at a telephone company. This sort of incident exacerbates the concerns of those who see cloud-based systems as being a security risk, and is used to argue that

Figure 1 Salesforce.com revenue $6.3bn $5.4bn

Overall, cloud computing also uses less energy than a distributed hardware model does systems should be based locally, where they can be secured against cyber attack. This is, of course, the argument that arises when we hear of an aviation accident, but, while it is catastrophic for anyone involved or affected, such incidents are thankfully rare and air travel remains as the safest form of transport based on all available statistics. The same is true of cloud systems and cyber attacks: organisations are no more or less likely to be hacked in the cloud than they are with a local server and systems infrastructure. In fact, most hacking takes place from inside organisations themselves (http://bit.ly/1SdyqMW). As long as organisations plan their security well, there should be no more risk associated with cloud storage than there is with local systems. The nature of the information stored by property professionals makes it extremely unlikely that they will attract any attention at all from the organised criminal fraternity. Widespread adoption of the cloud in the private and public sector has dispelled concerns over how secure information storage is, but it goes without saying that customers have every right to expect their personal or financial details to be protected. A good data security policy would ensure that none of that information was stored and available in the inspection or case management system unless protected by strong data encryption. Even then, it should only be available to those staff who need to see it as an essential part of their business function. Organisations need to stop using security as an excuse and start looking at how cloud-based technology benefits a modern practitioner-based business. b

$4.5bn $3.6bn $2.7bn $1.8bn $0.9bn

Source: Wikinvest

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Colin Wales is Business Development Director at Arcus Global colin.wales@arcusglobal.com

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RICS p r op e rt y JOU RN A L

upfront I P MS

Robert Jackson gives an update on the adoption of international standards in the Middle East

In equal measure

ountries in the Middle East have been looking to diversify their economies and depend less on oil and gas. In recent years, therefore, they have focused on sectors such as tourism, professional services, logistics and trade hubs, manufacturing and industry. As part of the economic diversification, land and real estate have become increasingly important, and Dubai has been leading the way in opening up to foreign direct investment. It was the first place in the region to allow foreigners to purchase freehold properties and has been seeking inward investment since the early 2000s. Dubai has also become the preferred location for businesses to establish offices, from which they can target markets in the Middle East and North Africa. As Dubai has developed, it has attracted large corporations looking to set up headquarters. Commercial and residential real estate are being supplied by a growing number of local and global developers and managed and built by a diverse and international supply chain. Sales and purchase transactions as well as leasing of real estate have therefore proliferated. However, this activity has all occurred in the absence of clear international guidance until the recent creation of the International Property Measurement Standards (IPMS). Dubai has a largely expatriate population with professionals coming from all over the world. As there were no clear local standards, they have all used their preferred measurement models. This has led to complete inconsistency and lack of clarity, with a variance of up to 24% in measurements depending on the standard used. This inefficient method has led to confusion and disputes relating to space measurements across the region. In an interconnected global

1 2 J U LY/A U G U S T 2 0 1 6

Dubai: aiming to be the tallest city in the world

IPMS signatories Other major organisations based in the Middle East that have signed up to IPMS include: bb Asteco bb British Arabian bb CBRE bb Chestertons bb Cluttons bb DTZ bb Dubai International Financial Centre bb GEOimage bb JLL bb Knight Frank bb LLJ Properties bb PRD Real Estate Survey Services. marketplace, this is a risky strategy for all property owners, occupiers and investors, especially those who are operating across borders. Fundamentally, it makes analysing property portfolios very difficult. Confidence needs to be high when bidding to attract foreign investment in the market, and that can only happen with the adoption of clear standards and regulations. According to the CBRE Global Investor Intentions Survey 2016, the commercial property industry represents around $1tr in investment transactions worldwide and it is important to have consistent internationally recognised standards that investors can trust (http://bit.ly/1V5O5yr). To enable IPMS to be adopted in the region, buy-in from Dubai’s government was essential. The Dubai Land Department and the Real Estate

Regulatory Authority are the government bodies responsible for property title deeds, transactions and rental indices. The local RICS team began building relationships with stakeholders and ran a workshop that was attended by government representatives from around the region. This early involvement with government bodies ensured they played a vital role in reviewing and commenting on the draft IPMS. Dubai is now leading the way in IPMS adoption; the standard will be used on Burj 2020 – which at more than 700m is set to be the tallest commercial tower in the world – together with a number of projects linked to the World Expo in Dubai in 2020. The Dubai International Financial Centre has also announced that IPMS will be incorporated into its tenancy agreements for all its occupiers, many of which are high-profile global corporations, including international financial institutions and professional services firms. RICS has been working with several Middle Eastern governments, relevant associations and corporate occupiers, and the international standards are now receiving huge support in the region. In addition to their use on the projects in Dubai, the government of another emirate, Ajman, has pledged its support to the standards, while the Saudi Arabian government is also now engaging with stakeholders in its market on IPMS. b Robert Jackson is Director for RICS Middle East and North Africa rjackson@rics.org

Image © istock

a dv ertising

“When I joined my new company in April 2015 they did not have access to BCIS. For a couple of months I had to manage without access which made it very difficult accessing cost data. Now having a subscription to BCIS, gives me easy access to a large amount of building cost data, saving me valuable time. BCIS is invaluable, as it helps me provide realistic early cost advice to our customers from a widely recognised source.” Paul Yandall, Project Manager and Quantity Surveyor, Torbay Development Agency

RI CS p ro perty JOUR NAL

BCIS provides essential data to carry out early cost advice A reliable source of independent data

To find out more about BCIS visit rics.org/paulsstory or phone +44 (0)24 7686 8433

Residential property conference 2016 6 July 2016 Radisson Blu Portman, London The conference brings together the leading ﬁgures in property to tackle the biggest issues facing the industry including: • Is there such a thing as affordable housing? • Will online services alter the face of traditional high street agencies? • Can PRS ﬁll the gap created in the wake of a shrinking supply of social housing? Attend this event for high-level strategic debate mixed with practical technical sessions that will improve your day-to-day practice.

Book your place online today:

rics.org/residentialconference

To ad ve rtise con t a c t Em m a Ke n n e dy +4 4 ( 0 ) 2 0 7 8 7 1 5 7 3 4 or emmak @wearesu nday. c om Untitled - Page: 1

ju ly / augu s t 2 0 1 6 1 3 2016-03-24 10:18:28 +0000

RICS prope rty JO U RN A L

Upf r o n t C U STO MER FEED BAC K

Reviewing the situation

Rosemary Rogers explains the importance of reviews

Do you collect feedback from your clients? Some 61% of customers read online reviews before making a purchase, according to Graham Charlton’s article about ecommerce consumer reviews (http://bit.ly/1BoZr5K). Such reviews are here to stay and are a strategic element in Google’s organic and sponsored listings. Your organisation cannot therefore afford to ignore customers’ growing reliance on crowd-sourced feedback. It is worth taking care to ensure that only validated clients can leave reviews; some larger review-led product websites have run into trouble by not verifying the user’s identity beforehand. More rigorous sites include Trustpilot, feefo and reallymoving.com; some of them charge a fee for acting on your behalf.

Table 1 Comparative ratings for home-moving services Service

Average out of five stars

Surveyors

4.75

Removals

4.72

Conveyancers

4.47

1 4 J U LY/A U G U S T 2 0 1 6

Is it worth the cost? Yes: the best surveyors know they need the best reputation. Potential clients will search for reviews of your service regardless of whether or not you have a formal system in place. Without such a system, Google or Bing search results will include random reviews or even details of your competitors, meaning that you have less control of your own reputation. Once a customer has found your firm online, they can use reviews as well as price to select the appropriate service for their needs. Looking at reviews helps to gain their trust, and you should not underestimate the power of crowd-sourced reviews: an article in the Financial Times states that no fewer than 90% of consumers trust peer recommendations online (http://on.ft.com/1JyPzO8). Although home-moving service reallymoving.com does not always know which of its leads are converted into sales, analysis of those of which it is aware show that most people do not choose the lowest-priced quote. Strong reviews are a vital way to prove service quality.

Bad reviews What happens when a bad review creeps through? It is difficult to regain trust once it is lost. Because customers are more likely to leave a bad review after unsatisfactory service than to comment favourably on good service, it is vital to foster their happiness at every opportunity. Send a review link to all your customers and remind them how important feedback is to your business.

Top tips bb Remember that a great service sells itself. bb Follow up client reviews; either ask your lead generator to send a link or do so yourself. bb Never leave a bad review unanswered or the reviewer always has the last word. bb Be authoritative in your responses. bb Include links to your reviews as a footer in your emails or on your website and share them regularly on social media.

If you have a system that allows you to respond, you are demonstrating that you are serious about customer service and can explain any confusion or extenuating circumstances that may have led to questionable feedback. A surveyor at reallymoving.com received a very unfavourable review and was most unhappy that it was published. He wrote a considered response, in which he said he really did not feel he could have done any more for his customer. The reaction was astounding; sympathy was expressed by new and existing clients alike. The surveyor’s heartfelt response demonstrated a passion for his work, which served to increase his client conversion rate. This corroborates statistics from social commerce company Reevoo, whose research suggests that bad reviews can nevertheless be good for business (http://bit.ly/1VnOcT0). Its survey showed that 68% of consumers trusted reviews more when they saw both good and bad scores, while 30% suspected censorship or fabricated comments when they did not see anything negative. Additionally, those

who make a point of reading bad reviews are 67% more likely to take up services than the average consumer.

It takes time Gathering reviews does not happen overnight and requires some effort on your part. Ensure that you record the source of the referral; some lead generators automatically send out feedback links, or you may need to send the client a link directly to your reviews provider. Always keep up to date, and ensure that reviews are consistent. Finally, how do surveyors compare to other moving services? Reallymoving.com has analysed the thousands of comments it has collected over the past 12 months and the results show surveyors narrowly take the lead over other professions. b

Rosemary Rogers is Chief Operating Officer at reallymoving.com rosie@reallymoving.com www.reallymoving.com

Legal Q&A Up f r o nt Lega l Q&A

Vanessa Crawley is a solicitor in the corporate team at SA Law vanessa.crawley@ salaw.com

Enveloped property

I have a client who wishes to sell a property that is enveloped in a company. Given HMRC scrutiny in this area, what needs to be done to ensure this sale complies with the law?

> Vanessa Crawley

this year’s budget saw the Chancellor continue to focus on high-value residential property (HVRP) owned by companies, partnerships with corporate members or collective investment schemes. HVRP is defined as that being worth more than £500,000, though until 1 April the threshold was £1m. The Chancellor’s objective in targeting HVRP appears to be to tackle tax avoidance head on, in particular stamp duty land tax (SDLT) avoidance. The Finance Act 2013 introduced an annual tax on enveloped dwellings (ATED) to deter individuals from using UK companies to acquire or hold HVRP. A 15% SDLT rate for HVRP was introduced by the previous Finance Act in 2012. Where a company is the registered owner of a property, the shareholders may look to sell shares in the company rather than the property, thereby avoiding SDLT. Expanding the reach of this tax regime is presumably aimed at discouraging ownership of properties in such a way. Therefore, as may be the case here, many owners of companies both onshore and offshore will be considering the alternative options available to them, given that the benefits of owning and buying property in a company are diminishing. ATED applies over chargeable periods of 12 months and arises if, during that period, a company, partnership or collective investment scheme meets the ownership condition in respect of a single-dwelling interest. This raises two questions. bb What is the “ownership condition”? This relates to the beneficial ownership or entitlement to a single-dwelling interest. bb What is a “single-dwelling interest”? It is a chargeable interest in a single dwelling, being an estate, interest, right or power – or the benefit of the same – in or over land in the UK. Image © Istock

If triggered, the ATED is based on the annual chargeable amount, subject to the taxable value of the single-dwelling interest, and on the number of chargeable days during the relevant period. There are, however, reliefs and exemptions available to you and your client that can help limit the application of ATED in respect of genuine commercial activities. For example, the property rental business relief may apply if the single-dwelling interest is held for the purposes of a property rental business operated on a commercial basis. Similarly, the property rental business (special) relief may apply if a single-dwelling interest held for the purposes of property rental is unoccupied pending sale, demolition or conversion. It may be possible to ‘de-envelop’ enveloped property or take it out of the company, but I would advise that this is not a simple matter and is likely to incur some UK tax. Options for transferring the property out of a company may include the following. A resolution can be passed to put the company into voluntary liquidation, providing that it has no debts or liabilities, and passing a distribution in specie of the property to transfer it to an individual. It is important to confirm that the company has the authority to make such a distribution in specie, and that it has sufficient distributable reserves to declare it. bb An outstanding debt of the company, such as a loan by a shareholder, can be cancelled in favour of transferring the property to that shareholder. This may, however, lead to the shareholder assuming a debt to a third party. There may in some cases be reasons to keep a property enveloped and pay the ATED charge annually rather than trigger a disposal when de-enveloping. It will be important to obtain specific legal advice in respect of the company’s article of association and the procedures involved, and the advice of a tax specialist should also be obtained to carry out hypothetical calculations before taking any further action. b J U LY/A U G U S T 2 0 1 6 1 5

RICS p r op e rt y JOU RN A L

upfront Equal ity act

Health in mind Jane Fielding and Rebecca Jones explain why building managers must consider their responsibilities to occupants with mental health needs

t is understandable that, when it comes to their obligations under the Equality Act 2010, operators in lettings and property management think first of all about physical access and use. But this is only part of the story. Here, we turn the spotlight on mental health, which is perhaps one of the less familiar aspects of operators’ obligations under the act. One important aim of the legislation is to protect those with mental health issues, many of whom often find that they are not recognised as disabled because they do not have an obvious physical disability. Yet while mental health issues can be difficult to spot, they are just as difficult to manage or address. In a premises context, the act defines certain protected characteristics for people where they buy, rent, occupy or otherwise use premises. The relevant characteristics are gender reassignment, pregnancy and maternity, race, religion and belief, sex and sexual orientation, and disability. The act protects occupiers from: bb direct discrimination; that is, less favourable treatment because of a protected characteristic bb indirect discrimination, where persons sharing a particular characteristic are at a particular disadvantage bb victimisation; that is effectively retaliation for raising or supporting a discrimination complaint bb harassment, which is essentially unwanted conduct related to a protected characteristic that has a detrimental effect on a person. The act also seeks to prevent disability-related discrimination and imposes a duty to make reasonable adjustments, which we focus on below.

Adjustments The requirement to make “reasonable” adjustments is designed to help tenants, occupiers or potential tenants benefit from the full use and enjoyment of the 1 6 J U LY/A U G U S T 2 0 1 6

property. The definitions of who is subject to these obligations are complex, but they basically cover: landlords in respect of property already let, plus property they are seeking to let; those managing such properties on behalf of landlords; and those responsible for common parts. Superior landlords can also be required to consent to reasonable adjustments. For ease, we will refer to the groups obliged to make reasonable adjustments as “operators” and those who request the adjustment as “occupiers”. Operators can be required to make reasonable adjustments: bb to remove a disadvantage suffered because of the way in which things are done; this could include changing the terms of a letting agreement bb where a disabled person needs an auxiliary aid or service to prevent them being at substantial disadvantage. Unlike the equivalent employment provisions of the Equality Act, operators cannot be required to alter physical features. In short, operators can be required to make sensible and proportionate changes that remove or lower barriers for their occupiers. An occupier must not be asked to make any payment in respect of an operator considering whether to make

the adjustment requested. However, this is not the same as an obligation on the operator to pay for all adjustments – in many cases the adjustment will simply require them to alter the terms of a letting agreement without charge, where this would otherwise prevent the tenant making the physical alteration which they seek. The tenant can then have the work carried out at their own cost. The act makes provision for cost sharing where there is joint occupancy of a building and there are special rules relating to private residential properties.

Identifying mental health difficulties The charity Mind reports that one in four people will experience mental problems each year; anxiety and depression remain the most common among a potential range of hundreds of recognised mental health conditions. Poor mental health is not always immediately apparent, and some people manage conditions very effectively much of the time. Operators are not required to anticipate the needs of occupiers in advance. An occupier must ask for an adjustment for the duty to make reasonable adjustments to be triggered. However, although an individual is required to ask for the adjustment,

upfront Equalit y act

Discrimination

Practical tips bb Be alert to hidden indicators of mental health conditions in tenants, occupiers and potential tenants, and train staff to recognise those signs and deal with occupiers appropriately. bb Consider disability at the outset of a tenancy. bb Watch out for passing comments made in conversation that could amount to a request for adjustment. bb Be proactive in asking an occupier to explain why they are making a request and don’t be afraid to ask for more information. bb Assume that there is a low threshold for “disability” triggering the duty to make reasonable adjustments. bb Remember that commercial occupiers can bring claims too. bb Think about what would make a difference to the barriers faced by the occupier before deciding whether an adjustment is “reasonable”. bb Keep any adjustments and decisions under review.

they want, they are not required to provide information about their disability. Operators would therefore be well advised to ask an occupier about the reasons for their request before taking a decision on whether to implement it and be conscious of warning signs that might point toward a mental health condition, such as the following. bb Has there been a recent change in the individual’s behaviour? bb Are there indications that the individual is having difficulty functioning or processing information? bb Are there indications that they are experiencing anxiety or paranoia? bb Is there any other unusual behaviour? The definition of disability under the Equality Act has several facets that we will not go in to here. Suffice it to say that it is a low threshold, and the safest approach is to presume that a person who is showing signs of a mental health condition will be covered. There is no guidance about getting evidence from occupiers, but the logical starting point is that if an individual says they have a mental health condition or you suspect they might, then it is reasonable to ask for more information.

What is a “reasonable” adjustment? The best approach is to consider what might work to alleviate the disadvantage, and then consider what changes it is reasonable to implement. Although operators are not required to make physical changes to premises, furniture, furnishings, materials, equipment and other chattels are not classed as physical, so adjustments do need to be considered for these. Image © iStock

The installation, provision or adaptation of a doorbell or entry system, replacement or provision of signs or notices, replacement taps or door handles and changes to the colour of a wall, door or any other surface are also areas where adjustments can be required. Potential reasonable adjustments are: bb providing extra time for payment for an occupier who does not pay their rent on time because their depression affects their ability to manage their finances bb advance warning of maintenance visits so an occupier suffering from a severe anxiety disorder or a behavioural disability can have a companion present bb additional security; though an operator is not necessarily obliged to provide a requested high-end solution if a more straightforward option will be adequate bb increased tolerance of non-violent outbursts from a person with borderline personality disorder, who is abusive to other occupiers and their visitors, before eviction is considered bb installing motion-sensitive taps for an occupier who has obsessive compulsive disorder and fixates on water being left running when not in use. The duty to make reasonable adjustments is a continuing one, and with that in mind, an operator should regularly review the ways it fulfils that duty in the light of its occupier’s experience. Physical adjustments should be maintained and repaired in order to ensure that they remain effective. As the duty is ongoing, an adjustment that is currently considered unreasonable could become reasonable later on – for example, if a product became more widely available, cheaper or better suited to the needs of the occupier over time. Image © xxxx

Although we have focused on the duty to make reasonable adjustments, there are other forms of discrimination that are equally relevant when dealing with people with poor mental health. bb Direct discrimination would occur if a prospective occupier is refused a lease because the landlord does not let to people with mental health problems. bb Indirect discrimination could occur if a landlord has a rigid policy of beginning immediate eviction proceedings for late payment of rent, which adversely affects people with a particular mental health condition such as depression. bb Harassment could occur where an occupier is subject to negative comments from an operator’s staff because of a mental health condition. bb Victimisation would be relevant if concerns had been raised about the treatment of that occupier and a threat of eviction then made to the person raising those concerns.

Commercial occupiers Until recently there has been no guidance regarding protection under the Equality Act for commercial occupiers, and it was often thought that only an individual could claim protection under the act. The recent case of EAD Solicitors LLP and others v Abrams UKEAT/0054/15/ DM, however, determined that corporate entities can claim such protection. While that was an age discrimination case, a relevant example in this context might be a company working with people having particular mental health conditions, whose application for a lease in multi-let premises is declined because the landlord is concerned about other occupiers’ response to their presence. Such a decision is likely to amount to direct discrimination. b

Jane Fielding is Head of Employment, Labour & Equalities and Rebecca Jones is Senior Associate at Gowling WLG (formerly Wragge Lawrence Graham & Co) jane.fielding@gowlingwlg.com rebecca.jones@gowlingwlg.com

Related competencies include Property management, Leasing/letting, Health and safety

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RICS P r op e rt y JOU RN A L

UPFRONT Tax in g t i m e s

TAXINGTIMES

Robert Walker considers the implications of the recent increase in stamp duty land tax on additional residential properties

Following an initial announcement in the Autumn Statement on 25 November and subsequent consultation, legislation has increased the rates of stamp duty land tax (SDLT) that apply to purchases of additional residential properties, such as second homes and buy-to-let properties, from 1 April 2016.

Scope of the rules An additional 3% applies where, as a result of the acquisition of UK residential property, an individual purchaser has more than one residential property, anywhere in the world. The additional 3% also applies to all acquisitions of UK residential property by companies and other “non-natural persons”. There is an exception for individual purchasers acquiring a UK property to replace an existing main residence disposed of in the last three years. Where such a residence has not yet been disposed of, the additional 3% will need to be paid upfront and then reclaimed if that existing residence is sold within three years. The requirement to be replacing an existing 1 8 J U LY/A U G U S T 2 0 1 6

main residence results in inconsistencies in the treatment of taxpayers in arguably similar positions. For example, a buy-to-let investor moving out of rented accommodation into their first home will pay the extra 3%, whereas a buy-to-let investor who already owns their own home and is replacing it will not be liable. Where the additional 3% applies, the SDLT rates are as shown in Table 1.

Annexes Where a purchaser is acquiring a main residence and an annex such as a granny flat and that annex can be used as a separate dwelling, the initial proposal was that the additional 3% SDLT may apply to the entire transaction – that is, both the main residence and the granny flat. Following significant public pressure, the government has agreed to relax these provisions, and it is probable that the transaction will incur the additional 3% only

where the annex represents a third of the total value of the property or more. However, at the time of writing, the amended legislation has not yet been published.

Exemptions Notwithstanding previous indications that there might be an exemption for significant investors in residential property, no such exceptions have been introduced. The Chancellor has ignored calls from industry for such a measure, saying that the case was not compelling and that housing development will remain attractive for investors. He is hoping that the changes will not hamper housebuilding in the UK, which could be the case if investors feel that the tax burden on residential development is becoming too high. Some investors will, however, be relieved to hear HMRC has confirmed that purchases of six or more properties in bulk will still be treated as a non-residential transaction subject to SDLT

Table 1 SDLT rates on additional residential properties by price Purchase

Rate

Up to £125,000

More than £125,000 and up to £250,000

More than £250,000 and up to £925,000

More than £925,000 and up to £1.5m

13%

More than £1.5m

15%

Image © Istock

at the lower commercial rates and outside the scope of the 3% surcharge. It will be interesting to see whether developers will start to design cluster flats that can be easily bought in parcels of six by commercial investors to avoid the higher rates. Where six or more properties are acquired, there is a decision to be made between claiming multiple dwellings relief (MDR) and paying the additional 3% on top of the usual residential SDLT rate or treating the transaction as commercial and paying commercial rates. Where the average unit price in the transaction is less than £333,000 it is likely to be worth claiming MDR and paying residential rates, and where the average unit price is greater than £333,000 it is likely to be preferable to treat the transaction as commercial and apply commercial rates. Student housing is outside the definition of dwelling for the purposes of the 3% SDLT and so is not subject to it. It is, however, within the definition of dwelling for the purposes of MDR; so for multiple acquisitions of student houses or flats, MDR can continue to be claimed based on normal residential SDLT rates.

Scotland Note that since 1 April 2015, land in Scotland is not subject to SDLT and is instead taxed under the separate Scottish land and buildings transaction tax, for which similar additional 3% rules have also been introduced. b

Robert Walker is Partner and Real Estate Tax UK Network Leader at PricewaterhouseCoopers LLP robert.j.walker@uk.pwc.com

R IC S p r op e rt y JOU RN A L

c o mm e r ci a l

commercial

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RICS prope rty JO U RN A L

Commercial P owe r

Grid rights and wrongs Most surveyors are unaware of opportunities in the rapidly evolving power sector that could each be worth millions, says Hugh Taylor

he way power is produced and then transmitted to homes and businesses has changed, and will continue to change over the coming decades. There is a move away from large, centralised generation – predominately fuelled by coal, oil, gas or nuclear – to smaller, decentralised and increasingly cleaner power plants. Where once there were relatively small numbers of brooding, monolithic power stations, each tethered to the pylons of National Grid’s 400,000V network and dominating their landscapes, demand in today’s market is instead for large 2 0 J U LY/A U G U S T 2 0 1 6

numbers of smaller, cheaper and more discreet schemes. To be cost-competitive, a smaller power scheme must connect to the grid at the lower voltages. However, little capacity remains on lower-voltage networks, limiting the opportunities to deploy and connect new schemes and bringing about a stark imbalance in supply and demand for viable sites. This undersupply of suitable sites has created a premium for property – or in some instances, bare ground – for which rights to connect power plant to the grid are available. These grid rights can considerably transform the rental or capital value of a site, provide investment opportunities for more entrepreneurial Images © © iStock Image

landowners, and in some instances offer significant revenue opportunities as by-products of existing site operations. This can be illustrated by extreme cases, where grid-consented sites with rental values of less than £50,000 per annum have been worth in excess of £250,000 per annum for lease periods of 30 years once grid rights have been secured. This represents a total annual rental uplift of £6m over a lease term – with a corresponding capital uplift.

A predominantly urban market From 2010 to 2015, the market for decentralised power sites was driven by the renewables bubble; it was

C o mme rcial Pow er therefore predominately rural in focus and typically for expanses of green field. However, since 2015 the market has almost exclusively been for sites of under an acre, and has focused chiefly on commercial and industrial landscapes. This swing towards urban environments is a product of the change in technologies being favoured. Sudden changes in government policy mean that demand for new wind and solar power has given way to a burgeoning demand for reliable and flexible power, and among the technologies that deliver this are diesel generators (gensets), gas gensets and battery storage. These typically require less than an acre of ground – often much less – can sometimes be integrated into existing buildings and are looked on more favourably by planners when sited in areas of commercial and industrial land use, their proximity to dwellings aside. The common characteristic of these schemes is access to the 33,000V (33kV) grid. While 33kV circuits do cross rural areas, their destinations are nearly always settlements, which is where the demand for electricity is greatest. It is these settlements, therefore, that provide the greatest likelihood of proximity to a 33kV circuit. Furthermore, the national lack of capacity on 33kV circuits has mainly been brought about by extensive deployment of wind and solar schemes in rural areas. More urban parts of the grid have both fewer connections to such technologies and a higher demand for power. Securing capacity – and therefore grid rights – is typically easier in urban areas. Gas gensets also need access to the medium- or intermediate-pressure gas grid as well as significant gas capacity. Again, the gas grid can be accessed in some rural locations, but is mainly to be found in towns and cities. Owing to their rapid rates of discharge, known as ramp rates, battery storage schemes would cause unacceptable step-changes in voltage on many areas of the grid that do not have sufficient demand for electricity – ‘loads’ – to absorb those voltages. This technology too, therefore, is more suited to urban than to rural areas.

National Grid’s balancing act The market for decentralised power schemes is predominately a product of their ability to inject power into the grid rapidly and cost-effectively. This ability enables plant operators to sell services to National Grid – services it requires in order to fulfil its responsibility to balance

the UK’s supply and demand for power on a second-by-second basis. Much of the requirement to balance power in real time is to maintain system frequency within statutory limits. Grid operating frequency is 50Hz, but even relatively minor deviation, to 48Hz or 52Hz, will cause power station shutdowns and localised black-outs; a fall in frequency to 47Hz would cause the UK’s grid to shut down entirely. National Grid, as the UK’s system operator, maintains grid frequency within 1% of 50Hz. While the energy market itself does much of the work in matching the supply from power generators to demand from homes and businesses, human beings are not entirely predictable and neither is their use of electricity. With 24.7% of UK power generated already coming from renewable sources in 2015, much of which was intermittent, the power output of the generator side of the market

Grid rights can hugely transform the rental or capital value of a site has also become far from predictable. Once the gate closes on the energy market an hour ahead of each half-hour delivery window, National Grid steps in. When National Grid buys power and the availability of power in its frequency response markets, it pays according to the speed at which the generator can respond. As a rule, power storage technologies such as battery and flywheel respond the fastest, followed by pumped storage, diesel gensets, gas engines and then gas turbines. The National Grid service with the fastest delivery requirement is enhanced frequency response (EFR), which requires delivery of 100% active power export in less than one second. As with the other, slower-response services, National Grid lets these contracts by regular competitive tender.

Peaks, capacity and reserves National Grid is also charged with ensuring that there is sufficient power capacity in the UK on a year-by-year basis. The highest peaks in power demand occur on winter evenings. The UK’s capacity requirement in a given winter is determined by the highest peak in demand, in gigawatts, over that year.

In order to minimise this peak capacity requirement, which was 50.6GW in winter 2015/16, National Grid retrospectively penalises energy suppliers for providing power during the three half-hour settlement periods of highest demand from November to February inclusive, a mechanism known as Triads. So as to avoid these penalties, energy suppliers in turn retrospectively penalise large energy users for importing power during these windows, and offer incentives for other users either to generate power themselves or to reduce their demand during these periods. Triad avoidance, therefore, provides both power plant operators and significant energy users with healthy opportunities to generate revenue, at some £35,000 per megawatt. National Grid also buys access to sources of extra power to deal with unforeseen levels of demand and unavailability of generation. These additional power sources are referred to as reserve. The most widely known of the reserve services that National Grid procures is short-term operating reserve (STOR). The acronym has become synonymous with gensets, although STOR is just one of a raft of revenue opportunities available to power plant operators – as applicable to storage or demand reduction schemes as it is to gensets – and is typically of lower value than Triad-avoidance revenues. The residual peak UK demand, after these services or mechanisms have been employed, is addressed by the Capacity Market. Capacity Market contracts, again let by National Grid, take the form of retainers paid to generators – including storage operators – in exchange for guaranteeing availability of a given capacity. In normal circumstances, these contracts are let via competitive auction four years ahead of the delivery year, which gives time to deploy power plant, and capacity contracts for new-build schemes are for 15 years. As an example, a 20MW genset scheme awarded a capacity contract following the 2015 capacity auction will earn predictable capacity payments of £340,340 plus VAT per year, index-linked, for 15 years from 2019. This amounts to more than £5m from just one of the available sources of revenue.

Decentralised sites Ensuring security of power supply is becoming ever more challenging for National Grid. Since 2010, 26 power stations have been decommissioned and the Department of Energy and Climate

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RICS p r op e rt y J OU RN A L

commercial P OW E R

Change (DECC) has now called time on coal-fired power. A further 43 power stations are scheduled to close by 2030. Combined, these closures represent a total of 50GW, or 55% of the UK power capacity. At the time of writing, the prospects of Hinkley Point C nuclear power station being commissioned by 2025, if ever, hang in the balance. DECC announced in March that it will be adding in the region of 20GW of new-build capacity contracts to the 2016 and 2017 capacity auctions. This is expected to put upward pressure on the per-megawatt contract values. Furthermore, the growth in deployment of intermittent technologies such as wind and solar, coupled with the reduction in reliable, frequency-stabilising technologies such as coal, is increasing the requirement for frequency response services. With some 30GW of wind schemes already scheduled to connect to the grid by 2030, these markets are set to grow significantly in the coming years, along with the Triad, demand-side response and reserve markets. There is no doubt that more operators across a greater range of technologies will be prepared to pay higher rents for a greater number of sites. Most notably, the political will to remove barriers to the deployment of battery storage and encourage demand-side flexibility will open up greater opportunities – in particular for urban power schemes, not least at existing properties with high energy consumption (see Property Journal March/April 2015, pp.24–5).

Getting value for grid rights With growth in demand for decentralised power sites, increasing revenues available to generators and ever-decreasing availability of grid capacity and connection opportunities, the value of grid rights will continue to rise. Unlike land rights, mineral rights and sporting rights – all of which are, arguably, ubiquitous and enduring – grid rights must be created on a site-by-site basis, and they can be lost as well as gained; the dos and don’ts below on grid authorisation letters offer some pointers. More importantly, the available grid capacity that helps determine the value of rights for a site is issued by licensed network operators on a strictly first-come, first-served basis. As such, valuable grid rights are available only to a few site owners in a given locality, if any. While substantial technical expertise is necessary to make a competent 2 2 J U LY/A U G U S T 2 0 1 6

Access to the grid and consent to connect can prove very lucrative

reliable access if they are to operate on a commercial basis.

Valuable grid rights are available only to a few site owners in a given locality – if any application for a grid connection, the greatest impact on a land or property owner’s grid-related prospects is in understanding the statutory framework within which the grid operators conduct themselves, and their individual commercial terms – then taking approaches that avoid the constraints and maximise opportunities. Being conscious of the range of power-related technologies, their particular market conditions, the opportunities that each represents for a site owner at any given point in time and in future, as well as the credibility of the key players in each market, is essential. As a case in point, the current market for sites for stand-alone battery storage schemes is fundamentally flawed: at the time of writing, a stand-alone battery scheme is incredibly unlikely to be viable without a contract for EFR, given that it is a relatively tiny market of 200MW, potentially with just four contracts. This can be evidenced by SSE Power Distribution having received some 500 battery storage applications, totaling some 4GW, and yet so far not a single stand-alone scheme is under construction on their network. Furthermore, very few of the scores of developers that are entering this new market have any experience of either battery technology or the complex revenue streams to which they must have Image © Alamy

Be aware Below are some dos and don’ts to help surveyors avoid common grid-related pitfalls and ensure value for their clients. Do: bb secure grid connection offers independently of any developers bb apply for the technology most likely to deliver value for your client bb proactively seek grid rights for your clients ahead of their neighbours bb put sites out to competition between different developers bb vet developers and only deal with the most credible bb use a tried and trusted legal framework for the above process bb seek specialist, expert and independent technical, strategic and tactical advice. Don’t: bb allow your clients to sign developers’ grid authorisation letters bb wait for a developer to come knocking bb put a site out to competition until grid rights are safeguarded bb sign over control of grid rights until negotiations conclude. C

Hugh taylor is CeO, Roadnight Taylor hugh@roadnighttaylor.co.uk

Related competencies include Development appraisals

c o mmer c ia l Bu sin es s valuation

Improving standards

A new credential for business valuers in the USA has international implications, says Steve Choi

A company’s financial statements offer information that investors and creditors can use to evaluate its performance. Investors and creditors, in their role as capital suppliers, rely on these to assess the profitability and safety of their investments. Over the past decade, more and more emphasis has been put on fair value estimates as a basis for measuring items in financial statements; however, valuation work products prepared by individuals in this time have faced increasing scrutiny due to quality issues and a lack of consistency and reliability in valuation results and products.

Experts scrutinised The US Securities and Exchange Commission (SEC) has expressed concern that those performing fair value measurements for its registrants lack appropriate training, qualifications and experience to make such estimates for the purposes of US financial statement reporting. Criticisms include: bb the lack of a unified identity for valuation experts bb no requirement for individuals to be a member of any professional organisation in order to perform valuations bb varied valuation credentials

bb lack of analytical consistency and transparency in valuation work products bb lack of consistent qualifications and experience for valuation credentials bb no consistent enforcement and disciplinary mechanisms for valuation experts. In response to these criticisms, RICS representatives have been working with representatives from the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers (ASA), the Appraisal Foundation, the International Valuation Standards Council and several major international public accounting firms to develop a shared credential for the business valuation profession, known as the Fair Value Quality Initiative.

Public interest The principle of the shared credential is consistent with RICS’ mandate to protect the public interest by ensuring standards and professionalism in the business valuation sector. The credential aims to develop the following three components. bb Performance framework: this will provide valuation practitioners with guidance on the level of work, rigour and documentation required when performing fair value assessments. The application of the performance framework will promote a greater understanding of a valuation practitioner’s use of judgement and estimates, as well as improve the level of

consistency and transparency by focusing on how much documentation is prepared by valuation practitioners. bb Qualifications: requirements will be developed for business valuation professionals to obtain and retain the fair value measurements credential. This will address the necessary work experience, base knowledge and continuing education requirements to be a credential holder. In addition, professionals wishing to attain the credential will need to pass a common assessment that will be developed by RICS, AICPA and ASA. bb Quality control: establishing such a process will regulate credential holders. It will review continuing professional education requirements, complaints received and valuation assignments performed. Regulation is vital, as having standards without the ability to enforce them would make them meaningless. This will provide confidence to the markets and regulators that valuations will be high in quality. The SEC challenged the valuation profession to increase its professionalism. All the organisations involved in the Fair Value Quality Initiative have thus spent substantial time and resources on developing a credential that will be a gold standard for the valuation profession. Some may argue that the survival of the US valuation profession depends on its ability to increase credibility with stakeholders and regulate itself successfully.

Framework To ensure consistency and transparency in the fair value measurement process, the organisations have developed a performance framework, qualifications and quality

RI CS p r o pe rty JOUR NAL

control for the new business valuation credential. Public consultation on the performance framework began in June, and the credential is due to launch later this year; it currently focuses only on business and intangible asset valuations for US financial reporting purposes, but it is hoped that it will have wider applications. Leigh Miller, FRICS, a partner and the National Director of Ernst & Young’s Valuation and Business Modeling group in the USA and a member of RICS Governing Council, says: “The Fair Value Quality Initiative was focused just on SEC registrants since this was our mandate from the regulators. The intent was to address their concerns and not overstep claiming the franchise for all valuations. “That said, we hope the performance framework and the new credential will gain traction in other spaces for valuation and also generate demand for comparable usage in other asset classes.” Longer-term efforts will involve financial instruments, property and machinery and business assets. This new credential is US-centric at the moment but has global implications, given the convergence between US Generally Accepted Accounting Principles and International Financial Reporting Standards over the past decade. C

Steve Choi is International Director of Business Valuation at RICS schoi@rics.org

Related competencies include Valuation, Valuation of businesses and intangible assets

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RICS prope rty JO U RN A L

Co m m e r c i a l Faci l iti es m anag em ent

Room for manoeuvre Cathy Harris explores how project-specific clauses can be inserted into NEC3 Term Service Contracts

t has been more than 18 months since the British Institute of Facilities Management (BIFM) and NEC Contracts jointly published the New Engineering Contract (NEC) for FM suite of documents. Principal among these is the NEC3 Term Service Contract (TSC), a ‘standard form’ of contract intended for use in the provision of any type of service, and therefore suitable for appointing an FM supplier. The TSC has also been endorsed by the Facilities Management Board of the Cabinet Office. A standard form is a contract published by an industry body and recognised by that industry’s participants, containing established and generally accepted terms and conditions. The construction industry uses a variety of successful standard forms, including NECs; the FM sector has more limited standard form options. Standard forms can result in more efficient procurement and fewer misunderstandings because both parties are familiar with the risk profile and can instead devote their time to genuinely commercial issues. However, standard forms are still usually amended to address such issues or perceived risk imbalances. The greater the amendment, the more legal expertise is required by the contracting parties to ensure there are no unintended consequences. One of the features of NECs is that they are designed to be more flexible than some other standard forms, and for instance include a secondary options clause where the parties may insert project-specific ‘Z clauses’. BIFM’s

2 4 J U LY/A U G U S T 2 0 1 6

Getting Started with the NEC3 guidance notes explain, however, that “you will find numerous examples of other Z clauses that are being used by organisations, but seek legal advice prior to using”. The parties therefore need to consider how the TSC may need to be adapted or supplemented on a project-by-project basis. This article considers the types of Z clauses likely to be required for most FM contracts. These are considered in three broad categories: 1. NEC’s public-sector Z clauses 2. clauses that should be considered for inclusion, being in common use in bespoke FM contracts 3. clauses that should be considered for longer or more complex FM contracts.

Background The TSC, like the other NECs, contains the following modules: bb core clauses bb main option clauses, for which a pricing option must be chosen bb dispute resolution, W – adjudication bb secondary options clauses, of which any or none of the following may be chosen: • X – commercial provisions, the most relevant of which to complex, long-term FM contracts are: price adjustment for inflation (X1); changes in the law (X2); low service damages (X17); task order (X19) and key performance indicators (X20) • Y – UK-specific • Z – the parties may insert Z clauses that are project-specific to amend or supplement the contract, which are the main topic of this article bb contract data, which is completed by both parties.

Z clauses published by NEC NEC has already identified a number of clauses for use in UK public-sector contracts, including clauses that relate to the following: bb the Public Contracts Regulations 2015 bb Official Secrets and confidentiality bb security admittance to affected property.

Industry-specific clauses The following clauses are often used in FM contracts, though are not covered by the TSC. bb Public-sector provisions – for example, freedom of information, data protection and audit and inspection rights – are not included in the NEC’s public-sector Z clauses. bb Qualitative provisions such as compliance with “good industry practice” and all legislation are also excluded; otherwise, the contractor’s obligations depend on what has been written into the service information. bb Transfer of Undertakings (Protection of Employment) Regulations 2006 are not covered. The outsourcing of an FM function is likely to result in the employer’s staff who currently perform those services to transfer to the contractor under the regulations. On expiry, the contractor’s staff would either transfer back to the employer or to a replacement service provider. bb Pensions: employers will also wish to ensure that their transferring employees’ pension rights are preserved, while contractors will wish to make sure that they are not inheriting large unfunded pension liabilities. bb Restrictions regarding assignment of part or the whole of the contract, Image © Shutterstock

C o mme rcial Faci lities m anagement typically imposed on the contractor, are not covered. bb Clauses restricting changes in control or ownership in the contractor are not included, sometimes for reputational reasons. bb Exit and handover provisions to address the transition from the service provider to a new one at the end of the term are likewise not covered.

Complex service provision Where complex services are specified, it is often market practice to have a comprehensive payment mechanism that enables corresponding deductions for any failures to comply. As noted above, the TSC contains options for low service damages (X17) and key performance indicators (X20), which will need to be developed in the service level table and incentive schedule. Unlike deductions-based payment mechanisms, Option X20 provides for incentive payments to be made if the contractor achieves or beats a target. Therefore, if a public–private partnership (PPP)-style performance regime and payment mechanism are required, they will need to be inserted into the service information and/or Z clauses.

Given that many FM contracts are let for 10 years or more, the parties will be seeking a balance between ensuring value for money and the ability to earn a fair profit. Various mechanisms have been developed to achieve this balance, including indexation, benchmarking and market testing. Option X1 enables the price adjustment factor to comprise a basket of indices by nominating the proportion for each chosen index; for instance, there may be a heavy weighting for the consumer price index for services incurring high employment costs. It may require a Z clause to clarify non-indexed elements of the service fee – for instance, pass-through costs. If the employer also requires periodic market testing and/or benchmarking to determine value for money, these provisions will need to be inserted as Z clauses because they are not covered by the TSC. The parties cannot foresee all legislative changes that may occur during the term of a long contract. While Option X2 makes any change of law a compensation event, this is unlikely to be acceptable to employers, who are used to the more favourable change of law risk profile found in PPP or bespoke contracts. If this is the

case, a Z clause would be required to amend the risk profile.

Conclusion Endorsed by BIFM as well as by various public-sector bodies, the TSC has been established as a contract for FM services. With luck, this may enable similar standardisation of contracts to the kind achieved in the construction industry. However, when using the TSC for FM contracts, the parties still have to consider how the form may need to be supplemented to achieve their commercial intentions on an individual, case-by-case basis. C

Cathy Harris is a solicitor at Caxton Legal cathy.harris@caxtonlegal.com

Getting started with the NEC is available at http://bit.ly/1sgwMzH

Related competencies include Facilities management

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RICS p r op e rt y JOU RN A L

Co m m e r c i a l Stu d ent accom m o dation

Top-class investment Student accommodation has become a popular choice for investors. Stewart Womersley reviews the risks and opportunities in the market

urpose-built student accommodation (PBSA) has undeniably come of age as an asset class, and many would question whether the ‘alternative’ label is still appropriate. Having proved its resilience after the global financial crash, the UK sector celebrated its 25th birthday in style with a record £5.5bn of investment, surpassing the North American market. This represented a tenfold increase on 2010 and more than tripled 2014’s figure of £1.7bn, so it is little wonder that in a British Property Federation survey, student housing was the specialist sector most expected to offer the best returns in 2016 (http://bit.ly/1NCgbPU). Driven originally by domestic and European institutional funding and a few small developers converting office buildings, the UK PBSA sector now has a wide variety of investors, developers and operators entering the market. Capital is coming from across the globe, with private equity, pension and sovereign wealth funds all picking up on the promising and steady returns on offer. Real estate investment trusts (REITs) are a recent addition to the sector, with Gravis Capital Partners and Empiric launching in the last three years. The suitability of the REIT structure remains largely underused by UK players for student housing; however, if Property Week is to be believed, Unite Students will be converting into a REIT next year.

Investor appeal So why has student housing been so appealing to investors compared with other assets? There are three key reasons. 2 6 J u ly/A ugu s t 2 0 1 6

First, it offers long-term, stable income. Rents have consistently increased above the rate of retail price inflation, with typical short-term annual leases giving operators an easy opportunity to adjust rents in line with inflation. With most students having parents to act as guarantors, there is little risk of tenants defaulting. Occupancy rates are also generally high; many operators enter into nomination agreements with universities that guarantee a proportion of beds will be taken each year. Second, demand remains strong. The number of students being admitted to university has increased by one third over the last 10 years (see Table 1), with the much-publicised tripling of tuition fees only temporarily stalling the continuing upward trend. Demand for higher education is also acyclical, with recessions prompting people either to reskill or to delay entering the job market, meaning that PBSA can typically

Table 1 Undergraduate admissions to UK universities by year Year

Admissions

2006

390,900

2007

413,400

2008

456,600

2009

481,900

2010

487,300

2011

492,000

2012

464,900

2013

495,600

2014

512,400

2015

532,300

Source: UCAS (http://bit.ly/1Nr2qA6)

offer reliable returns during periods of economic turbulence. Furthermore, with relatively little increase in university-provided beds, the number of students housed in PBSA doubled between 2007 and 2014. According to the Higher Education Statistics Agency, 83% of the 210,000 additional students went into the private rented sector (http://bit.ly/26wxEQd), adding strain to the lack of housing in many university towns and providing a clear case for future development. Third, PBSA is attractive from an investment perspective. It allows institutional investors to diversify their portfolios away from traditional, cyclical assets with less promising returns. The pronounced yield compression in the market – with yields on London PBSA hardening from 6.3% in 2012 to 4.5% in

C o mme rcial Student acco m m odation

2015 – reflects both robust land value appreciation and strong competition between investors to enter the market and access the long-term income on offer.

Room to grow? Even accounting for this competition, the sector still offers plenty of capacity for further investment. With a third of first-generation PBSA stock and 100,000 university-owned bedrooms in need of repair – representing potential investment of £5bn – refurbishment is one area for investment opportunity. Given increased competition between institutions, universities may also seek to join forces with developers to build new housing on campus space. Sean O’Shea, CEO of developers University Partnerships Programme, estimates that most universities only optimise a quarter of their estates, with development having the potential to save institutions more than one third of their running costs (http://bit.ly/1Wsnew6). The general opinion is that the PBSA market has not yet reached its ceiling. Nonetheless, several factors may inhibit continued growth for the sector as rapid as that of the last five years. The growth in international student numbers over the last decade has been pivotal to the expansion of the PBSA sector, particularly in prime schemes, Images © Alamy

as international students – who face uncapped fees in the UK – tend to be among the wealthiest. While the tougher immigration rules on student visas imposed from 2012 had a sharp effect on the number of Indian students in the UK, to date this has been outweighed by strong increases in numbers from countries such as China and Singapore. This does, however, mean that growing competition from developing nations focusing on establishing their own higher education sectors is a long-term threat, with China in particular investing heavily in tertiary education. Although the most successful UK universities will likely always have strong appeal for international students, if in future such students find universities in their own regions more attractive this may have a knock-on effect on prime PBSA schemes serving less prestigious UK universities. By the same token, there have been signs that the tripling of tuition fees has seen the domestic demand for less well-reputed institutions fall, as students look for more value for money. With the reduced birth rate of the late 1990s and early 2000s due to lead to a slowdown in admissions in the next decade, there is the potential that schemes that serve lower-tier universities may be less well occupied if the basics of good location and sensible pricing are not in place. Another key threat to the growth of the PBSA sector is opposition from local authorities, particularly in regional university towns. Planning tools used to limit the growth of student populations have included article 4 directions, which restrict the proportion of student houses in a given area, and the discretionary use of the Community Infrastructure Levy, which is not set nationally and can be used to disrupt viability. However, the pressure that forecast future increases in student numbers will place on the housing

market does give potential for developers to work with universities to persuade councils of the benefits of PBSA. The recent changes in stamp duty may also be a potential threat to investment, with the Chancellor deciding not to exempt commercial investors with more than 15 properties from the newly applied 3% point surcharge on purchases of second homes.

Conclusion It is worth recalling that despite these risks, PBSA remains a strong prospective market in the UK – in large part down to pent-up demand for student housing, if nothing else. Provided operators follow the lead of the likes of Unite Students and Urbanest in prioritising the fundamentals that pay off over the long term – such as good location, superb service, great amenities and sensible pricing – they are unlikely to fail. The long-term approach is crucial, as failure to pay attention to the features that ensure high occupancy rates year in, year out will be likely to expose developers to any threats to the UK market. So long as investors keep those lessons in mind, there is little doubt that the sector can graduate with honours. C

Stewart Womersley is a partner in Fund and Indirect Real Estate team at law firm Addleshaw Goddard stewart.womersley@addleshawgoddard.com

Related competencies include Investment management

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RICS p r op e rt y JOU RN A L

Co m m e r c i a l Su stainabl e bui l d ing s

Sara Wilkinson introduces RICS guidance that will help to familiarise members with the benefits and practical issues of green roofs and walls

Growth potential he first edition of the RICS Green Roofs and Walls guidance note is a timely publication that places chartered surveyors in a strong position to provide clients with professional advice. A multidisciplinary international team comprising building surveyors, a valuation surveyor, a property management surveyor, a green roof installer and an engineer prepared the guidance. It looks at green walls and roofs from the surveyor’s perspective, encompassing technical factors, value and community impacts. It is aimed at commercial and medium- to high-density residential buildings, and provides information for: bb surveyors bb owners bb tenants bb property managers bb builders and developers bb project managers bb facility managers bb services consultants bb local and national government.

Green roofs and walls are coming Many cities around the world are adopting policies to encourage or mandate green roofs and green walls. Green infrastructure is an essential component of liveable, healthy cities. Roofs represent up to 32% of horizontal surfaces in urban areas, and a 2009 study found the Melbourne Central Business District (CBD) could retrofit around 17% of these. A further study this year estimated that more than 16ha of CBD wall space has potential for greening. Benefits of such green infrastructure include: bb improved air quality – plants emit oxygen and absorb carbon bb large-scale reduction of the urban heat island and negative human health impacts bb attenuation of stormwater flows bb improved thermal performance, reduction in carbon emissions and heat loss to upper floors of buildings, and walls where provided bb lower energy costs bb extended lifecycle for roof coverings bb increased biodiversity habitats enabling, for instance, more pollination of plants by insects bb potential recreation space for workers and residents bb potential spaces for urban food production bb potential spaces for start-up businesses such as rooftop cafés, cinemas or farms 2 8 J U LY/A U G U S T 2 0 1 6

Rooftop garden at MacQuarrie Bank and Qantas, Sydney

Many cities around the world are adopting policies to encourage or mandate green roofs and green walls bb bb bb bb bb bb

lower energy consumption by provision of shade improved, water-sensitive urban design reduced noise pollution improved health and wellbeing for occupants aesthetic appeal enabling water recycling.

Types of green roof Green roofs can be extensive, intensive, or vegetated rooftops or rooftop gardens. Extensive roofs have substrate depths of less than 200mm, require minimal or no irrigation and are generally Images © MacQuarrie and Qantas; Frasers

C o mme rcial Sustainab le buildings

Removing barriers The guidance note offers the world’s first template for owners to adopt when licensing rooftops for commercial uses. Rooftops can be income-generating spaces for owners, and the note also proposes an approach to valuation. A barrier to third-party use of rooftops has been the need for owners to access them for maintenance or other purposes, and here the guidance note proposes a licence, which does not confer exclusive possession of the roof. The owner and their representatives can access the roof whenever needed. In the licence, commencement and termination dates are agreed, as is an ongoing schedule of condition and a commitment to make good at termination. These measures reduce owners’ concerns and provide surveyors with a comprehensive checklist to follow. However, all parties should check the relevant laws in their territory to ensure such a licence does not inadvertently create a lease.

Assessing potential One section covers assessment of buildings’ potential for retrofit with a useful checklist. It considers access, maintenance, structural, drainage and membrane issues, with a further section on maintenance and property management issues for surveyors. Using the Australian Green Star scheme as an example, the guidance note shows how green roofs and walls can increase sustainability ratings. With this guidance note, surveyors can be confident that they have evaluated all issues necessary to provide comprehensive professional advice to clients, and in this way we can enable our cities to become more liveable. C Green wall at Central Park, Sydney

planted with low-growing succulents and stress-tolerant herbaceous species. Intensive green roofs, on the other hand, have greater variation in substrate depth, although typically they are deeper than 200mm. Rooftop gardens are characteristically small-containerised garden beds (see image, left) using varying depths of substrate and higher organic components than extensive or intensive rooftops, and also feature recreational spaces. This enables them to sustain a wider variety of plant species, including fruit and vegetables, and provide amenity and recreation space for occupants. They offer the environmental and economic benefits of intensive green roofs without being physically incorporated into the structure, and costs fluctuate according to site access and use of cranes or goods lifts.

Types of green wall Green walls refer to vegetation grown directly onto a facade, or to vertical vegetation grown on a separate structural system that can either be freestanding and adjacent or attached to the wall. (see image above) Vegetation may be grown in planter boxes and trained on a trellis system with mechanised watering. Generally, there are two types of green wall: soil-less and modular. Soil-less green walls occur when vertical gardens grow on the surface of built structures. They mimic the growing conditions found where green walls occur in nature and are sometimes called living walls, green facades, bio-walls or vertical vegetation. Modular green walls use pockets of plants and climbing plants in prefabricated sections; the cost is generally about half that of a soil-less green wall.

Sara Wilkinson FRICS is Associate Professor at the School of the Built Environment at the University of Technology Sydney Sara.Wilkinson@uts.edu.au

Green Roofs and Walls http://bit.ly/1UnpCQy S. J. Wilkinson & T. Dixon, Green Roof Retrofit: building urban resilience (forthcoming) http://bit.ly/1NWatmI T. Croeser, ‘Biological potential in cities: An estimate from Melbourne’, Urban Forestry & Urban Greening, 16 (2016): 84–98 http://bit.ly/1TKgOU0

Related competencies include Sustainability, Property management, Leasing/letting

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RICS prope rty JO U RN A L

commercial Flood ing

A risky business Jessica Lamond and Namrata Bhattacharya-Mis look at the impact of flooding on businesses

lood Re – the UK government and industry flood insurance scheme – represents one of the biggest changes in this sector for many years because business premises will now be excluded from the insurance pool. Small to medium-sized businesses were included in the previous statement of principles on flood insurance, so this move may cause big problems for small firms – especially those affected by the recent flooding – making flood insurance more difficult and costly to obtain. Understanding the impact of flooding on businesses is therefore more important than ever as they struggle to recover physically and operationally. Building surveyors can make a real difference by providing guidance and advice for such businesses, however.

Statistical evidence The statistical evidence for direct and indirect damage and disruption to businesses from flooding is sparse, and much of it is confusing and contradictory. According to Environment Agency estimates, the 2007 flooding was a widespread event that affected an estimated 8,000 businesses yet resulted in 35,000 flood-related insurance claims from them, suggesting that they were claiming against multiple sources of loss on different policies. The insurance data indicates that direct damage is more costly than business interruption and other losses. Recently published research by the authors, based on a survey of mainly small to medium-sized businesses flooded in Sheffield and Wakefield in 2007, sheds some light on the different challenges businesses face during and after a flood. It shows that disruption can be just as important as physical damage in terms of recovery, with sales disruption ranked first in terms of initial losses during recovery. The study also showed that most of the companies paid for their own repairs 3 0 J U LY/A U G U S T 2 0 1 6

and losses and did not claim on their insurance. In fact, only 25% had used insurance to cover some or all of their recovery costs – at 13% and 12% of surveyed businesses respectively. Self-finance was the most frequent source of funding repairs at 68%, with only the remaining 8% reporting that they had used a business reserve.

Higher cost It appears that businesses may be wary of making a claim – if they can afford not to – because they fear losing their insurance, and this theory is backed up by recent government research. The true cost of flooding to businesses may be higher than we think, given that a large share of it may not be evident in insurance data. The study also suggests that preventing losses through individual property protection and other measures will benefit businesses directly, not just their insurers, so they may be more willing to undertake flood mitigation. Factors affecting the time taken to recover were also ranked by respondents. They indicated that clean-up and internal repair was the top factor and regaining customer base second. We know that households suffer financial, social and emotional impacts from being relocated; the relocation of business activities can be much more difficult. Only 11% of the businesses surveyed had an alternative location from which to operate, meaning many would have to close for repairs – potentially, if this repair were protracted, causing considerable loss of trade and then a struggle to regain custom. While the businesses surveyed were not closed for long – mostly less than two weeks – the lingering effect on turnover was still felt to be significant. So while indirect losses may be very important, the amount of those losses, in most small to medium-sized enterprises, is inextricably linked to the amount of damage and speed of recovery of the business premises. If staying open in a prime location is important then it makes sense for

businesses to be prepared; however, most businesses are not. Just under half of those responding had made any kind of preparation and the most popular measures were non-structural, such as signing up for warnings. Only 15% had installed temporary protection to prevent damage, 5% had installed flood-resilient features and 4% some permanent property protection. There is obviously potential for businesses to be much better prepared. However, flood preparation is often a low priority on the agenda of small and medium-sized businesses. Property owners and occupiers will benefit from the advice of qualified building surveyors in choosing and implementing suitable adaptation, not least in taking advantage of grants offered to households and businesses flooded in 2015. The changes in insurance associated with the introduction of Flood Re could force businesses to reconsider their approach to flood risk. This may present an opportunity for building surveyors to advise small and medium-sized business clients on measures that will enable them to get insurance. In doing so, it will be vital for surveyors to focus on measures that will speed recovery and get businesses back to trading. C Jessica Lamond is Associate Professor in the Centre for Floods, Communities and Resilience at the University of the West of England jessica.lamond@uwe.ac.uk Namrata Bhattacharya-Mis is Research Fellow in the Centre for Floods, Communities and Resilience at the University of the West of England namrata.bhattacharya-mis@uwe.ac.uk

Researchers at the University of the West of England are currently seeking surveyors who have advised on flood risk for commercial property to participate in a study. Please contact Jessica Lamond. To read National Flood Forum case studies, visit http://bit.ly/1SBEjn8 www.floodre.co.uk

Related competencies include Insurance

RICS prope rty JO U RN A L

Co m m e r c i a l R O O FI N G

Out of sight, out of mind Stewart Little discusses the value of infrared thermographic surveys

oofing is arguably the most important element of any building’s fabric. Keeping a roof over your head is so vital that it is difficult to comprehend why anyone would not prioritise it in any new build or refurbishment. Why then do people specify a cheap roof, going with the lowest tender and skimping on insulation and maintenance only to invest heavily in the office furniture? The answer has to lie in the fact that our client’s staff seldom visit the roof, but they do value a nice desk and chair. Complaints about the roof only come when it is too late and water is dripping onto the lovely desks below. Of course, many clients are aware of this and take a long-term view of the building’s lifecycle and operational cost; but even then, so much emphasis is put on the budget and lifespan that the poor old roof is overlooked. Ironically, if it were literally overlooked, they would care more. Commercial reality presents a real challenge. Some 85% of office buildings in London are rented, which means the owner and occupant have vastly different objectives. The tenant is not allowed to alter the fabric and may well not want to invest in the building, whereas the owner ultimately benefits from investment in the property. Conversely, the latter may well not really care if the tenant’s desks are dripped on now and again, as it does not affect them. This creates a conflict that must be resolved at as little cost to each party as possible. So what happens? Both owner and occupant hire RICS members and the bills start to rack up with the back and forth of differing opinions and conflicting

3 2 J u ly/A ugu s t 2 0 1 6

reports. To avoid such problems, many surveyors may choose to explore a technology called infrared thermographic (IRT) surveys.

Buy cheap, buy twice It can be frustrating when a client prioritises something less important than the roof in their budget. If I could talk to them personally, I would caution them all against cost-cutting in this area. But the prevailing mindset is that, if you cannot see it, why should you have to spend money on it? Refurbishments and conflicts always boil down to money. But who pays? Patching, overlays or complete strips all cost significant sums. If the client had chosen a good-quality system installed by a skilled contractor in the first instance, much of the cost could be avoided. But crucially, nine times out of 10, maintenance is ignored. This short-term attitude leads to a ‘make do’ approach and, ultimately, the premature failure of a roof. Most surveying professionals have seen roofs leak and contractors called out to visit the same building repeatedly, patching the damage until someone bites the bullet and invests in a new roof. Good-quality roofs need not cost a lot of money, and I would argue a high-quality system is far most cost-effective than buying a cheap system twice. However, we have to accept that we will always have problems with roofs – so now is the

Complaints about the roof only come when it is too late

chance to highlight the problem and get the solution right. IRT Surveys was founded 14 years ago to provide advice on roofing problems, uncover defects and help clients proceed with cost-effective refurbishments and repairs. The technique itself has been around since the 1950s and became a recognised roof-surveying method in the early 1990s. The technology has moved on significantly since then, becoming more affordable and accurate each year. Case study 1: Shopping centre My organisation surveyed a 3,000m2 roof in the South East of England for a blue-chip surveying practice. The images very clearly revealed problems across the entire roof, and the client decided to go for a complete strip and renewal. Although clients rarely contact IRT again after the initial instruction, in this case, we were asked to return and conduct an after-survey. The results were shocking. Having paid for a complete strip, the client had received only a partial strip and comprehensive overlay. The contractor in question was adamant that he had delivered a completely new roof and that the persistence of leaks must in fact be down to the cladding system. He Image © iStock

C o mme rcial RO O F ING

vapour barrier. However, 200mm away, we found two layers of felt on top on the old system, complete with saturated fibreboard, as seen in the image, left. Thankfully, this remains an isolated case for my organisation; this was the only occasion in 14 years that we have caught something quite so brazen as this. Of course, the organisation has not surveyed every single roof, but statistically this is a very rare event.

k Infrared thermography of the shopping centre roof; the dark blue and purple rectangle shows the new polyurethane insulation, while everything else is a two-layer overlay of saturated fibreboard had actually provided our client with a quotation to replace the cladding. Very soon after arriving on site, we were able to show exactly where the strip ended and the overlay began. The client, owner and contractor were all present to witness the survey. The contractor was asked to cut core samples wherever he was directed, which proved beyond a shadow of a doubt where work had been carried out in the easiest and cheapest way. The first core revealed brand-new polyurethane insulation below two layers of felt and sitting nicely on a quality

Case study 2: Office block In Glasgow, we surveyed an office block for a client who was complaining about a roof that was less than three years old and was leaking. This should have been an excellent flat roof, laid by an approved contractor to a decent specification. So what was going on? No details, penetrations or upstands could be found in the vicinity of the leak. This anomaly wasnâ&#x20AC;&#x2122;t as instantly obvious as in the first case study, neither was it a rare occurrence of fraud. This time it was a far more common problem. We found significant areas of saturated insulation close to the leaking areas reported by the tenant and were able to track this back to air-conditioning units that had been installed without consent

by a neighbouring tenant. The images were used to inform and guide the repair and replacement of the affected areas, for which the adjacent tenant was charged. This conflict had been going on for nine months before IRT was appointed and proves that the imaging can settle arguments very quickly indeed, giving confidence to all parties. C

Stewart Little is CEO of IRT Surveys stewart@irtsurveys.co.uk

www.irtsurveys.co.uk

Related competencies include Inspection, Building pathology, Property management

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RICS p r op e rt y JOU RN A L

R e s i d e n ti a l R ESI DEN TI A L P O L I C Y

Crisis? What crisis?

In the first in a series, Jeremy Blackburn summarises RICS residential policy

uccessive governments have failed to deliver the 240,000 units identified as the UK’s housing need in the Barker Review. Consequently, the country is facing a housing emergency. RICS is concerned that policies put in place by both the coalition and Conservative governments are too focused on driving up homeownership rather than increasing supply. Homes across all tenures are needed; not everyone is in a position to buy. The Prime Minister has said that if he could have found the button in Number 10 to increase housebuilding, he would have pushed it repeatedly; RICS believes there are multiple buttons and each should be pushed.

Market situation The past two years have seen a consistent shortage of new sales instructions; house prices are at record levels in much of the UK, and surveyors expect both these and rents to rise by around 25% over the next five years. To abate this, housebuilding needs to rise by around 80% over the next 15 years. RICS residential property professionals believe the housing situation will worsen due to record full-time employment and low mortgage rates. The average new mortgage is now substantially higher than at any time in recent years and the Bank of England’s Financial Policy Committee continually highlights the housing market as one of the biggest risks to financial stability. Rising house prices mean homeownership will become a distant prospect for many, while rents in the private rented sector are becoming less affordable as demand still outstrips supply.

Property taxation Government policy in this area affects the economic decisions of stakeholders in the property sector, the character of the market and the economy. RICS makes the following recommendations. bb Council tax is currently based on 1991 property valuations. There should 3 6 J U LY/A U G U S T 2 0 1 6

be a nationwide revaluation and higher rate bands introduced. By reducing the burden on houses at the lower end of the market, the system can be made more progressive and revenue-neutrality can be ensured as owners of expensive houses pay more. bb The Treasury has brought forward changes to inheritance tax. RICS argues that this tax hugely influences older people’s downsizing decisions; there needs to be an independent review into what will encourage them to downsize, thereby getting larger second-hand property back on to the market. bb Annual piecemeal change and reform to property taxes creates uncertainty and discourages long-term investment. The government has produced a business tax route map, but more clarity is needed in terms of property tax as a whole. RICS is asking the government to scrutinise this in line with the Montague Review (http://bit.ly/24FEl3P) in order to produce forward guidance on property tax that will give the sector confidence.

Increasing housing supply RICS members have focused on the three components, and they make recommendations on each. bb Availability of land: the government should aim to release enough public land for 200,000 homes during this parliament. The Homes and Communities Agency (HCA) should issue a long-term

RICS residential property professionals believe that the housing situation will worsen due to record full-time employment and low mortgage rates

nationwide plan for the disposal of public land, addressing problems identified in the National Audit Office’s assessment. Much more private land is needed; government should provide incentives for private landowners. RICS calls on a future government to introduce “amberfield”, a planning designation that integrates low-quality greenfield and ready-to-use brownfield, which signals that development is feasible and is included in a local authority’s subsequent pipeline of land. More greenfield sites on the urban edge need to be considered and the policy of green belt swaps formalised. RICS welcomes measures for a brownfield register, remediation fund and zonal planning. A future national brownfield map must include private and public sites, and local authorities should produce developer packs and consider better integration of match funding. RICS calls on government to endorse the organisation’s guidelines on Disposal of Land at Less than Best Consideration (http://bit.ly/24K0huN). This will speed up the process and support local authorities already exploring joint ventures. bb Planning: the Localism Act 2011 and National Planning Policy Framework (NPPF) simplified the planning system and brought forward much-needed housing development. RICS recommends that industry and government independently assess housing need, allowing the devolved governments and local authorities to plan for the relevant developments and tenures. Government should ensure that local authorities are aware of the work of the Local Housing Requirements Assessment Working Groups, which could assist in the formation of local plans. RICS believes that cooperation across authority boundaries is crucial to increasing housing starts and the government must urgently produce guidance. It welcomes ministers’ comments about streamlining the creation of local plans. The Department for Communities and Local Government (DCLG) needs to consult quickly on implementing these changes and how

Reside ntial RESI DENT I A L PO LIC Y

Successive governments have focused on driving up homeownership, rather than increasing supply, but housebuilding must rise by around 80% over the next 15 years

corresponding five-year land supplies can be ensured. The current housing zone (HZ) concept should focus on different tenures and scales as well as new build for owner occupation to promote mixed-use housing delivery that meets local needs and economic growth. Developers and landowners who obtain planning consent for schemes exceeding four homes should aim to ensure that construction starts within three years or they will lose planning permission. The Community Infrastructure Levy (http://bit.ly/1Tn4cH4) must be reviewed urgently. It has become very complicated and is not uniformly enforced. RICS wants the government to endorse the organisation’s Financial viability in planning guidance in support of the NPPF, and has collaborated with industry to ensure this guidance works in practice. It encourages the use of planning performance agreements to enable local planning authorities and applicants to agree timescales, actions and resources for particular applications. RICS believes Image © Shutterstock

there are options for maximising existing services in planning departments, by, for example, sharing resources and the use of temporary planning consultants. bb Means of delivery: housebuilding levels will not improve unless optimum use is made of the private-, public- and third-sector delivery mechanisms. The government should set up a Construction Finance Hub to bring together private and public funding. This would make it easier for small builders to access funds by providing a one-stop shop for development finance. RICS urges the DCLG to publish the University of York study into the Northstowe Pilot (http://bit.ly/262QgHb) and turn it into recommendations that empower public bodies to build homes at twice the rate of the private sector. Local authorities should be enabled to use the prudential borrowing capacity of their asset base to build homes or support other providers. There must be an increase in their previous entitlement to borrow an additional £300m by raising the borrowing cap on housing

revenue accounts. The government should announce whether it will pursue the Elphicke Review’s recommendations (http://bit.ly/1UCVaa9), which could fund council housebuilding. Local Enterprise Partnerships and other new entities offer a chance to create pooled Development Delivery Units armed with appropriate powers and expertise and resourced by both public and private finance to speed up delivery. Building on lessons learnt from Ebbsfleet and Bicester, the next set of garden cities should have remodelled development corporations with significant compulsory purchase order and land assembly powers. These corporations should consider tax increment financing schemes. The HCA and local authorities should identify significant strategic housing need for the location of these new garden cities. The government should reform the restriction whereby housing associations (HAs) have to value property transferred to them from local authorities at 30–45% of its market worth; allowing them to value at 60% would unlock significant borrowing capacity at no cost to the Treasury. Coupled with the extension of housing guarantees to the refinancing of HA debt, this would mean more low-cost borrowing, which could be channelled into affordable housing. Central and local governments need to recognise community land trusts as a viable route to delivering more homes. RICS suggests the establishment of a social-investment revolving loan fund, backed by government guarantees, to allow community housing groups to access lower-cost development finance. The next article will cover existing homes and construction issues. R Jeremy Blackburn is Head of RICS UK Policy jblackburn@rics.org

The RICS Residential Policy paper is available at http://bit.ly/1TxNReo

Related competencies include Housing strategy and provision, Housing management and policy, Land use and diversification, Planning

J U LY/A U G U S T 2 0 1 6 3 7

RICS p r op e rt y JOU RN A L

R e s i d e n ti a l PASSI VHAU S

Breathe a little easier Paul Mallion explains how the German Passivhaus standard can result in fuel savings and greater comfort compared to more traditional designs

he article Studying the links (Property Journal November 2015, pp.34–5), on the relationship between indoor air quality and asthma, will concern surveyors involved with energy-efficient buildings. How do we create efficient, comfortable buildings without creating air-quality problems? Studies into completed housing projects show that most new dwellings fail to live up to the energy standards to which they were designed, creating a so-called ‘performance gap’ that increases the risk of homes being inadequately heated and ventilated, according to the Joseph Rowntree Foundation (http://bit.ly/1QBO9BX). The gap is caused by a multitude of small failings, such as thermal bridges,

gaps in insulation, air leakage caused by poor design and construction, over-optimistic U-value calculations and inaccurate energy assessment methods, such as the Standard Assessment Procedure and the resulting energy performance certificates (EPCs). In the 1980s, Professors Wolfgang Feist and Bo Adamson considered why low-energy dwellings failed to meet expectations in Germany and Sweden, and their research led to the construction of four trial houses in 1991. They called their approach Passivhaus, later establishing the Passivhaus Institut, and defining a true Passivhaus as: “A building for which thermal comfort can be achieved solely by post-heating the fresh air mass required to achieve sufficient indoor air quality conditions without the need for recirculation of air.” Therefore, to tackle the failings that affect air quality and energy efficiency,

Pines Calyx Conference Centre

could the UK adopt the Passivhaus standard as an alternative to Building Regulations Part L (Conservation of fuel and power) and Part F (Means of ventilation) compliance?

Passivhaus principles in practice I incorporated Passivhaus principles into a new conference centre in 2005, the Pines Calyx (www.pinescalyx.co.uk), built

Key principles of the Passivhaus standard bb Maximum U-value for walls, floors and roofs is 0.15W/m2K, though it is less if the building has an inefficient surface-area-to-floor-area ratio. bb Windows and doors usually need to be triple-glazed with a U-value of 0.8W/m2K, averaged between the glass, glazing spacer and frame. bb All thermal bridges must be less than 0.01W/m2K, known as a psi value; if greater, they must be included in the calculation. Thermal bridges are weaknesses in the insulation where it is not continuous, such as wall ties and junctions. They often occur at internal corners, resulting in condensation and mould growth. The Building Regulations allow bridges 15 times worse than Passivhaus levels. bb An efficient mechanical ventilation system with heat recovery is needed, supplying fresh outdoor air to each habitable room, extracting damp from wet rooms; minimum heat-recovery efficiency is 75% and fresh air supply at 30m3 per person per hour, or a whole-house ventilation rate of 0.3 air changes per hour. bb Airtight construction should be tested to a maximum of 0.6 air changes per hour using a blower door at 50 pascals, under both positive and negative pressure. Under current Building Regulations, a dwelling can be completed without testing for air leakage. The regulations allow a leakage rate equivalent to around 15 air changes per hour, which is 25 times worse than Passivhaus levels. bb Overheating is prevented, with temperatures above 25°C occurring for no more than 10% of the year. bb Heating may be provided simply by warming the ventilated air or using any efficient system. Following the Passivhaus principles will result in a building with a maximum heating demand of 15kWh/m2 annually, or a heating load of 10W/m2. To put this into perspective, a typical three-bedroom UK house uses around 180kWh/m2 a year and still fails to provide comfort and sufficient fresh air.

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Reside ntial PASS IVHAUS

Passivhaus is only an energy and comfort standard, setting no restrictions on the construction method that can be used

under the guidance of David Olivier of the consultancy Energy Advisory Associates. Initially, I was sceptical about achieving U-values of 0.15W/m2K or better for all the thermal elements, using triple-glazed windows and creating an airtight envelope. Olivier’s attention to thermal bridges and airtight details required a total rethink of common junctions such as window jambs, thresholds and eaves. However, the result was a 390m2 building that could be heated by the equivalent of a single radiator. I still believe Passivhaus offers the best voluntary energy and comfort standard available, and the only one that accurately calculates the fresh air supply, extraction rates and thermal bridges to combat condensation and mould growth by maintaining the temperatures of internal services above 12.6°C. Unlike the Building Regulations, EPCs and the Code for Sustainable Homes (the code), there is no way of cheating the software. Calculations are thorough and can be time-consuming, but the rigorous approach has proved to be statistically accurate for thousands of completed buildings around the world. Passivhaus is only an energy and comfort standard, setting no restrictions on the construction method that can be used: the Pines Calyx conference centre was built of rammed chalk, yet meets the thermal insulation requirements thanks to its external insulation system. Constructing to higher standards can have cost implications, although

experienced Passivhaus designers in mainland Europe argue that these will become neutral in time. Commercial buildings and schools can even cost less than conventional buildings, because the need for complex heating and cooling systems and advanced building controls can be avoided.

Savings and comfort Cost savings on fuel are significant and last for the lifetime of the building. A 160m2 timber-framed, detached, three-bedroom Passivhaus that I designed in Dorset has a peak heating demand of 1.9kW at an external temperature of –1°C, the equivalent of heating the whole house with a hairdryer. A similar house built to Building Regulations might need a 20kW boiler. We have low expectations of comfort from our homes due to the UK’s ageing housing stock and lack of awareness of the alternatives. A Passivhaus avoids cold surfaces and draughts and provides perfect levels of fresh air 24 hours a day. Building to the Passivhaus standard requires a greater level of competence from the designer, more collaboration with suppliers and knowledge of windows, ventilation, insulation and airtightness products. There are a number of training courses, numerous certified products and building systems, and established building certifiers. Designing to the Passivhaus standard can reduce energy consumption by

80–90% compared with conventional housing, providing continuous fresh air and ensuring that condensation cannot occur. Passivhaus does not cover water usage or sustainable materials, a void left with the end of the code. However, guidance is available from the Association for Environment Conscious Building (www.aecb.net), the Alliance for Sustainable Building Products (www.asbp.org.uk) and the Passivhaus Trust (www.passivhaustrust.org.uk), which was established by the AECB to promote the standard in the UK. These bodies offer training, guidance, open days and a register of members. BRE’s Home Quality Mark may address some of the problems with indoor air quality and the performance gap, but must be totally open to scrutiny, with no commercially sensitive hidden detail – a criticism that is often levelled at BRE’s Green Guide. R

Paul Mallion FRICS is Director of Conker Conservation Ltd and a certified Passivhaus designer paul@conker.cc

Tips for a successful Passivhaus project can be found on www.conker.cc

Related competencies include Environmental assessment, Housing management and policy, Housing strategy and provision

J U LY/A U G U S T 2 0 1 6 3 9

RICS p r op e rt y JOU RN A L

R e s i d e n ti a l P R O FESS I O N AL I N DEMNI T Y

Time will tell

Emma Vigus discusses the state of the insurance market

lthough the majority of RICS-regulated firms have for the past decade enjoyed access to competitively priced professional indemnity (PI) insurance, it has been a very different experience for organisations that provide lending valuations. Enough has been written about the torrid PI insurance market conditions over the past six years, but on a positive note, new notifications against valuers have fallen considerably. That is not to say that all the claims arising from the last economic downturn have just disappeared. Insurers continue to deal with more complex matters resulting from valuations carried out from 2007 to 2010, particularly those related to commercial valuations. Given the length of time taken to resolve these, legal costs are racking up and can often end up being disproportionate to the value of the original claim. These all add to the already substantial bills that insurers are dealing with from the past six years. While costs continue to mount, many insurers are less concerned about the claims that could still arise from historic work now that the full impact of limitation is being felt and property prices across much of the UK have returned to pre-2007 levels. This has led to an increase in competition among insurers, with at least eight willing to consider providing a primary quote for firms undertaking valuations for lending – compared with no more than five a year ago. The increase in completion (or capacity as it is known in the insurance industry) has resulted in a reduction in insurance rate, with most firms benefiting from stable premiums at renewal against a backdrop of rising fee income. Daniel Prince, Head of PI at Hamilton Underwriting, says: “For those firms demonstrating a strong or improving claims experience, rates are certainly not going up. The general trend appears to be a reduction in notifications and this will help to attract new insurers to the space, which will aid competition in pricing – assuming economic conditions remain as they are now.” The increase in insurers’ appetite will not apply in equal measure to all firms undertaking lending valuations. They remain wary about firms with claims records that do not benchmark

For those firms demonstrating a strong or improving claims experience, rates are certainly not going up 4 0 J U LY/A U G U S T 2 0 1 6

The status quo should hold until the next time the UK property market falls off a cliff

favourably against their peer group, irrespective of the work undertaken, and demand for firms undertaking commercial valuations remains limited. As always, insurers’ penchant for smaller firms, typically those with a fee income of less than £2m, is also restricted, because relatively low premiums make it harder for insurers to amass sufficient premiums to settle an influx of claims. In light of the significant losses of the past few years, insurers continue to be very diligent when it comes to selecting which risks they want to underwrite. This is evidenced by the volume of information required at renewal and the scrutiny surrounding risk management, with the latest hot topic being client selection: basically, how you decide who you want and who you do not want to work for. Insurers also continue to be very nervous about firms working beyond their traditional areas of expertise. Prince comments: “We see plenty of claims arising from firms operating outside their normal remit and we do not expect this to stop. We have seen claims from firms dabbling in houses in multiple occupation, properties with short leases, development work, bridging loans and many other areas where really they should have said ‘no’ from the outset. Knowing which work and clients to refuse at the start is still one of the best risk management tools.” Pricing remains very competitive for businesses that buy excess layers, as it does for all activities outside of survey and valuation. In an increasingly competitive insurance market, preference and pricing models will vary from insurer to insurer, so the quote received from one can differ significantly from that received from a second. As an example, the quotes from more long-standing insurers of the sector, who have been hardest hit by the losses, may fluctuate widely compared with those applied by newer insurers, who are more likely to quote aggressively to help them establish a quick foothold in the surveying category. For those firms that wish to remain loyal to their existing insurers, a good broker should be able to balance variations in quotes between established and new insurers through effective negotiation. The variation in demand highlights the need for firms to ensure that their broker is seeking terms from as many insurers as possible at renewal. Image © iStock

Reside ntial P ROFESSI ONA L I NDEMNITY

In light of the significant losses of the past few years, insurers continue to be very diligent when selecting which risks they want to underwrite Self-insured excess levels remain broadly flat, although in an improving insurance market firms would be well advised to review this situation, given its ability to have a significant impact on the balance sheet in the event of a claim. Prince says: “I would not expect firms to secure big reductions but it never hurts to ask. Property prices are increasing and therefore the potential severity of claims will increase, meaning insurers will value the protection provided to their own balance sheet by a firm’s self-insured excess.” Based on the experience of the last three economic cycles, we would expect the status quo to hold until the next time the UK property market falls off a cliff. It is only then that we will totally understand whether the reforms made by Lord Justice Jackson (http://bit.ly/1OUc3Ih), valuer registration, general improvements to risk management and increasing use of technology have really made a difference in terms of their ability both to prevent and to defend a claim.

On the potential impact of another economic downturn, Prince comments: “Eventually interest rates will rise, repossession rates will increase and lenders will once again look to recover their losses from valuers, solicitors and others involved in the property purchase process. At this time we will see the real benefit of improved risk management and technology. “My personal feeling is that the number of successful claims will decrease but the value of successful claims will be higher. The real test of an ‘improved’ risk management policy is when the claims come in. It is then you discover whether it has been applied as robustly as it should have been. I foresee a good number of client meetings in the future where we have conversations that start: ‘Our risk management policy was in place, but on this occasion …’.” R

Emma Vigus is Director of Howden Professional Indemnity emma.vigus@howdengroup.com

Related competencies include Conduct rules, ethics and professional practice, Legal and regulatory compliance, Risk management

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Nothing lasts forever Continuing his series on the connections between building design, failure and occupants’ lifestyle, Michael Parrett considers how building defects contribute to damp problems

efects and failures occur through natural deterioration, lack of maintenance, architectural design and poor construction. The difficulty arises when internal dampness and mould develop and investigators often struggle to make the vital connections between the principal factors. For example, in social housing, emphasis has been placed on problems being caused by occupants’ lifestyles. In my opinion, based on thousands of investigations, it would be a mistake for practitioners to make this assumption without eliminating the other elements affecting the building; the approach must be holistic.

Natural deterioration All materials have a life expectancy. Even something as durable as natural Welsh slate, which took millions of years to form, 4 2 J U LY/A U G U S T 2 0 1 6

2 1 Roof spread on a typical 1920s cottage where the original slate-tiled roof was replaced with interlocking concrete tiles with a much higher implied weight loading on to the frame. The timber collars had not been strengthened with additional bolts to the rafters. Warning signs include separation of the soffit boards from the wall face, curvature of the cast iron guttering and outward movement of the top of the brick walls 2 Perforation of steel barrel underground water main supply pipes. Galvanised (zinc-coated) steel pipes laid into soil will eventually corrode and lead to an escape of water. These pipes were excavated from the ground at an 85-year-old property. Zinc is a sacrificial anode and will deteriorate in most soils, especially ones with higher acidity. This results in the steel gradually losing its protection, leading to corrosion and eventual perforation of the buried bare steel pipes

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will eventually delaminate and crack; this is through natural deterioration caused by exposure to water, algae, frost and so on. Hard Portland cements used for wall renders will also deteriorate over time because they are unforgiving when buildings naturally move. Cracks will allow water in, and so starts the degradation cycle of frost action. Another example is lime used on walls. In Venice, lime is partly used to encourage salt to come out of the brickwork because of the high incidence of rising damp. The salt naturally breaks down the lime and the walls have to be re-limed at least every 15–20 years. Underground lead water mains meanwhile have a proven life of around 100 years, after which they become brittle and the slightest movement will cause them to perforate or fracture, particularly if they are laid in acidic or aggressive soils. Natural deterioration also happens with underground steel pipes for gas and water mains. Some are galvanised and use zinc as a sacrificial anode that will deteriorate; a similar process is used on old steel-frame windows. In both cases, the zinc breaks down and exposes the unprotected steel beneath, which then rapidly corrodes. Other examples of natural forces causing deterioration include: bb ground movements – both subsidence and heave – cracking slate damp-proof courses and disturbing gas, water mains and drainage bb sulphates permeating through a rising water table causing solid floors to crack, craze and delaminate, in particular in older buildings bb carbonation of concrete, when carbon dioxide slowly penetrates the surface and mixes with moisture trapped in the pores, reacting with calcium hydroxide to form calcium carbonate that causes the deterioration of the concrete and the steel reinforcements inside bb chloride attack on concrete, for example, caused by salt being spread on road bridges, which leads to severe breakdown of the concrete bb low bitumen content undersarking will erode, especially where it is lapped into the gutter. Water then runs down the back, rotting fascia and soffit boards, and perhaps also runs into the walls or the top of window heads as well, leading to further deterioration.

Assisted deterioration Human intervention can exacerbate deterioration and is often linked to poor maintenance routines, for instance, where

Case study A four-storey flat conversion in south London suffered from many of these issues. Poor design and construction, natural and assisted deterioration, and lack of maintenance all combined to create serious problems in the property. The owners had partially extended the rear ground floor and installed a mono-pitch roof. Unfortunately, this prevented easy access to the eaves gutters of the main roof and impeded routine maintenance, such as painting the cast-iron gutters. The gutters also filled with leaf litter and moss balls that had formed on the north-facing main roof. This had been replaced some years earlier but now suffered from erosion of the low-bitumen content undersarking, which further deteriorated in the eaves gutter.

The building surveying profession needs a Hippocratic oath that recognises the limitations of most general or structural surveys work is ill-conceived, badly performed or not carried out at all. Examples include: bb decorating externally during poor weather – I have witnessed painters sweep snow from window sills before painting them bb wooden windows being painted on an irregular basis bb external spar-dash render only infrequently painted, often just covering cracks in the surface bb cast-iron gutters not being painted on the back, so they then corrode, allowing water to run down the walls bb using the wrong type of primer paint, e.g. a non-aluminium type primer, which is typically used on hardwood timber window sills, used on metal windows will accelerate deterioration bb using non-micro-porous paints on wall renders, particularly lime renders

The result was that rainwater spilled over the gutters and penetrated the solid wall where timber-floor joists anchored into the wall between floors. These joists then started to decay. An under-sink pipe also leaked because of poor maintenance and a blocked bathroom extractor fan did not remove the moisture. These issues together conspired to create a massive outbreak of the dry-rot fungus, Serpula lacrymans. Because this growth had prevailed over time, the fungus produced the ‘fruiting’ body from which extended the mycelium hyphae and its characteristically cobweb-like strands. These eventually weakened the timber joists to the point where their collapse was a possibility.

that require lime-wash finish, which trap moisture rather than letting walls breathe bb use of most chemical damp-proof injections, which do not provide a complete barrier to prevent rising damp in masonry and other walls. The Society for the Protection of Ancient Buildings promotes the annual National Maintenance Week and National Gutters Day to help raise the profile of preventative maintenance. Poor construction often exacerbates deterioration and increases the chance of building failures. Take the example of a slate roof that has naturally deteriorated and needs renewing. Slate roofs should normally be replaced with a similar natural or simulated material, but interlocking concrete tiles are often used and these place a much higher loading on to a timber-framed roof, so additional strengthening works are needed. We have found cases where this has not happened and even instances where some collars, struts and purlins have been removed, or the collars are merely nailed rather than bolted to the rafters. These issues lead to roof spread that pushes out the tops of the external walls, distorting soffits and fascia boards and even bending cast-iron gutters. In extreme cases the roof can collapse.

Identifying the cause The signs of dampness caused by a building defect are similar to other causes. There may be staining on walls, J U LY/A U G U S T 2 0 1 6 4 3

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mould, high meter readings and so on. Many defects happen at roof level with water penetrating downwards throughout a building. Indications of building failures can be obvious, such as cracked or dislodged roof tiles and leaking pipes. Or they may be more subtle, such as the slight outward movement of walls, distortion of fascias or the curvature of guttering. These signs should be easy to see in houses, but may be more difficult to identify on a much taller building where it is harder to check clearly whether guttering is an older cast-iron system or a modern replacement, for example. Good binoculars or a telephoto lens on a camera should help you identify detail. Defective rainwater goods are the most common failure that cause damp penetration, often leading to a misdiagnosis of rising damp when water from an overspilling gutter strikes the ground and splashes onto the base of the wall. While it may sound simplistic to talk about issues such as gutters, these problems bedevil everyone from surveyors to social landlords. I have been called to many properties where it has turned out to be routine gutter and rainwater pipe failures that have 4 4 J U LY/A U G U S T 2 0 1 6

All materials have a life expectancy and even something as durable as natural Welsh slate that took millions of years to form will eventually delaminate and crack somehow escaped identification by many other people. But to properly identify the cause of a building defect problem, it is crucial for surveyors to have knowledge of the in-built defects caused by design, material selection and construction across different types of buildings (see Property Journal March/April 2016, p.38). Besides using your investigative skills, remember to talk to people during site reconnaissance. A seller is unlikely to give information that might prevent a Images © Michael Parrett

sale. However, in multiple-occupancy buildings other people might give clues to help diagnose potential problems. A chat with someone else – such as another tenant, neighbour, management committee member or the person in charge of maintenance – might reveal a lot more about the history of a building and any maintenance issues. It is easy for a surveyor to miss or misdiagnose a building defect. This is mainly because surveys are usually conducted on a single visit and often do not include any measurement, invasive testing or detailed investigation. In such a short timescale, it can therefore be difficult to correctly determine the cause of an issue, so surveyors invoke caveat emptor (“let the buyer beware”). Some causes and problems are clearly connected, such as a leaking external rainwater pipe and a corresponding internal damp stain. But what happens if the link isn’t clear, or there may be more than one cause? What if the actual cause is a leaking water main, a missing damp-proof membrane or some other problem that is invisible on a brief inspection? A surveyor might use their professional judgement about the likely cause, but this will require further examination and testing to be certain.

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More in-depth pathology is required, which will usually mean some degree of invasive investigation. This might feel like a step into the unknown on a residential survey, and goes against general guidance that promotes non-intrusive, non-destructive approaches. I have often found that the best way to determine the cause and source of a problem is through some kind of invasive testing, such as an optical endoscope. In many cases, further and better pathology should be suggested to the client to make them aware of what is required, rather than a referral to damp ‘specialists’ offering long-term guarantees.

Construction supervision

4 3 Carbonation of reinforced concrete mullions on a 1960s building. Some buildings with reinforced steel concrete can benefit from additional cathodic protection, which can act as a medium to take the corrosive electrical flow away from the embedded steel rebars in damp concrete 4 Carbonation of concrete, as seen in both images, occurs when reinforced concrete absorbs moisture and carbon dioxide from the air. This reacts with the Portland cement, which contains calcium hydroxide, and begins to lower the alkalinity of the concrete from the normal level of around pH 12. The acidity then increases and begins to corrode the steel reinforcements at pH 7 or below. The deterioration weakens the structure, eventually requiring specialist repair. The carbonation process is only harmful in reinforced concrete and will not occur in very dry environments (below 40% relative humidity)

Insufficient supervision of construction contributes to building defects; it can be easy for the quality on projects to slip and this increases the risk of failures. My previous article (see Property Journal May/June 2016, p.36) discussed an example in which poor design led to many failures, including damp caused by leaking soil vent pipes and buildings that did not comply with fire regulations. These issues had not been identified during building control visits. Another example of poor building control processes relates to airtightness. A building was nearing completion and a standard air pressurisation test was conducted. It found that the building leaked like a colander. When the head of building control was asked about inspections, he said his department had never been invited to visit the site. In my opinion, the building control service needs to be strengthened to meet the challenge of an increased number of construction projects during stronger economic cycles. This can only be done by engaging more trained inspectors to cope with the demands and complexities of making buildings sustainable, airtight and energy efficient.

Maintenance data When budgets are tight, maintenance cycles are often stretched and cause building elements to fail, when more regular intervention would have prevented damage. It is important that those responsible for maintaining property portfolios, such as social landlords, build accurate databases recording when different solutions were applied to various elements of buildings. The system should include reminders of when a previous

repair or renewal solution is approaching its anniversary, so its condition can be reassessed and a decision made about whether a renewal is required. It should also drive and record the mid-life maintenance regimes of solutions, as these will help prolong their working life. For example, flat roofs with elastomeric mineral felt systems only have an insured life of 20–25 years, but many may not last that long. A protected underground steel water main may last 50–80 years, but an unprotected one may perforate in eight to 10 years. It is important that somebody understands this lifecycle information as it allows them to make proactive and informed decisions about maintenance work.

Lifecycle work While ensuring high-quality construction for a building is crucial to its future performance, preventative maintenance is probably the most important way to avert ongoing building failure. So when you next perform a survey, what questions are you going to ask about work that has or should have been done? The building surveying profession needs an equivalent of doctors’ Hippocratic oath, one that recognises the limitations of most general or home surveys. It needs to develop a new generation of forensic building pathologists who can independently determine the source and cause of a building defect, especially relating to dampness. These pathologists will be able to write a specification of remedial works, or at least be more prescriptive about the exact remediation, further investigation or monitoring that may be required. R

Michael Parrett is a building pathologist, chartered building surveyor and founder of Michael Parrett Associates. He is an Eminent Fellow of RICS and the lead author on the Building Pathology Damp section of isurv info@michaelparrett.co.uk

Related competencies include Inspection, Building pathology, Housing maintenance, repair and improvements, Design and specification

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Home truths Tony Mulhall examines what ‘policy-compliant’ means when deciding affordable home numbers

n a planning appeal decision last September, policy compliance on affordable housing delivery proved to be a central issue. Against a local authority’s strategic target for 50% affordable housing, the Planning Inspectorate determined 14% as complying with policy. It also accepted that the price paid for the site could be taken into account when assessing site value. Parkhurst Road Ltd sought planning permission for residential development on a 0.58ha former Ministry of Defence (MoD) site at 65–69 Parkhurst Road, London N7, in a built-up area of Islington. The site was bought following a public tender exercise by the MoD, attracting 26 bids. The final planning 4 6 J U LY/A U G U S T 2 0 1 6

submission proposed 112 dwellings, but the application was refused by the London Borough of Islington on three grounds, including inadequate affordable housing provision. The key decision for the inspector was “whether the proposal complied with policy objectives relating to the provision of affordable housing”. At the outset, the inspector recognised that there was a “substantial unmet need for affordable housing both in London and in Islington”, but added that “while 50% is the strategic target, any level below this could be in accordance with the plan, providing it is shown to be the maximum reasonable amount”. Paraphrasing the National Planning Policy Framework (NPPF), he said that “to ensure viability the costs of any requirements likely to be applied to development, such as affordable

housing … should, when taking account of the normal cost of development and mitigation, provide competitive returns to a willing landowner and willing developer”. Referring to the national Planning Practice Guidance (PPG), he continued: “Where the viability of a development is in question, local planning authorities should look to be flexible in applying policy requirements wherever possible.” He added: “The PPG further identifies that the assessment of land or site value is central to the consideration of viability and will be an important input into the assessment.” Drawing again on the PPG, he noted that in all cases land or site value should: bb reflect policy requirements and planning obligations and, where applicable, any Community Infrastructure Levy (CIL) charge Image © iStock

There is a substantial need for affordable housing throughout the capital

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Table 1 Establishing benchmark value, Parkhurst Road, London N7; MoD site sold by public tender with obligation to achieve “best consideration” Value

Winning tender May 2013

£13.25m

Underbidder – registered provider (housing association)

2% below winning bid – £12.98m

Other underbids

Within 13% of winning bid, say £11.5m

Financial viability appraisal, June 2014 – 112 dwellings (25% reduction on earlier submission)

£13.0m

Unsolicited bid Taylor Wimpey May 2015

£15.75m

Independent CBRE Valuation May 2015

£15.5m

Assumed 25% AH in a scheme of 125 units

Not in excess of:

AH by floor area:

£9.35m £7.32m £4.98m

32% 40% 50%

London Borough of Islington viability appraisal based on the proposed scheme London Borough of Islington notional existing use value bb provide a competitive return to willing developers and landowners bb be informed by comparable, market-based evidence wherever possible; where transacted bids are significantly above the market norm, they should not be used in this exercise.

Comparable evidence Table 1 shows the various valuation figures submitted by the parties, ranging from the notional existing use value of £750,000 to the winning tender of £13.25m. The question was which of these figures should be the relevant land value benchmark for assessing viability, and therefore for the level of affordable housing necessary to comply with policy. The appellant argued that the site value of £13.26m – in accordance with RICS guidance – was the relevant land value figure to be entered into the development viability appraisal as a fixed acquisition cost. The council disagreed, arguing that the site value adopted and also price paid was an overpayment that did not fully factor in the need for 50% affordable housing. The local authority carried out a number of residual valuation calculations based on the proposed scheme at

Affordable housing (AH) and obligations

Reference

21% AH by habitable room (14% by unit) £2.54m (section 106, Mayoral CIL, Islington CIL)

£750,000

different levels of affordable housing of 50%, 40% and 32%. The calculations gave a residual land value of £4.98m, £7.32m and £9.35m respectively. Critically, the inspector said that the council had not put forward any market-based evidence of the kind that the PPG indicates is important. In contrast, the appellant had the following evidence to support the £13.26m figure. First, the MoD was bound by a statutory requirement to obtain the “best consideration”. The underbid was only 2% lower and was made by a registered provider. It was not contested that such a purchaser could be assumed to have reasonable knowledge of the local market and be unwilling to overpay for the land. A number of bids were received within 13% of the winning bid, suggesting that the winner was not out of line. Second, the site was the subject of an unsolicited and unconditional offer of £15.75m in May 2015 by one of the unsuccessful bidders, a major housebuilder. Third, the site was independently valued the same month at a figure of £15.5m. Finally, the appellant carried out an assessment of comparable evidence based on 21 larger residential

development land sales in Islington since 2010. These placed the price paid for the appeal site at the lower end of the range. A subset of seven sites, mainly those without planning permission at the time of the transaction, generated a comparable range in value for the appeal site of £12.98m–£16.44m. One of the comparables was located in the neighbouring borough of Camden, which has similar affordable housing policies: a 0.27ha site sold by the local authority in 2014 for £11.2m. This was granted planning permission by Camden, based on a proposal offering 22% affordable housing against a policy target of 50%. The borough was also bound by “best consideration” requirements.

Inspector’s observations The inspector commented that the appellant’s evidence showed that the price paid for the site was not significantly above the market norm. There was no counter-evidence. The council pointed to the PPG’s statement that land or site value should reflect policy requirements as well as planning obligations and CIL. The inspector regarded this as consistent with the special assumption approach J U LY/A U G U S T 2 0 1 6 4 7

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“ Development plans are full of broad

statements of policy, many of which may be mutually irreconcilable

of the RICS Financial viability in planning guidance note in defining site value, which should equate to market value but have “regard to development plan policies and all other material planning considerations and disregard that which is contrary to the development plan”. It was argued by the council that the appellant’s evidence did not assess the extent to which these sites took account of affordable housing policy and therefore may be importing the constraints of other sites inappropriately into the assessment of the appeal site. The inspector recognised that, in recent decisions in Islington, around 25% affordable housing was typical but with a wide variance. The council expressed concern about the possible effect of using purchase prices based on a downgrading of policy expectation for affordable housing as this would perpetuate under-delivery. The appellant stressed that their comparable sites had been acquired at risk prior to seeking planning permission. The inspector emphasised the need to take account of market signals, and concluded that the only information on these supported the use of the appellant’s land value figure. He concluded that the evidence did not suggest that a reasonable landowner would have an incentive to release the land for development at the value suggested by the council. The inspector found that the appellant’s land value figure of £13.26m reflected policy requirements to achieve the maximum reasonable rather than the maximum possible amount of affordable housing. He did conclude that the delivery of 14% affordable housing would comply with policy, but also provided for a pre-implementation review mechanism. The inspector, however, dismissed the appeal on amenity and other environmental grounds.

Judicial review Islington started proceedings for a judicial review of the appeal decision. In its “letter before claim”, it argued that the decision would have “significant implications for affordable housing provision within London and beyond”. It was concerned 4 8 J U LY/A U G U S T 2 0 1 6

that the appellant would rely on the inspector’s reasoning in a resubmission. It could also be used by other developers to justify affordable housing levels well below the 50% strategic target, drawing on land transactions that do not reflect development plan policies. It argued that the inspector addressed the wrong issue by seeking to establish whether the price was sufficiently above the market norm to be an overpayment, when he should have been identifying whether the land value had “reflected policy requirements”, particularly on a relatively unencumbered site. Specifically, the council asserted that the inspector: 1. failed to understand and/or give lawful effect to the PPG requirement that site value should reflect policy requirements in all cases 2. divorced the concept of securing a competitive return from the policy requirements that affordable housing should be maximised as a requirement of the development plan, and the NPPF 3. unlawfully undermined the plan-led system contrary to the statutory scheme 4. proceeded on flawed logic by basing site value on market evidence without taking proper steps to ensure that it reflected policy requirements.

Government response The government’s legal department rejected a judicial review. It said the council was not a “person aggrieved” because the inspector had dismissed the appeal on other grounds. This would result in a hypothetical case being presented that the High Court would not entertain. The case did not meet the “exceptional circumstances” test necessary for special treatment; besides, there were many other avenues open to the planning authority in taking decisions on future proposals. The council discontinued judicial review proceedings. The government’s response also addressed the issue of “reflecting policy requirements” but chose not to go beyond the content of the PPG. It said the Secretary of State had given such guidance as he considers appropriate in his PPG, which states, among other things, that land value should “in all cases

… reflect policy requirements”. It added that any necessary working out of its consequences should proceed on a case-by-case basis. The government response also referred to a leading case where a judge stated that, in principle, interpretation of planning policy is a question of law. He did point out, though, that policy statements should not be construed as if they were statutory or contractual provisions: “Although a development plan has a legal status and legal effects, it is not analogous in its nature or purpose to a statute or a contract … Development plans are full of broad statements of policy, many of which may be mutually irreconcilable, so that in a particular case one must give way to another. In addition, many of the provisions of development plans are framed in language whose application to a given set of facts requires the exercise of judgement.”

Conclusion This appeal reveals the tensions in the planning system between the need to satisfy policy objectives and achieving them through specific development proposals. Overriding national policies emphasise the need for plans to be deliverable; but being “deliverable” in a market economy requires maintaining the business case for development, which comes down to a question of viability in each case. Planning appeal decisions do not set precedents. In accordance with the government lawyer’s rebuttal, the application of policy should “proceed on a case-by-case basis in practice”. The inspector’s application of policy proceeded on the basis of taking the headline affordable housing target and moderating it by reference to other material considerations, to arrive at a level which he judged to be deliverable at the time. R The content for this article is mainly drawn from the inspector’s report, the local planning authority’s letter before claim and the response of the government legal department to that letter. Tony Mulhall is Associate Director, RICS Professional Groups and Forums tmulhall@rics.org

Related competencies include Development Appraisal, Planning, Valuation

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personal property arts + antiques

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Taking a closer look at art funds The changing legislative environment provides RICS-registered valuers with opportunities, says Andrea Amadesi, but members must be clear on their liabilities

rt has now has now developed into a strong and growing alternative asset class. Despite being illiquid, it is increasingly used as collateral for loans, a basis for securitisation and an asset for alternative investment funds (AIFs). The valuation of art thus becomes an increasingly important function in this context. It is a complex task as well, because the valuer must work with market information that is far from perfect concerning objects that are naturally illiquid. There has nevertheless been increased interest among the financial community in the establishment of collective vehicles that raise capital from a number of sources and invest this in works of art. These vehicles have various structures, and not necessarily just the classic fund arrangements.

AIFMD The Alternative Investment Fund Managers Directive (AIFMD), introduced in 2011, applies to all AIFs managed or marketed in the EU and not already regulated under the Undertaking for Collective Investment in Transferable Securities Directive, which generally covers retail investment funds. There is a broad range of asset classes covered by the AIFMD: the European Securities and Market Authority identifies 25 asset types and 71 sub-asset classes, including traditional ones such as equities and bonds as well as more esoteric types such as art and collectibles. There are exemptions to AIFMD such as holding companies, joint ventures, special purpose vehicles, family offices and pension funds, but a very wide variety of financial instruments now fall under the directive. This means that it will also cover art assets held in other collective vehicles that do not have the juridical nature of funds but that can still be considered as such according to the definition of their scope. 5 0 J u ly/augu s t 2 0 1 6

Management and liability The AIFMD does not apply to the fund itself but rather to its management. It lays down rules for the authorisation, operation

Significant risks There are significant risks associated with being appointed an external valuer for the purposes of AIFMD. Appointment on this basis brings with it a liability under the AIFMD for the full extent of any losses suffered as a result of the external valuation agent’s negligence or intentional failure to perform its tasks. This unlimited liability is irrespective of any contractual arrangements. It’s not possible to limit liability when acting as an external valuer. While it may be possible to obtain increased professional indemnity insurance (PII) to cover these bigger liabilities, this could mean a significant rise in costs – depending on the level of cover required, the excess being paid and the valuation house’s professional indemnity record. There will also likely to be difficulties in obtaining unlimited PII.

The importance of a location It is important to understand that it is the location of the AIF rather than the location of the asset being valued that is critical in determining if the directive’s legislation applies. Therefore, the advice is applicable to all valuers irrespective of geographical location. We recommend that you do not accept instructions to act as an external valuer to an AIF, unless you are fully aware of and understand all the responsibilities and potential consequences of the appointment by seeking appropriate advice. Ben Elder is RICS Global Director of Valuation

P erso na l pr ope rty I nv estment

and transparency of fund managers, and in these rules are various sections that cover the valuation of an AIF’s assets, which can be particularly important for RICS-registered arts and antiques or personal property valuers who may be involved in doing valuations on behalf of AIFs investing in works of art. The directive requires that the manager of each of the funds “has appropriate and consistent procedures so that a proper and independent valuation of the assets can be performed”. It sets out who can value the assets, how and when they should do so, and the management’s liability to investors for those valuations. Briefly, the valuation function can be performed either by an external valuer independent of the AIF or AIFMD, or internally by the AIF management itself, provided that this process is independent from the portfolio management and other functions of the AIFMD. It is likely that AIFs in the field of art will increasingly approach valuers, either to act externally or to assist and advise the internal valuation function. An RICS valuer has the necessary professional registration to perform both roles. It must, however, be clear that the appointment as external valuer implies professional liability for the full extent of any losses suffered as a result of negligence or intentional failure to perform the required duties. This risk is to be carefully considered and is set out in a RICS briefing note (see ‘Significant risks’, below left), which mainly concerns real estate but applies to any type of fund asset being valued.

It seems the valuer is not liable if they are only assisting the internal valuation function, but this is not yet clear. Summing up, the development of art as an alternative asset class will strongly increase the opportunity for professional work by competent art valuers, both as valuers of collateral for banks and securitisers as well as for AIFs. RICS registration would appear to be an advantage in obtaining the necessary local regulatory approvals. While the valuer should take care to understand the full potential consequences of their activity in relation to an AIF, it would appear that the securitisation of art opens up an enormous field of activity for RICS arts and antiques or personal property valuers. P

Andrea Amadesi is Partner, Amadesi Partners Real Estate Advisors, and Chair of the RICS Personal Property Working Group aa@aprea.co.uk

Art funds www.artfundassociation.com AIFMD www.fca.org.uk/firms/markets/international-markets/aifmd

Investing in art Investing in art and personal property as an asset rather than having it on display in your home or office is a relatively new concept. But since the 1970s, when Citi Private Bank began to offer loans secured by the art that made up significant proportions of their wealthiest clients’ net worth and the British Rail Pension Fund began what would today be called an art investment fund – from which it saw healthy returns – the practice has increased in popularity. The area is not without controversy from those who believe that art should only be purchased for enjoyment and those who are concerned about the lack of transparency or compensation should things go wrong. But it is clearly an important force in the market, appealing to investors because of its lack of relationship with market cycles in the rest of the investment sector. Although the worth of the ultra-wealthy may fall during a downturn, they still usually have plenty left with which to buy art and antiques, keeping the market buoyant while others sink. Arts and other objects of value bring their own problems, however, including the need to understand past performance and the dependence of their value on trends in the market. Art also differs from other markets in its illiquid nature – assets are relatively rare, may have a small pool of potential buyers and their sale is a complex matter. However, the Art Fund Association argues that these characteristics “generate the significant arbitrage opportunities within the market that seasoned art professionals can exploit for the benefit of the fund’s investors” (http://bit.ly/1YuEIY5). Investors may have to rely heavily on the skills of professional advisors, but they may not be regulated, deal in an opaque world vulnerable to manipulation and face the more tangible problems of forgeries, misattribution and dubious title.

Image © Alamy

Art fund managers are usually from a financial background but have an interest in or experience of the arts, and, as the Center for Art Law explains, their services include “fundraising, investor relations, strategy development, market monitoring, and management of the disposition of fund assets” (http://bit.ly/1XtUaFx). Investors may be individuals of high net worth or institutions such as pension funds, family offices or sovereign wealth funds. Most often they are close-ended funds, where new investors cannot join after the capital-raising period has ended. Shareholders in such funds also cannot usually redeem shares or sell on to another investor under the terms of the fund. As they are still few in number, there are not always funds open to join at any given time. They are private vehicles, and thus not generally subject to the same levels of scrutiny or protection as other funds. Net profits from the sale of an asset will be split between the management, investors and reinvestment for the fund. Today, the sector is spawning innovative approaches to making money from real assets, in some cases expanding beyond art. The Liquid Rarity Exchange, for example, has patented its business process of investing in collectables of many kinds, including toys, autographs and wine. The singular nature of artworks and the limited audience means that investment will never be a mainstream area, but its longevity is assured, as is constant development, harnessing the power of technology and data to bring together the right people, assets and information. Claudia Conway is Editor of the RICS Personal Property Journal claudiaconway@rics.org

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RICS p r op e rt y JOU RN A L

P e rs o n a l p r o p e rt y Art cri m e

Not the real deal

warranty, as well as negligence and misrepresentation. The court held that the claimant was entitled to a refund under the limited warranty, but Christie’s conditions of sale barred the claims for negligence and misrepresentation.

Becky Shaw examines the law around looted and forged items, and assesses what buyers should do if they have purchased one

iscovering that an item you purchased at auction is a forgery or was looted means it will be worth only a fraction of what you paid for it and is likely to be unsaleable. According to a 2014 report by the Agence France Press (http://artnt.cm/1WaWaTW), as much as 50% of art circulating on the market has been forged or misattributed. High-profile news stories concerning fakes include a forged Rothko painting that led to the collapse of the Knoedler Gallery and an out-of-court settlement earlier this year (http://bit.ly/23rklw4). Looted artefacts are meanwhile reportedly being excavated and smuggled out of Iraq and Syria on an industrial scale, to be sold online or in Western dealerships. Innocent buyers may unwittingly purchase these items, deceived by convincing descriptions about their style or origins and vague but plausible explanations of their provenance. This is not to imply wrongdoing on behalf of the dealers, who may themselves have been convinced by a fabricated account further up the chain. But what can you do if you unwittingly buy a forged or looted item at auction?

terms generally state that – provided any specified conditions are met and the auction house is satisfied that the item is a forgery – then it will re-purchase the item from the buyer for the purchase price plus buyer’s premium as well as VAT and expenses. It is important to read all the conditions carefully and consider the requirements and exclusions that may apply. Consulting several different auction catalogues shows that most contain a limited warranty for forgeries – though not all, so it is essential to check the exact wording in each case. There are often strict time limits and other specific requirements for notifying the auction house that the item is a forgery and returning it. Assuming that all the requirements are met, the buyer may be able to return the forged item to the auction house and obtain a refund. While this sounds straightforward, it can in practice be a lot more complicated, as the interesting case of Avrora Fine Arts Investment v Christie Manson & Woods Limited [2012] EWHC 2198 (Ch) demonstrated. This concerned a painting bought at a Christie’s auction, said to be by the Russian artist Kustodiev, but which transpired to be a forgery. The claim was brought on the basis of the limited

Forgeries On discovering that the item is a forgery, the buyer should check the conditions of sale as they set out the extent of the auctioneer’s liability and the nature of its obligations. These factors can vary over time and between different auction houses, so it is important to consider the particular conditions of sale for the auction in question. Most will set out the terms of a limited warranty relating to forgeries. Such 5 2 J u ly/augu s t 2 0 1 6

Check the conditions of sale that set out the extent of the auctioneer’s liability and the nature of its obligations Images © U.S. Immigration and Customs Enforcement

Looted artefacts If a buyer is concerned that they may have acquired a looted item, the first step is to check whether it has been listed as such or as stolen. The International Council of Museums has created a ‘red list’ of cultural artefacts most at risk of theft, which includes separate lists for Iraq and Syria among other countries. Interpol, the FBI and private organisations such as the Art Loss Register, Art Recovery International and Art Claim also maintain databases of looted and stolen art. However, these lists are not definitive, may not be up to date with items recently looted and do not provide absolute comfort, while some are not publicly available. This explains how smuggled art can sometimes find its way to prestigious auction houses despite their best efforts, as Christie’s found out when it was raided in March and two Indian artefacts seized (http://artnt.cm/1VL0vws). If it does transpire that an item is looted, there are legal implications for the buyer under both criminal and civil law. Criminal law In terms of criminal law, there are potential implications under three different pieces of legislation: Dealing in Cultural Objects (Offences) Act 2003, the Theft Act 1968 and the Proceeds of Crime Act 2002. The first two offences share a requirement for “dishonesty”, which is judged according to both objective and subjective standards. So if the buyer’s acquisition of the item was not dishonest according to the ordinary standards of reasonable and honest people, and/or the buyer did not realise that reasonable and honest people would regard what they did as dishonest, then that buyer will not be guilty of these offences. A 2015 article (http://bit.ly/1C6qpCq) reported that Scotland Yard’s specialist Art and Antiques Unit at that time had three live investigations into stolen antiquities from Syria, and that in two of these cases restrictions had been placed on the items in question, but there had been no arrests.

P erso na l pr ope rty A rt crime

A buff sandstone panel depicting Revanta and his entourage, from India in the 8th century AD – a very rare representation of this equestrian deity, a figure of great importance in Hinduism – was seized in a raid at Christie’s in New York

k A buff sandstone stele of Rishabhanata, from Rajasthan or Madhya Pradesh, India in the 10th century AD, seized by the authorities from Christie’s before an auction scheduled for Asia Week Civil law There are also implications for the buyer under civil law. They may be liable for conversion, a type of wrongful interference with goods that occurs when a person interferes with the personal property of another so as to amount – in the eyes of the law – to appropriating it for themselves. If the buyer acquires an item that was taken by somebody not entitled to do so, then they could be liable for conversion. The owner of the item could bring a claim for damages or restitution to recover it. In 2007, the Iranian government issued court proceedings to recover 18 carved chlorite bowls, jars and cups that were almost 5,000 years old, and which had been removed from the country following unlicensed and unlawful excavations. Iran claimed that the items formed part of its national heritage. The defendant was the Barakat Gallery, an international art dealer based in London that claimed to have purchased the items in Europe under laws that gave it good title.

Preliminary issues were tried, including whether Iran had sufficient ownership in the items in the jurisdiction to pursue its claim. Reversing the first instance decision, the Court of Appeal held that the English court should recognise Iran’s entitlement to recover the items, which was based on Iranian national law. The court observed that there was international recognition that states should assist one another to prevent the unlawful removal of cultural objects. Over time, a bona fide purchaser of looted or stolen goods can acquire good title, although the rules differ by country. Under English law, if the buyer purchased the item in good faith from a previous bona fide purchaser and more than six years has elapsed since the seller’s purchase, then they can acquire good title to the item. If, however, a buyer purchases an item directly from the person who looted or stole it, then they cannot obtain good title on the principle of nemo dat quod non habet; that is, no one can give a better title than they themselves possess.

What next? If the buyer discovers they have unwittingly purchased a looted item, their first step should be to notify the seller. If the buyer bought the item from a dealer then there may be a sale contract or terms and conditions, sometimes on the back of a consignment note or invoice, making provisions to cover such a scenario and allowing the buyer to return and obtain a refund for the item. Alternatively, as a matter of goodwill, the dealer may agree to refund the item and take the matter up with the person from whom they acquired it. If the buyer acquired the item online, then the website should provide a procedure for items to be returned. The Distance Selling Regulations may come into play, although are not considered further here. If the seller is unwilling to offer a refund for a higher-value item, the buyer may consider seeking legal advice, as they may have a claim against the seller if the latter has not carried out satisfactory due diligence. However, for lower-value items, the buyer may have to suffer the loss of their investment on the piece, which will be unsaleable. The buyer may also consider notifying the police, UNESCO or the International Council of Museums. Prevention Buyers should take steps before acquiring any item that could potentially have been looted, or that could originate from high-risk areas. The higher the value of the item, the more rigorous a buyer should be. A secure and fully documented provenance and a comprehensive explanation of the origins of the item are absolutely critical, and buyers should not accept vague explanations or undocumented accounts. A lack of paperwork, particularly for high-value items, should also ring alarm bells. P

Becky Shaw is a solicitor in the art law team at Boodle Hatfield. bshaw@boodlehatfield.com

artlawandmore.com

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IT’S GETTING EXCITING AT

e.surv

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Celebrating success since 1987

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