Property Journal INC OR P ORAT I N G T H E C O M M ER C I AL P R O P E RT Y J O URNA L, RESIDE N T I A L P ROP E RTY J O U R N A L A N D P E RS O N AL P ROP ERT Y JOURNA L
The new HomeBuyer Report What members need to know 40 PG.
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RESIDENTIAL
PERSONAL PROPERTY
November 2016
Co-working spaces
Historic buildings
Auction websites
Legal advice for landlords providing shared offices
Finding the right solutions for older houses
The major players and innovators in online sales
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UPF R O NT CONT ENTS
RI CS P RO PERTY JOUR NAL
contents C ON TACTS
UPFRO NT
COMMERCIAL
5 Think negative
Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org Advisory group: Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Hannah Davis (Faithful+Gould), Martin Francis (BNP Paribas), Fiona Haggett (RICS), Simon Hooper (Edward Symmons), Vivien King (Malcolm Hollis), Milton McIntosh (Excello Law), Nigel Sellars (RICS) RESIDENTIAL Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org Advisory group: Mike Basquill (RICS), Andrew Bulmer (RICS), Paul Cutbill (Countrywide), Julian Davies (Earl Kendrick) Graham Ellis (RICS), Chris Rispin (BlueBox Partners), Philip Santo (Philip Santo & Co) PERSONAL PROPERTY
Negative interest rates have moved from theory into practice. Tarrant Parsons examines their impact on real estate and the wider economy
6 Update
12 Fair competition and fair gain
Peter Bolton King responds to questions about the International Ethic Standards Coalition
14 Taking your small business online
Understand what you want before you create a digital presence, advises Peter Haggett
8 In absentia
Online auctions are increasingly popular for property sales, explains Gary Murphy
10 Homing in: IPMS Residential
Alexander Aronsohn introduces the newly published IPMS Residential Buildings
Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org
16 Legal Q&A
Legal experts answer common queries
18 Taxing times
Robert Walker considers two fund vehicles that will benefit from the introduction of a stamp duty land tax ‘seeding’ relief
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: James Tuthill 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.
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CO MME RCI A L
20 Off the starting blocks
Emma Mulliner and Louise Kirsten look at how landlords in England and Wales are preparing their portfolios for MEES
24 Getting on the right path
Self-awareness is the key to making your FM practice strategic. Dan Weiss offers a model for assessing your service
26 Assets fit for the future
30 A lease of life
Green leases are becoming more and more popular in Australia, and Sara Wilkinson considers what lessons other countries can learn from them
32 Come together
Co-working spaces are increasing in number and attracting major players as well as start-ups. Rachael Rigamonti and Guy Wilmot offer some legal advice for landlords
Lawrence Melton and Charles Dilley introduce an RICS report on the challenges that are facing public-sector asset managers and the approaches being taken
28 Chain reaction
Could blockchain change the face of property transactions, asks Ragnar Lifthrasir?
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 PE RS O N AL PR O PERT Y J O U RNA L
The new HomeBuyer Report
contents R
“Share of freehold” claims can actually prove divisive, as Anna Favre and Andrew Kafkaris explain
37 A stormy passage
Jeremy Blackburn dissects the provisions of the Housing and Planning Act 2016
38 One in four UK buildings is at risk
John Edwards argues that traditional buildings need better treatment and understanding
40 Member alert
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PERSONAL PROPERTY
November 2016
Co-working spaces
Historic buildings
Auction websites
Legal advice for landlords providing shared offices
Finding the right solutions for older houses
The major players and innovators in online sales
rics.org/journals
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RESIDENTIAL
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Front cover: © iStock
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RES I DE NTI AL
36 Love thy neighbour
What members need to know 40
PE RSO NA L PRO PE RT Y
42 What’s going on down here?
In the second in our series on surveys, Martin Beattie explains the importance of using a certified drain surveyor
44 Things ain’t what they used to be
Fiona Haggett looks at the challenges in valuation for residential secured lending
46 Becoming streetwise
A “complete streets” approach to housing estates could help tackle London’s growing housing demand, argues Yolande Barnes
Graham Ellis summarises changes to be found in the new RICS HomeBuyer Report and updates to RICS Home Surveys
50 An experienced eye
Claire Grindey discusses the value of art consultants’ and advisors’ skills
52 Keeping the e-customer satisfied
What does it take to thrive in the world of online auctions and sales, asks Ivan Macquisten?
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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UPF R O NT OP I NI ON
Think negative
B
Negative interest rates have moved from theory into practice. Tarrant Parsons examines their impact on real estate and the wider economy
Before the global financial crisis, the idea of using negative nominal interest rates to stimulate an economy and ward off deflationary forces had been discussed in theory, but remained largely untested in practice. Today, negative rates have become a major part of the unconventional approaches being taken, or at least considered, by policymakers around the globe. In total, six central banks globally have cut interest rates below zero, including the European Central Bank (ECB) and the Bank of Japan.
How it works Each of these six banks’ negative policy rates apply to the excess reserves that
Image © Shutterstock
commercial banks choose to hold with them. This is known as the deposit rate facility. It is hoped that charging financial institutions for parking excess reserves will encourage lending and support stronger economic growth. However, moving interest rates below zero has different implications from just cutting positive rates. The existence of cash means that holding physical currency in effect provides an interest rate of 0%; but in reality, hoarding a large amount of cash comes with its own costs, such as storage and security, meaning the lower bound for interest rates is not zero. The actual lower bound will vary between countries but, at a certain point, the cost of negative rates will outweigh the cost and inconvenience of holding and making transactions with banknotes. Negative rates are also channelled through the banking system by portfolio rebalancing. Yields on short-term government bonds are heavily influenced by policy rates, and a negative deposit rate facility therefore drives these lower. A lower return on government bonds subsequently pushes money into investments such as corporate bonds, reducing the cost of borrowing for businesses. Evidence shows that negative policy rates have
successfully shifted a broad range of interest rates on money market instruments in a downwards direction.
Good or bad? When considering the effectiveness of negative rates on lifting bank lending volumes it is difficult to draw definitive conclusions, given the limited length of time that they have been in place in most areas. In the euro area, where negative rates were introduced in June 2014, bank lending has started to recover. Credit to the non-financial private sector declined almost relentlessly between 2011 and 2014 but, following the ECB’s negative rate announcement, there was a turnaround. However, the use of negative interest rates has come in for criticism from some quarters. Concerns surround the undesirable impact on banks’ profitability and, in turn, their resilience. If banks insulate retail customers – who find it relatively easier than larger depositors to hold cash – from negative deposit rates, the banks themselves will have to incur the cost. A prolonged period of negative rates could therefore be viewed as potentially harmful. However, the ECB has dismissed such concerns and defended its monetary policy stance. Vice President Vítor Constâncio said negative rates have in fact helped banks by lowering funding costs, ensured capital gains on bond holdings and
RI CS P RO PERTY JOUR NAL
reduced loan impairments. He also stated that, during the period since negative rates were introduced, net interest margins have actually widened, on average, in the euro area.
Real-estate impact Extremely low government bond yields have induced a marked change in the long-term capital allocation strategies of institutional investors. This has increased the pressure to substitute risk-free government bonds and push even further out the risk curve. The deeper into negative territory bond yields go, the more appealing the income return offered by commercial real estate becomes, contributing towards an increase in portfolio allocation towards property. But it is very difficult to imagine a scenario in which a landlord pays tenants to occupy a building – it would make more sense to leave the building vacant – so commercial property yields cannot turn negative. All things being equal, such an interest rate environment is beneficial for investment in commercial real estate. All the same, investors’ search for yield could lead to excessive risk-taking, and there is a danger of capital being overallocated to the sector. A prolonged period of negative rates could subsequently drive property yields to unsustainably low levels, making the sector more vulnerable to a shift in investor confidence or a turn in the interest rate cycle. As this poses a threat to future market stability, the risks associated with negative rates will need to be monitored closely by policymakers. b Tarrant Parsons is an economist at RICS tparsons@rics.org
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UPFRONT U P DAT E
UPDATE Commercial conference focuses on change RICS Commercial Property Conference, 1 December 2016, London With the current uncertainty in the market, it is more important than ever to join fellow professionals to debate, analyse and address the major challenges and opportunities that real estate faces in a post-Brexit context. The annual RICS Commercial Property conference will bring together leading experts who will explore the short-, medium- and long-term effects of the referendum on the sector. Discover how investors, buyers, occupiers and owners have responded, as well as how property transactions and commercial property funds have reacted. Get updates on the latest market conditions for the different asset classes and gain insight into take-up levels, supply and demand.
The conference will also address the other key issues that are going to affect the future of real estate, including Minimum Energy Efficiency Standards, looking at the steps that owners must take to improve efficiency and create sustainable properties. Hear thought-provoking debate into the future of the HQ office, and discover what
the working day will look like in 2040 and how artificial intelligence and technology will play a major role. Understand how to future-proof the workplace and remain at the forefront of the sector. Attend this conference and discover how to survive and thrive during a time of significant change. n www.rics.org/commercialconf
New platform for busy APC candidates Many candidates often express concern about the different challenges they face when trying to complete their APC tasks, such as time management, how to demonstrate competencies and what to do to prepare effectively for the final assessment. In response, RICS has launched Compass, an online platform that gives access to bite-sized online learning and other training resources, which will help you with your assessment activities and enable you to gain the knowledge and skills you require in order to be fully prepared for your final assessment. As a candidate, you have automatic access to the website – visit rics.org/compass and log in through your RICS account. Explore new e-learning micro-modules under “My Resources” on your homepage. The free content is accessible on mobile devices, enabling you to train flexibly. Check out the competency encyclopaedia, which provides an insight
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into what each means in the context of your role and can also help you identify what knowledge and experience you need to demonstrate competence in APC assessments. Next, have a look at the course browser, a dedicated area for you to manage your training. Track courses for which you have registered and those you have completed, and browse classes to help you develop the skills needed for passing your assessment. There is also a new CPD tracker, an automatic personal record that will help you monitor the number of hours you have completed and the courses you have attended, and help you understand the areas where you need to develop further skills. You can also get instant access to the mandatory ethics course. This e-learning module has been designed to provide and test your knowledge and understanding of the RICS ethical standards. Compass will enrol and track your progress automatically; all you need to do is complete it.
Images © Shutterstock
STANDARDS International Standards International Construction Measurement Standards Consultation soon. n https://icms-coalition.org/ consultation/
Conflicts of Interest professional statement Publishing soon.
International Ethics Standard Publishing soon.
Recently published Real estate agency and brokerage, 3rd edition
Energy penalties warning for businesses Ofgem is introducing a measure to ensure that half-hourly supplies exceeding the assigned available capacity will have to pay significantly more. DCP 161 is a change to the Distribution Connection and Use of System Agreement that will introduce excess capacity penalties for half-hourly electricity supplies. The change takes effect from 1 April 2018 to recover the additional costs that distribution network operators can incur when customers exceed their available capacity levels. Currently, there is no penalty if a supply exceeds its available capacity, other than the charge the supplier adds for the excess in the month of the breach, which is levied at the standard available capacity rate. The amounts are often minimal, and so they give no incentive for
users to review and increase capacity where required. DCP 161 means that from April 2018, users will be charged an excess penalty rate that could be more than three times higher than the standard. The applicable rates have not yet been published and will vary by region and voltage. It is expected that in areas where demand for capacity is high the costs will reflect this. If a supply is regularly exceeding its assigned available capacity, this change could increase the overall electricity costs by up to 1–2% or more depending on the consumption profile. Supplies that have been or will be converted to half-hourly as a result of P272 (profile class 05–08, Non half-hourly supplies) will be settled on the half-hourly market by the time DCP
Business waste campaign Right Waste, right Place (rWrP), the campaign that raises awareness of the duty of care legislation and provides information to help businesses comply with this, has launched its ambassador programme. Suez, Veolia, the Federation of Small Businesses, Cory Environmental, Augean PLC, Redrow, Willmott Dixon and the Gloucestershire Joint Waste Team have already signed up to become campaign ambassadors and will raise awareness of the duty of care among more than 5,000 suppliers. The initial criteria to be an ambassador are as follows: bbevidence that the organisation embraces the principles of rWrP and has an internal programme and policy on waste management bba commitment to promoting best practice with regard to waste management bba commitment to engage actively with rWrP to promote the campaign. Sam Corp, Head of Regulation at the Environmental Services Association, commented: “The number of organisations actively involved with rWrP, representing a broad range of sectors, shows just how serious an issue duty of care compliance is.” n www.rightwasterightplace.com n info@rightwasterightplace.com
n www.rics.org/ realestatebrokerage
Forthcoming
The valuation of buy to let and HMO properties n www.rics.org/standards 161 comes into effect. It is vital that the available capacity and maximum demand are understood in case these supplies exceed the available capacity levels. Melanie Kendall-Reid, Compliance Director for energy services provider Carbon2018, commented: “Any sites that are incurring excess capacity charges need to agree a revised import capacity or take energy-saving measures to reduce demand and avoid these charges. “Where a supply is not currently exceeding the available capacity level but may do in the future due to a planned increase in usage, it is vital that a review is undertaken and an increase in available capacity is applied for ahead of the change to avoid incurring significant additional costs.” n http://bit.ly/2admex2
New event for specialist valuers RICS Specialist Valuation Conference, 29 November 2016, Kensington Close Hotel, London This full-day conference has been designed for valuers in the Machinery and Business Assets, Business Valuation, Trade-Related Property and Personal Property Professional Groups. The event will feature streams for each specialist group and will tackle topics that are most relevant to your profession. n For more information and a full programme, please email rimrit@rics.org NO V E MBE R 2 0 1 6 7
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UPFRONT AU C T I O N S
Gary Murphy discusses the increasing popularity of online auctions
In absentia
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n 1999, Allsop was the first property auction house to introduce simultaneous online bidding for traditional ballroom auctions – that is, auctions held in conference facilities, ballrooms or other large meeting places. Today, most auctions are multi-channel and buyers can bid in the room, by proxy, over the phone or online. However, although the online option is easy and accessible, residential and commercial buyers alike still prefer to be there on the day to gauge market sentiment and feed off the buzz in the room.
The concept Demand for ballroom auctions is still strong, but I firmly believed that there was a significant opportunity for auctions held exclusively online. It was when I was talking to a client that it occurred to me that the real potential for online auctions lay in the new-build residential sector, as this could be a global market. Developers have traditionally used international roadshows to market off-plan property to overseas investors, but online auctions offer an alternative way to harness competition nationally and globally. Why not invite investors to register for an online auction specifically designed for new homes? The model works very well for the new-build market; it offers fairness and transparency by providing a level playing field for domestic and international buyers. With this in mind, we presented the idea to some leading developers, who immediately supported the concept.
land can only be made in writing with the exception of “a contract made in the course of a public auction”. Allsop took advice from legal counsel: an online auction that is open to bids from anyone anywhere in the world, as opposed to bids by invitation only, is considered a public auction. There is also no requirement in law for an auction to involve the physical fall of a hammer, only that the conclusion of the bidding is clearly signified, as is done after the prescribed time limit for bidding online expires. During registration, the bidder authorises Allsop to sign a written contract for the purchaser as soon as the bidding is concluded. As with traditional auctions, the auctioneer also has authority to sign for the seller.
The process Before holding an online auction, we ensured that all legal and administrative bases were covered to be certain that the process was as smooth and efficient as possible. Bidders still have to complete a comprehensive registration process
The law One of the most powerful advantages of an auction is that the fall of the hammer represents a legally binding contract, so an important objective in setting up a digital sales platform was to establish that the online legal framework replicated the one in the auction room. According to the Law of Property (Miscellaneous Provisions) Act 1989, a contract for the sale of an interest in 8 NO V EMBER 2 016
Image © Paul Harmer
before bidding. Full details of each potential purchaser and their solicitors are required, as well as uploaded identification documents. A letter from the purchaser’s solicitor, who has to be UK-based, is also required to verify that identity checks have been completed. Finally, a bidder security of £5,000 has to be paid to Allsop to show intent, confirming that anyone who makes it into the virtual auction room is likely to be a serious buyer. In June 2015, Allsop held its first online auction of new-build homes, comprising 36 apartments in a residential development on the Crossrail route at West Drayton. In the four-week marketing period before the auction, we received more than 28,000 visitors to the auction and developer websites, of whom 15% came from outside the UK. All the properties were sold; and, notably, the prices achieved were 10% higher than those for the units in the first phase of the scheme, which had been sold off plan by private treaty a few months earlier.
The Irish experience In conducting these sales, we were building on our experience of running online-only auctions in Ireland in 2014. We have held five online auctions there,
UPFRONT AU C TIO NS
Figure 1 Breakdown of devices used to bid in Allsop Ireland online auction (March 2016)
20% 32% Phone Tablet selling a total of €38m worth of property, including portfolios and commercial lots. The average success rate has been 86%, which is comparable with that for ballroom auctions. Introducing online auctions in Ireland has given us useful insights into the practicalities and potential of the method. The market there has experience in searching for property online, so taking auctions in this direction was a natural progression. Online auctions as a method of sale are now part of the Irish property market, and many private buyers are taking this route. Online auctions increase access to potential buyers and, as awareness of the benefits of this option increases, there will also undoubtedly be more. Since our first Irish digital auction in March 2015, we have found that the online bidder count has risen from 4.1 to 6.1 per property. This increase is hardly surprising; the internet is usually the first place where buyers seek property for sale or simply look for market information. The scale of the potential audience is demonstrated by the traffic to allsopireland.ie during 2015. This increased by 18% to 1.4m, with unique visitors increasing by 20% to 654,000. Although the majority of visitors to the site are from Ireland, people from 197 countries have also visited. At the online auction held in March 2016, 8% of bidders were from overseas. Furthermore, although 48% of bids came through from desktops, 32% were made on smartphones and 20% on tablets, indicating that people are happy to make bids on the move, as well as from their home or office (see Figure 1).
The future The pendulum is swinging from ownership towards rent, which is creating opportunities for buy-to-let investors. The lot sizes at auction are also appealing to investors. Historically, they have had
the choice of buying resale property at auction or new-build homes by private treaty. Auctions are a clear barometer of the market and confidence on the day; online auctions will give buyers from around the world access to a fair and transparent marketplace. Digital communications also make auctions more efficient and effective, widening the exposure of the lots for sale and making information more accessible for buyers. We email catalogues to more than 220,000 subscribers, but still post hard copies to those who prefer these. As with any good auction house, much of the hard work is done before the sale, including extensive marketing and personal engagement with potential bidders. The same principles apply to online auctions, as the software is simply the means for bidding on the day. In order to achieve the best possible results, vendors should always consult legal and property experts, though: there is nothing more expensive than cheap advice. If the auction house does not generate enough interest or loses bidders, this can seriously affect the final price. To sell successfully at auction, market knowledge is vital – particularly when it comes to setting the reserve. The data collected through our website is hugely beneficial to the auction process in enabling us to match demand to price. Since we began developing online auctions, the dynamics of the market have changed considerably. But I think this shift has made the prospect all the more exciting. Brexit has created uncertainty – yet where there is uncertainty there is also opportunity. Exchange rates are making investment in UK property a more attractive proposition for buyers abroad. Today’s overseas investors are altogether more informed and selective. Demand is still there, but there will continue to be a fight for quality: what is on offer has to be the right product and the right price.
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Online auctions let developers sell quickly and efficiently and at the best price on the day. For buyers, there is easy, transparent access to the new-build market. Our team is in talks with major developers about this approach, as we are confident that online auctions can offer certainty and encourage renewed confidence in this uncertain market. Online sales will never replace ballroom auctions, but will be used to complement traditional sales and marketing methods. In the new homes markets, however, they will seriously challenge traditional sales methods and provide a practical alternative with all the benefits of ballroom auctions. b
Gary Murphy FRICS is Head of Residential Auctions and Partner at Allsop gary.murphy@allsop.co.uk
www.allsop.co.uk See also RICS best practice guidance, Auctioneers Selling Real Estate, 6th edition www.rics.org/auctioneers
Related competencies include Auctioneering
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RICS P ROP E RT Y JO U RN A L
UPFRONT IPMS
Homing in: IPMS Residential Alexander Aronsohn introduces the newly published IPMS Residential Buildings
T
he International Property Measurement Standards Coalition (IPMSC) recently published IPMS Residential Buildings, the second building class in this suite of standards, following a second stage of consultation that concluded in April. The standard is an open-source document that is available to download from the IPMSC website (www.ipmsc.org).
Definitions and revisions The IPMSC Standards Setting Committee (SSC) has amended or added the following definitions. bbBalcony: an external platform at an upper floor level with a balustrade to the open sides projecting from or recessed from an External Wall and including in this definition generally accessible rooftop terraces, external galleries and loggia. bbCovered Area: the extent at ground level of the area of Building covered by one or more roofs, the perimeter of which, sometimes referred to as the drip line, is the outermost structural extension, exclusive of ornamental overhangs. bbMezzanine: an intermediate or partial storey, other than a Catwalk, between the floor levels or roof of a Building and usually fully or partially open on one or more sides. bbPatio: a paved or floored terrace, adjacent to a Building, that may or may not be covered by an independent framework. bbPermanent Mezzanine: a Mezzanine that is an integral part of the structure of a Building. bbResidential Building: a Building predominantly used for residential purposes, whether or not part of the Building is used for other purposes. bbVeranda: an open or partly enclosed area on the outside of a Building at ground level (Level 0), and covered by a roof that is an integral part of the Building. 10 NO V EMBER 2 016
In response to the feedback it received from the consultation, the IPMSC SSC has also revised the following definitions for both Internal Dominant Face (IDF) and IDF (Internal Wall Section), the latter of which was previously called Vertical Section, in order to make these more user-friendly. bbIDF: the inside Finished Surface comprising more than 50% of the floor-to-ceiling height for each IDF Wall Section. If such does not occur, then the Finished Surface is deemed to be the IDF. bbIDF Wall Section: each internal finish of a section of an External Wall, ignoring the existence of any columns, that is either recessed from or protrudes from its adjacent section. The revised standard also includes a new section 1.4, entitled Floor Level Designation, to deal with a lack of global market consistency. IPMS Residential Buildings states: “to provide consistency in IPMS, the primary ground level has been designated Level 0, with the levels above as Level 1, 2, 3 etc. and levels below the primary ground level as Level –1, –2, –3, etc.” The standard also identifies a new Limited-Use Area called “Example 5 – Area difference from Covered Area”. It explains that, “where a Sheltered Area is not functional for the primary use, this part of the Covered Area may be classified as limited-use area”.
Format The format of IPMS Residential Buildings marks a change from the one that was used for IPMS Office Buildings; in addition to Part 1 – Aim and Scope of the Standards, Part 2 – Principles of Measurement IPMS 2 and Part 3 – IPMS Standards, there is a new Part 4 – Technical Section, which contains the IPMS Residential Component Areas and the IDF technical diagrams. IPMS Residential Component Areas have now been revised so the sum
of the Component Areas now equals IPMS 1, and the sum of the Component Areas minus the new Component Area B1 (External Walls) equals IPMS 2 Residential Buildings. The new sub-categories of Component Area B are as follows. 1. IPMS Residential Component Area B1, external walls, are defined as: “The external enclosure of a building, which comprises the area between the IDF and the outside face of the building.” 2. IPMS Residential Component Area B2, internal structural elements, comprise all internal structural walls and columns. 3. IPMS Residential Component Area B3, internal non-structural elements, comprise all internal full-height permanent walls other than those included in Component Areas B1 and B2. In addition to the revised Component Area B, there is also a new Component Area G called Living Space, which is defined as “the area available for use by residential occupiers. Some of the Image © Shutterstock
UPFRONT IPMS
Component Areas in this table can be further used for IPMS 3 if required.” IPMS Residential Buildings still comprises the following three main measurement standards: bbIPMS 1 bbIPMS 2 – Residential Buildings bbIPMS 3 – Residential Buildings. IPMS 1 can be used by parties for planning purposes or the summary costing of development proposals, and is defined as “the sum of the areas of each floor level of a building measured to the outer perimeter of external construction features. It is the same for all classes of building. In many markets, but not universally, this is known as gross external area.” IPMS 2 – Residential can assist the property sector in making efficient use of space and benchmarking data, and is defined as: “The sum of the areas of each floor level of a residential building measured to the IDF.” However, in respect of IPMS 3 – Residential Buildings,
the SSC identified three different measurement bases that were required to meet global market needs: IPMS 3A – Residential, IPMS 3B – Residential and IPMS 3C – Residential. Some markets require only one of these measurement bases, but others may use two or more for different purposes. Furthermore, IPMS Residential Buildings includes separate floorplans for Residential Apartments and Residential Dwellings in order to enable the general public to use the standard to measure their houses. IPMS 3A – Residential is the area in exclusive occupation measured to the outer face of the External Wall for detached dwellings, and to the outer face of the External Wall and the centre line of shared walls between occupants for attached dwellings. IPMS 3B is the area in exclusive occupation, including the Floor Area occupied by internal walls and columns, measured to the IDF and the Finished Surface of internal perimeter walls.
IPMS 3C is the area in exclusive occupation, excluding the Floor Area occupied by full-height internal walls and columns, measured to the IDF and the Finished Surface of all the full-height internal walls. The IPMSC SSC is currently working on drafting IPMS Retail Buildings, while consultation on IPMS Industrial Buildings concluded in September. b
Alexander Aronsohn FRICS is RICS Director of Technical International Standards and Executive Secretary of the IPMS SSC aaronsohn@rics.org
Related competencies include Measurement of land and buildings
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RICS P ROP E RT Y JO U RN A L
UPFRONT E T HI C S
industry’s future, with greater education and awareness across our sectors. Ethical values are important because: bbthey are an anchor to appropriate behaviours bbthey ensure consistency and clarity, irrespective of changing factors such as the state of the economy or business practices in different marketplaces.
Membership has grown dramatically since this photo was taken outside the UN last year
Fair competition and fair gain
B
Peter Bolton King reflects on the Rio Olympics and answers questions about the International Ethics Standards Coalition
By the time you read this, the Rio Olympics will have finished. Thousands of column inches will have been written about the achievements, the events, the winners and losers. The 2016 games were hosted against a backdrop of complex challenges facing 12  NO V EMBER 2 016
Brazil that hit the headlines in the run-up to the tournament. These included corruption, political turmoil and the Zika public health crisis. I have visited the country several times both for RICS and as chair of the International Ethics Standards (IES) Coalition, most recently for a major conference to talk about international standards. Great interest has been shown in the coalition and how this fast-growing group of almost 100 professional bodies, associations and standards-setting organisations is working to create the first set of globally applicable ethics principles for
land, real estate, construction and infrastructure, and major Brazilian organisations working in our sectors have now joined us.
Why are ethics important? To err is human. Organisations operating in hyper-competitive commercial environments are under intense pressure to make money, and there is a greater risk that ethical breaches may occur. Some situations faced by property professionals may not always have clear responses. This strengthens my belief that professional ethics must play a stronger role in our
People tell me that continuing scandals in businesses and sport are evidence that ethical values do not work. If they did, they argue, we would not have so many corporate failures and individuals who feel they need to cheat the system. While I can understand this cynicism, the current context highlights the need for more education about business ethics, not less. One RICS member commented that Enron’s code of ethics did not stop the huge scandal that caused its collapse: but if Enron had implemented the code properly and business ethics had played a more central role in its corporate culture, would the organisation still be here? It certainly might have had a better chance of survival. Education about ethics and related issues is as important as enforcement in terms of reducing the risk of poor conduct. Without it, dark corners in large and complex companies have a stronger chance of persisting. A colleague reminded me of the similarities and differences between the nature of competition in sport and business, referring to a little-reported incident that occurred during the 2012 London games. After winning a gold medal, a swimmer confessed to breaking the rules: although he was only allowed a single dolphin kick in the breaststroke, he admitted to doing several deliberately. He justified his actions by saying the rule was poorly policed and had to be
UPFRONT ETH IC S
broken by any competitor who wanted to win. He was right about the first point, and arguably the second; the authorities didn’t take any action against him. Having trained all his life for his moment of glory, he ultimately put personal gain first, devaluing both his status as a sportsman and the Olympic ideal of fair play.
Winning in our world Do we promise a potential client that we will carry out work in a certain way, with the unspoken intention of cutting corners to save costs? The justification for winning a contract in this way is that the client got what they paid for – if unwittingly – which was no less than a competitor would have delivered. Depending on specific details, such behaviour could well be unethical and a breach of contract. Any surveyor acting in this way has forgotten what it means to be a professional, and devalues our profession.
Questions and answers Who belongs to the IES Coalition and why? Representative real-estate and related professional bodies exist to guide, enhance and promote the professional, technical and ethical expertise of members. As a founding member of the coalition, RICS believes that assembling non-profit organisations from across the sectors creates a powerful way to undertake extensive consultation, combining ethical knowledge about different real-estate markets and related disciplines. By harmonising many existing codes of conduct, the coalition aims to establish an overarching standard. Do other professions have global ethics standards? The global accountancy profession, for instance, is governed by the International
Organisations operating in hyper-competitive commercial environments are under intense pressure to make money and there is a greater risk that ethical breaches may occur Ethics Standards Board for Accountants (IESBA), which issues ethical standards for professional accountants and its member bodies. Those such as the Association of Chartered and Certified Accountants and Institute of Chartered Accountants in England and Wales are required to comply with the IESBA code of ethics. The IES document was drafted by an independent standards-setting committee (SSC), which was appointed by the coalition. How did they decide on its scope? This is the first global exercise of its kind for these sectors, and the IES SSC sought to align and identify universal fundamental principles as a basis on which to develop the first international ethics standards for land, real estate, construction and infrastructure. Each organisation that belongs to the coalition agreed to implement the final standard and is likely to provide advice to their members about related ethics issues. Don’t ethics codes need a central enforcement authority to work successfully? Of course enforcement plays a strong role in regulation. Setting ethics standards for 2.5m accountants globally has been a crucial role performed by IESBA since it was set up in 1977. Its board provides adoption and implementation support and promotes good ethical practices globally,
but does not have a direct enforcement role. All the existing IES Coalition members already have their own code or rules of ethics. It will be up to individual organisations to ensure compliance with the ethics standard and each will have different disciplinary and enforcement mechanisms. How can global principles be applied across complex world regions? International standards such as those operated by the IESBA are based on principles, not rules. This makes them globally applicable: professionals have to think carefully about their specific application and must exercise sound professional judgement in deciding on the correct behaviour and action. The IES SSC undertook a three-month global consultation, which attracted nearly 400 formal responses from many countries. We believe this feedback and proactive consultation will help ensure that the final standard can be understood by all. Are the participating organisations expected to give up the codes of conduct that they already have in favour of the IES? The coalition aims to introduce, at an international level, one shared set of values reflecting principles on which the entire profession can agree, and to which all existing codes of conduct will conform. They will be free to
retain their own more detailed codes if they wish, on the understanding that they do not conflict with IES.
Comments from coalition trustees One of the UK-based IES Coalition trustees, Peter Robinson of the Association of International Property Professionals, commented: “In the fast-moving and ever-changing world of international property sales, ethics are vitally important to remind the profession where the true ‘North Star’ of fixed standards lies. “These should be transparent and unify trade and consumers, underwriting any sensible company.” Trust can mean different things in different cultures, but another IES Trustee, lawyer Eric Finn from the International Right of Way Association in the USA, commented: “Of primary interest to all real-estate professionals is to be a trusted advisor to their clients and the general public. “A common grounding in ethical behaviour, at the local community level and on a global scale, is essential to establish such trust.” b Peter Bolton King FRICS is RICS Property Standards Director pboltonking@rics.org
www.ies-coalition.org RICS has issued comprehensive guidance at www.rics.org/ responsiblebusiness A full toolkit about RICS’ existing ethics principles can be found at www.rics.org/ethics Extensive guidance on conflicts of interest is forthcoming.
Related competencies include Conduct rules, ethics and professional practice
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RICS P ROP E RT Y JO U RN A L
UPFRONT TEC HN O LO G Y
Taking your small business online Understand what you want before you create a digital presence, advises Peter Haggett
If you have a small budget and want to put together a professional site with imagery and live contacts, then this sort of tool is immensely useful. Many facilities even have pricing structures that enable small businesses to make free use of their services and create and manage small but professional campaigns and digital products. Others are likely to incur a monthly cost, but this will be minimal compared to their potential value. Any good site-building tool will allow you to associate a personal domain name with the site you create. At the time of writing (July 2016) there were 1,365 different top-level domain suffixes available to choose from to widen your available pool of web addresses (http://bit.ly/1c9EADr).
Start with people, not technology
S
With such a vast quantity of data on the internet, it is vital that you know how to make your online presence felt
ometimes the impetus to become involved in something can be so strong that you feel compelled to dive in blindly and hope for the best. You might not be entirely sure what is going on, but other people are and they seem to be getting great results. For instance, a rather striking renovation in a nearby street can appear to have been easily achieved, but will actually be the result of a lot of hard work. The likelihood is that the owners are still trying to forget the decision to live in chaos while pretending to the neighbours that all is well. A strange comparison … but it is a useful way of considering the costs and benefits of creating a digital presence for your business. When you eventually stand back and marvel at your creation, it can often be everything you hoped that it would be. Conversely, there is a risk that you will end up metaphorically walking Kevin McCloud through the timbers of your broken dreams. My point in this analogy is that hard and continuous work is needed to get an effective digital presence. You can reap
14 NOV EMBER 2016
huge benefits by getting it right, but waste huge amounts of effort if you get it wrong.
The digital landscape The internet has seen a great deal accomplished worldwide. By allowing the rapid dissemination of ideas and information across vast distances, it enables people to access a remarkable amount of material – but because there is so vast a quantity of data out there, finding what you are after is becoming increasingly difficult, especially given how much of it is essentially useless to most people. This can mean it is very difficult for any new presence online to have a meaningful impact. The good news is that the barriers to this revolution in information creation are decreasing in number every day, and are now almost non-existent in the majority of developed countries. There are, for instance, various options available to individuals and small businesses that completely remove the need for any coding or extensive technical capabilities. Being able to drag and drop elements on to a page and use modules that have already been built allows you to take more of a building-block approach to making an attractive website.
Intriguingly enough, the best first step to building a successful digital presence does not involve going anywhere near an internet connection, development tools or even a computer. The most important thing to do is talk to the people that you are looking to appeal to – your customers. Surprisingly, many large companies, small businesses and multinational brands alike, look directly through potential clients and put together a digital presence as they see fit. That is risky, even if you have a clear and innovative strategy; there are many stories of companies that had valuable propositions but did not communicate them properly. So, ask your customers open and non-leading questions about your online presence and what they want to see from it. Do not take any responses personally; you’ll be surprised how much you learn about your successes and where you can improve as well. Another vital step is considering what business problems or objectives your website is aiming to solve. It might sound simplistic, but writing these thoughts down on a selection of sticky notes will give you a clearer picture. This also means that the notes can be rearranged, grouped or prioritised according to the relative urgency or effect of their information. Putting them in order means you can match solutions to problems that were not previously apparent. These practices are not just relevant to the initial creation of an online presence – the same is true of any digital marketing campaign that you want to create or maintain. Images © iStock; Shutterstock
UPFRONT T ECHNO LO G Y
k Write your thoughts down on sticky notes, which can be rearranged, grouped or prioritised as necessary Many large and small companies share an inability to look beyond their internal perspective on what drives their business. Rather than thinking about what you would want in your online presence, go to the people you meet every day and ask them what they want. You should try to gather as much information as possible: the greater the available data set, the better informed your strategic decision-making will be.
Making the most of data After you have figured out what your company means to your customers, it is important to apply this knowledge logically and practically. Creating and maintaining a Twitter account for your firm is pointless if your customer base will not engage with you this way. Responding promptly and helpfully to emails may well be better, so focus on improving performance in the areas that matter. “Ah yes,” I hear some of you cry. “I’ve already got a website, thanks very much.” Good for you: but when was the last time you updated it? I bet there is at least one typo lurking somewhere in the various levels of copy. The idea is that your website should communicate the level of service and professionalism that you offer. Anything even slightly out of place is going to stick out badly and show that you lack attention to detail.
A poorly maintained website can often look worse to your customers than not having one at all. Similarly, are you aware of how many people are visiting your site, or what they are viewing? This knowledge can be invaluable when judging the kind of information or content that has worked previously and is resonating with your audience. You should be able to identify these areas and improve them. The pace of change in digital media and rapid improvement in the technology that underpins them means that an online presence cannot be static. An iterative approach of continuous updates and change can keep you relevant and interesting to potential customers. Having a digital presence alone is not enough; you also need to maintain interest and passion for what you are doing.
Think about trying it These processes can be as simplistic or complicated as you want to make them, but ultimately, you need to have sourced the information that will allow you to make informed decisions. While it certainly helps to have an understanding of digital technology, making best use of the numerous site-building and content-management tools available will largely do away with the need for any actual development experience. It is possible to pave the
way for more complex or specialised adaptations by building on the services these provide as a foundation for your digital presence. My advice to anyone looking to make a foray into digital, or improve their current standing, is first of all to research thoroughly. Channelling that information into your website, communications or digital strategy is the point when you can have fun and create something of which you are truly proud. b
Peter Haggett is Web Services Manager for Public Health England haggettp@gmail.com
RICS also offers a Digital guide for small businesses www.rics.org/growbusiness
Related competencies include Business planning, Data management
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Legal Q&A RICS P ROP E RT Y JO U RN A L
UPFRONT L E GA L Q & A
Heating regulations
Q
I am landlord of a multi-let property, including occupiers who have leased multiple floors, some of which are subleased. I understand the tenants and I are affected by the Heat Networks (Metering and Billing) Regulations 2014. What do we need to do before the December 2016 deadline?
> Daryl Rivero and Louise Kellaway
A
The Heat Network (Metering and Billing) Regulations 2014 apply to both district heat networks and communal heating, but only the latter is covered here. There are both civil and criminal penalties for non-compliance, including unlimited fines. You should first work out whether you are a supplier of communal heating, which you will be if all of the following apply: b thermal energy is distributed around a single building as steam, hot water or chilled liquids from a central source b this is for space or process heating, cooling or hot water b you supply this heating, cooling and/or hot water to two or more final customers, who buy it for their own consumption. If you are not sure whether the regulations apply, a useful place to start is the enforcement agency’s guidance, such as the heat networks scope guidance (http://bit.ly/2aNtrlv) and frequently asked questions (http://bit.ly/2bhydqO). The government body named Regulatory Delivery took over as the enforcement agency on 1 April, so do consult its latest online guidance as well. If I am a supplier of communal heating, what should I do? b You must notify the Secretary of State, providing detailed information about each communal heating system you operate. The deadline for notification was 31 December 2015 or, for systems first operating after that date, on or before the first date of operation. Notifications must be renewed every four years. Regulatory Delivery has suggested that multiple heat suppliers arrange for the primary supplier – which will be you, if you are in charge of building services – to submit a notification that includes all the other heat suppliers’ information. b When a meter is being replaced, you must ensure, unless exemptions apply, that the replacement is a “suitable meter”; that is, it accurately measures, memorises and displays a final customer’s consumption of heating, cooling or hot water. b As of 31 December 2016, where it is cost-effective and technically feasible, you must ensure that suitable meters are installed to measure each final customer’s heating, cooling or hot water consumption. Where these are installed, the heat 16 NO V EMBER 2 016
Daryl Rivero is a senior associate and Louise Kellaway is a professional support lawyer in the Real Estate Department of Stevens & Bolton LLP daryl.rivero@ stevens-bolton.com louise.kellaway@ stevens-bolton.com
supplier must ensure temperature control devices are fitted to enable each customer to control their consumption. bbIf it is not cost-effective or technically feasible to install suitable meters, a heat supplier may have to install alternative measuring equipment. bbWhere you have to ensure that meters or heat cost allocators are installed, you must also ensure, unless exemptions apply, that all bills for the consumption of heating, cooling or hot water by a final customer are accurate, based on actual consumption and comply with standards in the regulations. You also have to give certain detailed billing information to each final customer. bbYou may want to ensure that future leases or licences to occupy include wording that allows you access to the premises to comply with the regulations and recovery of your compliance costs – such as those for notifications, carrying out works and associated professional fees – from the occupier. You should also ensure you can charge occupiers for heating, cooling and hot water based on each final customer’s actual consumption. bbYou should check existing leases and licences to occupy as well. Regulatory Delivery has advised that even where an existing contractual arrangement does not provide for a heat supplier to bill the occupier for actual consumption of heating, cooling and/or hot water, the supplier must still comply with the regulations; you cannot use the existence of conflicting contractual arrangements as a defence if you breach these. Can my tenants be heat suppliers too? If you are a heat supplier and your tenant has sublet or licensed their premises to a number of final customers, then they will be both a final customer and a heat supplier. In practice, a tenant’s lease will probably not grant them the rights needed to carry out works to services or common parts to install meters or other equipment required by the regulations. They may thus only be able to comply if you, as superior landlord in control of building services, comply. However, the tenant is still subject to civil and criminal sanctions if they do not comply. Landlords and occupiers may therefore need to cooperate with each other to fulfil the regulatory requirements. Any there any further points for my tenants? When a tenant is granting a lease or licence to occupy, they should consider whether they will become a heat supplier as a result of the new occupation when they were not before. b This information is necessarily brief and is not intended to be an exhaustive statement of the law. It is essential that professional advice is sought before any decision is taken.
A DV ERTISING
RI CS P RO PERTY JOUR NAL
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Find out more: t 024 7686 8584 w rics.org/training e training@rics.org
Gain a unique insight into valuation Valuation: Foundation Programme will provide detailed knowledge of the key valuation methods and best practice techniques for measurement and inspection. Find out more: rics.org/valuationfoundation Valuation: Residential Property advanced course will give a full breakdown of the process for creating a residential property valuation to RICS and international standards. Find out more: rics.org/valuationresidential Valuation: Commercial Property is designed for professionals with existing skills in valuation, to be fully competent in creating a commercial property valuation. Find out more: rics.org/valuationcommercial 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 N O V E M B E R 2 0 1 6 17
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UPFRONT TAX I N G T I M E S
TAXINGTIMES
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Robert Walker considers two fund vehicles that will benefit from the introduction of a stamp duty land tax ‘seeding’ relief
Property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACS) are regulated fund vehicles that can be used to hold UK real estate. In essence, they enable investors to incur tax as though they were invested directly in the underlying real estate, and therefore means that they are not subject to double taxation. Although both vehicles have been around for a number of years, it is fair to say that they have not been widely used, despite being tax-efficient. One of the main reasons for the low level of take-up has been the upfront costs of seeding them in terms of stamp duty land tax (SDLT). However, on 1 April 2016, HMRC introduced a new ‘seeding’ relief, which might enable existing property funds to switch to use of PAIFs and CoACS without an SDLT cost. Another helpful change that has been made is the removal of the SDLT charge on buying units in CoACS. Before getting into a little more detail on the relief, however, it is worth considering the key features of PAIFs and CoACS. 18 NO V EMBER 2 016
A PAIF is a form of authorised investment fund that invests largely in real estate or shares in UK real-estate investment trusts. There is no requirement for the shares in the PAIF to be listed, although only open-ended investment companies with variable and widely marketed capital are able to join the PAIF regime. The PAIF benefits from a corporate tax exemption on both its gains and on its income from qualifying investment business. A CoACS is a type of collective investment scheme that is not a legal entity in its own right. Instead, it is established by formal agreement under which its real-estate assets are overseen by a fund manager, but their beneficial ownership is held on trust for investors. The CoACS is “taxtransparent” for income purposes, which means that its income is treated as received directly by, and taxed on, the investors rather than the CoACS. It is exempt from tax on gains from asset disposals. This means that, from a tax perspective, investors in PAIFs and CoACS are in a very similar position to that in which they would be if they invested in real estate directly.
Introduction of SDLT seeding relief The transfer of property into a PAIF or CoACS, including ‘seeding’ it with a start-up portfolio, has historically been
charged to SDLT, as has the transfer of units in CoACS. But from April 2016, there is a 100% relief from SDLT on the initial transfer of properties into PAIFs or CoACS, as well as the removal of the SDLT charge on transactions in CoACS units. The key features of the relief are that: bbthe only consideration for the initial transfers of property into the PAIF or CoACS must be units in the PAIF or CoACS bbit applies to transfers in the 18-month period starting with the seeding of the first property, or until other investors are introduced if this takes less than 18 months bbby the end of the 18-month seeding period there must be at least £100m of property made up of either a minimum of 10 non-residential properties and with less than 10% of the value in residential (the non-residential portfolio test), or a minimum of 100 residential properties (the residential portfolio test) bbthere must be a diversity of investors bbSDLT will be clawed back where the conditions cease to be satisfied or where any of the initial investors sell their units within three years.
Effect of relief The Association of Real Estate Funds has said the relief is likely to herald a wave of property funds converting to PAIFs and CoACSs: “Currently, investment in most property funds does not offer
tax-neutrality as tax can be levied more than once. PAIFs and CoACSs allow investors to experience better outcomes.” PricewaterhouseCoopers welcomes the relief and agrees that removing fiscal barriers should encourage further activity in the funds, reducing the need for managers to consider other, more complicated structures. The downside is that there will be tension between the diversity of ownership requirements on the one hand and the clawback provisions on the other. Units will need to be made available to the market, but if seed investors make units available within the three-year period, they will be subject to an SDLT charge. One instance where the clawback is likely to prove a deal-breaker is where an existing fund wishes to convert into a PAIF or CoACS by seeding the new fund and then distribute units to investors; funds should therefore seek advice in such circumstances. The relief also does not extend to properties in Scotland. So it remains to be seen whether the clawback provisions will prove to be a barrier to the sector’s use of PAIFs and CoACS, or to funds’ conversion into them. b Robert Walker is Partner and Real Estate Tax UK Network Leader at PricewaterhouseCoopers LLP robert.j.walker@uk.pwc.com
c
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C OMMERCI A L
commercial
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RICS P ROP E RT Y JO U RN A L
CO M M E R C I A L M EES
Off the starting blocks Emma Mulliner and Louise Kirsten look at how landlords in England and Wales are preparing their portfolios for MEES
T
he Minimum Energy Efficiency Standards (MEES) present significant implications for landlords (see Property Journal September/October, pp.28–29). However, it is not clear how much progress has been made by those seeking to mitigate risk in this regard. This article summarises the findings of a survey of commercial landlords that seeks to establish how they are preparing for the standards. It should be stressed that the results obtained are representative of larger organisations (see Table 1); 44% of respondent landlords owned portfolios of more than £1bn. Despite attempts to include smaller landlords in the survey, no responses were obtained from those with portfolios of less than £1m. Their lack of participation may indicate that they are less familiar with or concerned about the prospect of the MEES and have yet to make significant preparations.
Preparation for MEES MEES could adversely affect a property’s income stream and require capital expenditure to achieve compliance. Planning ahead will thus be critical if investment values are to be maintained. Landlords of all sizes should now, at least, be reviewing their assets to assess current energy performance
Table 1 Participant background information Value of respondent’s property portfolio <£1m
0%
£1m–£100m
20%
>£100m–£500m
23%
>£500m–£1bn
13%
>£1bn
44%
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and establish the extent of exposure to substandard properties. Where necessary, mitigation measures should be considered, and existing leases may need to be reviewed to determine liability for bringing properties up to standard. But how much progress is being made in practice? In order to understand the current level of preparation, various steps that could be taken ahead of 2018 were listed, and commercial landlords indicated whether they currently engage in these on “all stock”, “some stock”, or “will be doing so in the near future” or “not on any stock” (see Figure 1). The level of preparation was varied, although most landlords appear to be actively engaged in some activity. In particular, landlords are becoming aware of the sustainability profile of their stock. The survey found that 77% of landlords are checking energy performance certificates (EPCs) for either all or some of their assets, and 72% are checking EPC recommendations to establish the cause of low ratings. In anticipation of more stringent MEES in the future, 57% of landlords are assessing risk exposure to E-rated buildings for at least some of their assets. It is also possible that this is being considered, as existing EPCs may not be accurate thanks to variations and updates in assessment methodologies. Once risk exposure and necessary improvement works are established, the costs and timing of works need to be assessed. More than half of landlords are undertaking cost–benefit appraisals to assess the financial implications of upgrading some or all stock, and a further 27% are considering doing so in the future. For at least some of their stock, 59% of landlords have started putting plans in place to improve energy efficiency where assets are F- or G-rated. In terms of timing works, 85% of landlords are proactively considering options to improve energy performance when repairing, upgrading, altering or during routine maintenance, and 60% are currently taking advantage of voids
The recovery of costs for energy efficiency improvement works through service charges could be contentious or lease breaks to make improvements before 2018 for all or some stock. Sixty per cent of landlords are also using an asset management strategy to seek to improve operational performance on all or some stock. However, decisions to dispose of poorly rated assets, particularly those where upgrades would not be viable, are less prevalent at present, with only 35% of landlords having already considered this. It is likely that this level will increase as 2018 approaches. MEES are having an impact on some landlords’ investment decisions; 74% are beginning to consider the MEES when making acquisition decisions, and 65% are building in the cost of necessary works for some or all new property when buying. A further 15% are thinking about building in such costs in the future. MEES will undoubtedly prompt fresh energy efficiency issues for both new and existing leases. The survey asked landlords to indicate their level of preparation with regard to lease provisions for managing MEES risk ahead of 2018 (see Figure 2, p.22). Respondents could indicate the following engagement levels: “yes”, currently engaged; “no”, not engaged, “but will be doing so in the near future”; or “no”, not engaged. In terms of altering leasing provisions before 2018, many landlords were mainly considering making changes in the future, with fewer having actually already done so. Preparations already made primarily
C O MME RCIAL MEES
Figure 1 Landlord preparations: management and investment
Using EPC ratings to assess energy performance of assets
33%
Checking EPC recommendation reports to establish the cause of any low ratings
26%
Where EPC rating is, or is at risk of being, F or G, putting an energy efficiency plan in place to improve the property
28%
Using an asset management strategy to improve operational performance e.g. behavioural change, amending control set points
Taking advantage of voids or lease breaks to make energy efficiency improvements before 2018
Considering alternative use or disposal for premises which have unviable solutions for improving EPC ratings
10%
20.5%
25%
10%
20%
45%
20%
33%
35%
10%
30% 31%
5%
25%
27%
41%
26%
15%
15%
43%
Considering the requirements of the MEES when thinking about acquiring new property investments
13%
46% 40%
25%
18%
15%
40%
Not on any stock
5%
20.5%
31%
20%
10%
Assessing risk exposure to E-rated buildings, in anticipation of possible future policy
46%
39%
Undertaking cost‑benefit appraisals to assess the financial implications of retaining and upgrading buildings or disposal strategies
Building in the cost of necessary MEES works when buying new property
44%
20%
Proactively thinking about improving energy efficiency when repairing, upgrading/altering or during routine maintenance
Will be doing so in near future
On some stock
On all stock
15% 20%
16% 20% 23%
Engagement level (% of respondents) concerned landlords specifying the nature of tenant improvement works so that they will enhance rather than diminish energy efficiency, with 41% suggesting that they already do this, as well as including green lease covenants in new leases, which 38% of landlords already do and a further 44% intend to do in future. The recovery of costs for energy efficiency improvement works through service charges could be contentious, particularly in the absence of clear wording, because tenants are generally liable for the cost of repairs but not improvements. Thirty-one per cent of landlords have begun inserting so-called ‘sweeper’ provisions in an attempt to cover for additional costs relating to environmental works. Depending on the nature and wording of the particular sweeper provision, there may be a case for suggesting that the cost of energy-efficiency improvement works designed to ensure compliance with MEES falls under such a provision
and is thus recoverable. However, this is likely to be challenged by tenants and lead to disputes between parties until case law sets precedents. A small proportion of landlords have begun inserting lease clauses regarding the maintenance of certain EPC ratings by tenants. Twenty per cent of landlords currently include reinstatement clauses that require tenants to return property with the same EPC rating as at lease outset, but a further 26% are considering doing so in the future. Only 18% of landlords already insert clauses that penalise tenants if they do not maintain a certain EPC rating; more
Landlords are becoming aware of the sustainability profile of their stock
than half of landlords surveyed are not considering doing this. Fewer landlords – 13% – currently incorporate an EPC disregard in rent review clauses, such as “any detrimental effect by the tenant on the EPC rating is disregarded” or “any effect upon rent arising from an EPC rating is disregarded”, but a further 54% are considering this for the future. Aside from new leases, 28% of landlords are currently making amendments to existing leases to satisfy the MEES, while a further 46% are considering this. A very limited number of landlords – just 5% – are presently in the process of renegotiating existing leases prior to 2018 to try to avoid the implications of the MEES, but 59% are considering doing so.
Implications for the market The survey also collected information on landlords’ level of agreement with a number of statements related to the impact the MEES may have on market demand (see Figure 3).
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CO M M E R C I A L M EES
Figure 2 Landlord preparations: lease provisions
Incorporating ‘green’ covenants in new leases
38%
Making amendments to existing leases to satisfy MEES requirements
26%
28%
Inserting a reinstatement clause requiring tenants to return property with same EPC rating as lease outset
20%
26%
Inserting a lease clause that penalises tenants if they do not maintain EPCs at a specific level
18%
31%
31%
54%
51%
31%
20%
13%
Incorporating a disregard in rent review clauses
18%
46%
41%
Including a ‘sweeper’ provision in service charge to cover for additional costs relating to environmental works
No
44%
28%
Encouraging tenants to use materials/technology that would benefit energy efficiency when undertaking any works
Renegotiating leases before 2018 to seek to avoid MEES until a later date
No, but will be doing so in the near future
Yes
49%
54%
5%
33%
59%
36%
Engagement level (% of respondents)
n
While robust evidence of price premiums for sustainable property is not yet firmly established in the UK, 74% of landlords feel energy-efficient buildings will increasingly have a competitive edge in the marketplace. Coinciding with this, 70% of landlords think there will be increased difficulties selling properties with low EPC ratings, unless upgraded, after 2018. However, fewer than half of the landlords are concerned that substandard buildings will result in a
‘brown discount’ as 2018 approaches, and buildings will subsequently face obsolescence. Finally, despite warnings of penalty fines for non-compliance with the MEES, 64% of respondents believe that many landlords will continue to let substandard properties after 2018. While there is no definitive evidence for a general ‘green premium’ with sustainable property, it is clear that there will potentially be a negative impact on the value of assets that do not fulfil MEES requirements – primarily due to
income lost as a result of inability to let non-compliant property, the capital expenditure of having to upgrade it and financial penalties. With the implementation of the MEES less than two years away, there is only a brief time frame for property owners with assets subject to the regulation to seek to minimise risk and maintain investment values. It is clear that some progress is being made in this regard, but for those who are yet to begin forward planning it is important to act now. C
Figure 3 Impact of the MEES on demand in the market Energy-efficient buildings will increasingly have a competitive edge in the market place
Dr Emma Mulliner is a senior lecturer at the Department of the Built Environment, Liverpool John Moores University e.k.mulliner@ljmu.ac.uk
There will be increased difficulties selling or leasing properties with low EPC ratings after 2018, unless upgraded
Louise Kirsten is senior lecturer at the Department of the Natural and Built Environment, Sheffield Hallam University l.kirsten@shu.ac.uk
Buildings that do not have at least an E-rated EPC will result in a ‘brown discount’ approaching 2018 Buildings that do not have at least an E-rated EPC will face obsolescence Many landlords will continue to let substandard properties after 2018 Strongly agree/agree
22 NO V EMBER 2 016
0%
20%
40%
% of respondents
60%
80%
Related competencies include Landlord and tenant, Leasing/letting, Sustainability
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23
RICS P ROP E RT Y JO U RN A L
CO M M E R C I A L FAC I L I TI ES M AN AG EM ENT
Self-awareness is the key to making your FM practice strategic. Dan Weiss offers a model for your service
Getting on the right path
F
or some time now, there has been a recognition that facilities management (FM) has not been living up to its potential; much is written about how the profession should be more strategic and could have a greater influence on the success of organisations. Being strategic requires a move beyond reactive management and taking a planned, standardised and good-practice approach to service delivery. The continual review of operating plans, service suitability, delivery processes and performance will bring FM closer to optimum performance, benefiting operations across the organisation. Some sceptics think this is simply rhetoric – a tactic to combat supply-side commoditisation and manage the persistent problem of attracting talent into the discipline. There is no doubt that the prevailing perceptions of FM are that it is the poor cousin of the more ‘glamorous’ sectors of real estate and capital construction. But whether it is rhetoric or not, more strategic approaches to service delivery are a way to add value and elevate operating margin for a business that is suffering from commoditisation and a
Develop
vicious cycle of underinvestment and falling service quality. It is also true that a lower value is assigned to a facilities manager than to a project manager or a building surveyor. Attracting, retaining and developing high-calibre people is a constant barrier to FM’s strategic operation and perception as unimportant. This shortfall in the way FM’s value is perceived is matched by an internal perception of a low-value status quo. One well-known model demonstrating this is the Johari Window (see Figure 1). This models self-knowns and unknowns against the knowns and unknowns of others. Applied to an organisation’s FM delivery function, it makes clear that in order to expand the area of transparency – and therefore commercial value – external communication must be matched by increased internal awareness. The importance of self-awareness in making change is clear; self-assessment is therefore key in establishing a successful FM strategy.
The development cycle Knowing how to advance your FM arrangements is analogous to personal development. It is never the same for two individuals, and the process is neither generic nor linear. Developing awareness
Known by self (FM function)
Selfassessment
Open area
Unknown by self (FM function)
Blind area
Demonstrate value
24 NO V EMBER 2 016
Plan
of yourself, of yourself in the team and of yourself as a leader are steps that need to be taken in fulfilling the strategic potential of FM: you must understand where your FM operation stands against its potential (self), then appreciate FM’s potential contribution to your business (yourself in the team) and, finally, consider how FM can drive and develop the business (yourself as leader). Accessing FM’s strategic value is never the same for heads of property or FM directors at two different organisations – the context, ambition, contingencies, constraints and opportunities are specific to every business. That said, whether you are buying out your joint-venture partner, procuring the next generation of FM contracts or putting a new landmark building into operation, there are tell-tale signs that organisations can use to gauge whether or not they are on the right path to realising the strategic potential of their FM operations. As with personal development, plans are required to move forward through these phases and enable FM to fulfil its potential. This development cycle (see Figure 2) must be periodically repeated in order for it to become a culturally embedded method for ensuring continuous improvement.
Asking the right questions
A version of the Johari Window
Unknown by others (wider organisation)
Development cycle Assess
Figure 1
Known by others (wider organisation)
Figure 2
Hidden area
Unknowns
Even though all FM arrangements are unique, reflecting the fact that no two client organisations are the same, a common framework can be applied to develop a strategic service. As ever with self-assessment, understanding where you are in relation to that framework depends on asking yourself the right questions – questions that challenge you to think about how both you and others see your FM organisation, and questions that require you to provide evidence of your response. Figure 3 identifies the key steps in accessing FM’s strategic potential. These
C O MME RCIAL FACI LI T I ES M A NAG EMENT
Figure 3 Drive business improvement
Do you have an effective continuous improvement process and an embedded culture of innovation?
Do you have lifecycle cost models that drive optimal investment and maintenance decisions?
Would your business say FM provides value for money? Do you have an appropriate service change model?
Is FM integrated into the real-estate, capital programme and energy functions?
Is FM part of the corporate real-estate strategy? Can you demonstrate how FM contributes to corporate goals and objectives?
Do you have a single process model and delegation of authority?
Do you have a single data structure and taxonomy? Do you have the right IT and computer-aided FM?
Do you have an effective audit regime? How do you provide yourself with compliance assurance?
Can you measure and report performance? Can you manage and control change?
Do you have maintenance plans for all of your assets? Do you comply with your legal obligations?
Do you have a defined scope of services and appropriate service levels?
Do you have balanced supplier relationships that achieve value for money?
Are you proactively managing the provision of your FM services?
Optimise
Align with the business
Create control and transparency
Do the basics right
Do you have a record of all of your properties and assets?
Is FM driving improvement in all of the organisation’s production factors? Does FM work with the IT and HR functions to improve productivity?
Do I have the right people in the right roles, doing the right things?
Strategic FM pathway: asking the right questions
Do I have the right strategies, plans and can I manage change? are: doing the basics right; ensuring control and transparency; aligning the FM operation with the business; optimising asset and space performance; and driving business improvement. For all of the key steps, having the right people, the right strategies and the right plans is critical. There are in each key step a number of questions that can be asked about the fundamental components for a successful strategic FM operation. Each is suffixed with the instruction “… and prove it”, encouraging the respondent to be accurate and objective. The answers to these questions will indicate the maturity of an organisation’s FM arrangements.
Doing the basics Clients can often think that they rate well in the ‘business alignment’ assessment by having a mission statement and strategy plan for FM that accords with the corporate estates strategy. Unfortunately, the reality for many is that there are some significant shortcomings in their building blocks, which will prove to be critical to the FM operation. For example, asset data is often misunderstood as being better than it actually is. Once this misconception is discovered, a lack of confidence in the FM function follows, with questions asked about its ability to ensure critical
service outcomes; for example, statutory maintenance compliance. Trust in the accuracy of reporting and effective management of performance is therefore undermined. The desire to have FM contribute meaningfully to investment decisions quickly evaporates. Clearly, this situation must be avoided when strategic contribution to the organisation is the ultimate objective. For FM to be considered strategic, it must provide the basics. Credibility grows from confidence in a core data source that is known to be accurate and that enables transparency, control and decision-making. By consistently providing this, the FM function will give itself both credibility and opportunity to contribute more strategically.
by failing to manage change effectively. It needs to ensure the development is sustainably implemented and the benefits of the investment realised. Above all however, as with any personal development review, the first step in testing the hypothesis of how strategic FM is in your organisation is to become self-aware in the context of what can be achieved. C
Dan Weiss is a director at Faithful+Gould and leads its strategic FM consulting business
Moving forward The strategic FM pathway (see Figure 3) models a successful development process, starting with knowing where you are and what it is possible to achieve. The actions required for change will, however, be specific to each organisation. This is where solutions need to be designed and planned by specialists that know, in detail, what ‘good’ looks like and what it means for the organisation’s progress. After all the hard work, the FM team should not fall at the final hurdle
See the guidance note Strategic facilities management, 1st edition www.rics.org/strategicfmguidance
Related competencies include Analysis of client requirements, Corporate real estate management, Strategic real estate consultancy
NO V E MBE R 2 0 1 6 2 5
RICS P ROP E RT Y JO U RN A L
CO M M E R C I A L P U B L I C S EC TO R
Assets fit for the future Lawrence Melton and Charles Dilley introduce an RICS report on the challenges facing public-sector asset managers and approaches being taken
A
All around the world, public-sector asset management (PSAM) professionals face similar challenges. These stem from advances in technology, a mobile workforce, and 50 years of growth in government real estate – resulting in large asset portfolios with major maintenance backlogs – unreliable data sets and aggressive budget cuts. Consequently, many assets are becoming expensive, underused liabilities instead of valuable resources. Today, PSAM leaders are looking for new strategies to preserve these public assets, manage risk, make better use of technology and retain and develop talent for the future health of the sector.
The search for solutions As a global leader in asset management standards and best practices, RICS set out to organise these professionals to work together on solutions. During the first quarter of 2016, we arranged a series of roundtable sessions to 26 NOV EMBER 2016
across PSAM and provides recommendations on next steps. While these findings are too extensive to cover in full, this article highlights some of the key issues.
Systemic issues
government-wide policies on asset management practices. One of the broad transformations is the adoption of policies to reduce real-estate footprints. For years, agencies increased the number of facilities in their portfolios or sought long-term leases in order to get newer space in downtown locations. But as mobility became easier, these spaces are increasingly underused. Recent efforts address this through accelerated asset disposal processes, reforming lease practices and increasing use of government-owned property portfolios. But these only represent a first step towards the changes that PSAM professionals want to make across the sector.
hear directly from PSAM organisations around the world. Our research team ran seven roundtable forums, each targeting a specific region of the globe. Participants received questions in advance and arrived ready to engage with our research team. This research focuses on four strategic core disciplines. 1. Governance: this refers to the possibility of establishing regulations, policies, and standard operating procedures that guide the way that organisations manage system investments to drive business performance. 2. Standards: industry standards and best practice refer to asset management benchmarks that have been adopted by the sector. 3. Business practices: this refers to the actual practice in the functional areas – physical assets, real estate, portfolio management, facilities and operations management, property supply and logistics – across the various government regions. 4. Systems: this refers to the business systems – software, sensors and hardware automation – that support asset management.
PSAM leaders emphasise an urgent need to implement global strategies to manage their portfolios better. Issues that contribute to this urgency are tighter budgets, underused assets, sustainability policies, skills gaps and the effect of technology on how they manage and use property. Participants from all regions expressed these common frustrations, but also shared encouraging insights and the activities they are pursuing to have greater influence across their enterprise and national government bureaus. In recent years, industry managers have routinely faced budget cuts, higher operating costs, ageing assets, maintenance backlogs, siloed organisations and a lack of governance around decisions. There is a tendency for agency executives to pressure PSAM leaders to spend most of their time on short-term accomplishments before the next election rather than on the 20- to 50-year lifecycle asset plans that would ensure efficiency. Many of the systemic issues require comprehensive strategies, and get passed on to the next administration where the cycle starts over again. Despite these frustrations, a growing sense of urgency across the public sector is giving PSAM professionals more influence over agency- and
Our concluding report, Public Sector Asset Management: Roundtable Report, was published at the 2016 Summit of the Americas in Washington DC. It details a number of systemic issues
Many assets are becoming expensive, underused liabilities instead of valuable resources
Top concerns Our research identified three urgent concerns among research participants, which will require coordinated efforts to overcome: skills gaps, organisational silos and strategic asset management plans (SAMPs). Research participants recognise a skills gap that prevents their organisations from advancing programmes to keep pace with the private sector. High employee turnover among generalists has made long-term training and development difficult. As a result, adoption of new technologies and software that would advance data modelling and asset management plan techniques lags behind industry practices. There is a desire to further professionalise PSAM to make better use of advances in automation, sustainability technologies and information modelling; however, many
C O MME RCIAL P UBLI C SEC TO R
agencies lack the commitment to see these programmes through to fruition. Training and education also fail to gain traction as a result of structural issues. Government asset management organisations tend to be separated from other departments in a bureau, and are viewed by government executives as service providers rather than partners in the bureau’s core mission. Their influence lies at the periphery of the enterprise, which leaves them frustrated and with little say over operational policies that could help agencies be more efficient with their resources. For example, decisions on IT expenditure often happen at departmental level and so miss out on opportunities for large-scale solutions that might work for multiple organisations and collectively save money. This lack of communication often results in unproven software stacks that are not compatible with each other, and so unreliable data is trapped in spreadsheets rather than being readily accessible in a well-organised enterprise data warehouse. It ought to be useable across the organisation instead of
remaining stuck in department data silos. This can be particularly difficult for PSAM professionals who rely on overlapping systems to track rents, work orders, tenants’ work locations, workspace drawings, utilities, security clearances, facility information and financial transactions. These databases have a tendency to accumulate conflicting information that leaves doubt lingering over their authority to inform important decisions across the enterprise.
Getting strategic Nowhere does this affect PSAM professionals more than in the pursuit of accurate lifecycle cost models and SAMPs. A global approach to SAMPs requires reliable data to inform top-level decisions and fill the gap between agency objectives and tactical asset management. The first step is to consolidate systems and implement standards in data collection practices: divergent systems lead to conflict between data fields and to naming conventions that erode the integrity of the data and then require laborious processes to correct.
Second, organisations must establish SAMPs that are routinely updated and relevant to ongoing operational decisions. Issuing an annual “state of the portfolio” report does not constitute a SAMP. Organisations should think of it instead as a strategic road map to guide their programmes towards common objectives for the future state of the portfolio. Last, PSAM professionals must use SAMPs to institute measures programmes that track progress and help make asset performance clearer across their enterprise; this increased visibility is achieved by relating asset performance to an organisation’s mission, whether through sustainability goals, efforts to reduce the real estate’s footprint, or linking total lifecycle cost management to budget performance measures. Organisations are being creative with some of these measures by reporting them on a per-tenant basis to help make the information more engaging and relevant to employees. Others use digital signage or online dashboards to display progress and promote awareness of these strategic efforts. By making this information accessible to tenants, they understand how their behaviours have an impact on asset performance, and asset management goals become transparent rather than the responsibility of an asset management department. It also makes asset performance visible to stakeholders across the enterprise and influences their decisions, so they are more conscious of how organisational decisions affect that performance. One participant in the research said it best: “We are trying to change our strategic mindset from knowing what can be done towards education and influencing what should be done.”
PSAM organisations are working hard to control costs and optimise returns for their public stakeholders. However, the surge in public-sector real-estate ownership has put many of these institutions at risk of losses, as maintenance costs continue to rise. These pressures are compounded by dramatic changes in the way people conduct business remotely, by budget cuts and by a demand for more sustainable practices. To help agencies succeed, asset management strategies must consider the organisation of those agencies and of government bureaus, then use this information to map where functions, systems, activities and data elements can be integrated. Efficiency at the portfolio level requires agencies to work together and support each other with relevant, timely, practical information, common standards and training specific to their objectives. The key to developing a successful strategy and advancing PSAM practices is the ability to manage information flows and provide analysis to support long-term investment decisions that top-level executives can use to shape policy and provide value to the public. C
Lawrence Melton FRICS is CEO and President of the Building People lawrence.melton@ thebuildingpeople.com Charles Dilley is Managing Director at the Building People charles.dilley@ thebuildingpeople.com
Related competencies include Asset management, Corporate real estate management, Property management
NO V E MBE R 2 0 1 6 2 7
RICS P ROP E RT Y JO U RN A L
CO M M E R C I A L D I GI TAL C U R R E N C Y
Could blockchain change the face of property transactions, asks Ragnar Lifthrasir?
Chain reaction
T
he internet made it possible to transfer information, quickly, cheaply and paperlessly without intermediaries. Similarly, blockchain technology offers the same advantages for transferring value. You use the internet to transfer words and pictures; you use blockchain platforms to transfer money and assets. Blockchains comprise two elements: 1. distributed ledger: shared and synchronised data that is spread geographically across multiple sites, countries and/or institutions 2. cryptocurrency: a digital token with monetary value. When people use the term “the blockchain”, they are most often referring to Bitcoin, although sometimes to Ethereum and occasionally other smaller cryptocurrencies. In any case, blockchains can offer the following advantages when making real-estate transactions: 1. disintermediation 2. fraud prevention 3. enabling “money 2.0” 4. smart contracts.
Disintermediation Real-estate transactions can be cumbersome, opaque and expensive because of intermediaries; in the USA, these include brokers, government property databases, title companies such as insurance and property databases, escrow (third-party) companies, inspectors and appraisers and notaries public. The line-up will be similarly lengthy in most territories. Paying multiple parties, waiting for and depending on them causes much frustration with property transactions; Bitcoin, Ethereum and others cut out 28 NOV EMBER 2016
these intermediaries. Currently, these are necessary because they hold information that others cannot access, or they have skills or licences that are needed in the existing market. Public blockchains in contrast provide a distributed database in which anyone can record information without needing permission to do so and without it being censored, and which anyone can access. To consider title: US county recorder offices and title insurance companies maintain various databases of property ownership records, including the address, previous and current owners, and various encumbrances such as mortgages. Before the advent of the internet, the government and title companies were necessary to verify and record property data. How can blockchain replace them? As Jason Ray, Chief Customer Officer at Indiggo, explains: “Blockchain will enable every property, everywhere, to have a corresponding digital address that contains occupancy, finance, legal, building performance and physical attributes that conveys perpetually and maintains all historical transactions. “The data will be immediately available online and correlatable across all properties. The speed to transact will be shortened from days, weeks, or months to minutes or seconds.” Currently, the title to a property is a piece of paper. To transfer a property in the USA, you fill in the blanks on a deed, sign it with a pen, drive to a notary who puts their rubber stamp on it and then deliver it to the county recorder’s office to be placed in their database. Instead of a paper title, Bitcoin or Ethereum can create a digital title; this is a cryptographically secure token that can be transferred as effortlessly, quickly and cheaply as an email.
Before email, you needed envelopes, stamps, trucks, sorting facilities and postal workers to organise and distribute the mail if you wanted to send a letter. Once people can easily verify property records themselves and transfer a title digitally, brokers, escrow companies, title insurance companies, county recorders and notaries public will go the way of the post office.
Fraud prevention Real-estate fraud is practised at every level of the market, and is accomplished by forging paper documents such as driving licences, bank statements or deeds. Where does Bitcoin come in? Don Oparah, the CEO of Venture Aviator, comments that: “By offering a 100% incorruptible resource, whereby the sender and recipient of funds is logged, and where ‘digital ownership certificates’ for properties are saved, the blockchain would effectively make forged ownership documents and false listings a thing of the past. “The unique digital ownership certificates would be almost impossible to replicate, and would be directly linked to one property in the system, making selling or advertising properties you do not own almost impossible.”
“Money 2.0” Bitcoin is a digital currency; Ethereum has its “Ether” token. Unlike the dollar or euro, blockchain currencies are not paper that is later represented by software but are entirely electronic from the outset. The power of software is its programmability; the power of cryptocurrency is you can program it to escrow and distribute itself. With fiat currency – that is, conventional, non-cryptocurrency – you need humans and banks. Image © Shutterstock
C O MME RCIAL DI GI TA L CUR R ENC Y
Using a smart contract Drew Hinkes, a lawyer at Berger Singerman and a digital currency advocate, observed in 2014 that, at present, a real-estate transaction works in the following way: “Party A and Party B … enter into a contract that requires Party A to pay $200,000 to Party B in exchange for Party B agreeing to convey title to Party B’s condominium unit to Party A on receipt of payment. “If Party A pays ... but Party B refuses to convey title, Party A is required to hire an attorney to seek specific performance of that contract, or to obtain damages. The determination of the outcome will be made by a third party: a judge, jury or arbitrator.” But Hinkes explained that, in contrast, “using a smart contract … avoids the potential for one party to perform while the other refuses or fails to perform. Using a smart contract, Party A and Party B can agree to the same transaction, but structure it differently. In this scenario, Party A will agree to pay $200,000 worth of virtual currency to Party B, and Party B will agree to transmit the title to the condominium in a specialised type of coin on the blockchain.”
When someone rents an apartment, the landlord takes a security deposit in case the tenant damages the property. By law, they are supposed to keep those funds in a separate escrow account and not spend it. Once the lease ends, the tenant has to rely on the good faith of the landlord to have the deposit returned. But if you have ever attended a small claims court, you will know how frequently this system fails. Bitcoin has a function called multisignature, in which you can use your private key to approve the transfer of digital currency to another person. With this “multisig” option, you can carry out a transaction with three private keys, where at least two are required for spending. Bitcoin can be used to create a programmable escrow. Instead of sending the landlord’s dollars to a bank account, the tenant and landlord together create a multisignature transaction. Each have a private key, while a third is given to a neutral third-party arbitrator. For the security deposit to be spent, two of the
He continued: “When Party A transfers the virtual currency to Party B, this action serves as the triggering event for Party B, which then automatically sends the specialised coin, signifying the title to the condominium at issue, to Party A. The transfer is then complete, and Party A’s ownership of the condominium is verifiable through a publicly available record on the blockchain. “Structuring this transaction as a smart contract ensures that the transfer occurs as soon as funds are received, and results in a publicly available, verifiable record of the transfer. Because the contract [is performed] automatically based on the predetermined rules agreed to by the parties to the contract, there is little risk of fraud, and virtually no need for external measures to enforce performance of the agreement. “Thus, no specific performance action would ever be necessary to compel the transfer after payment is made because the coin, which represents title to the condominium, is automatically transferred, and the transfer is automatically published to third parties on the blockchain.”
three people need to use their private key. The funds are locked in crypto-escrow for the duration of the lease. The tenant will almost always want their deposit back, and so they will approve the transaction with their private key. When the lease ends, if the tenant did not damage the property, the landlord uses their own private key to release that Bitcoin deposit. If they did damage the property, then the landlord will send evidence to the arbitrator, though the tenant has an opportunity to respond. After the arbitrator hears both sides, they will use their private key to send the deposit to the successful party. The Bitcoin can be sent instantly, 24 hours a day, seven days a week. There is no need to wait for a letter or an email, or any need to deal with routing and account numbers and banking hours for a wire transfer. By using Bitcoin, real-estate escrows can be carried out more securely, quickly and cheaply. Bitcoin is also censorship-resistant. China attempts to maintain tight control
of its currency, the Renminbi, and each citizen is restricted to transferring the equivalent of $50,000 outside the country a year. However, this year, Chinese families made up the largest group of overseas homebuyers in the USA for the first time, showing the potential for a technology that would enable such transactions to be made easily and safely.
Smart contracts Blockchain protocols such as Bitcoin and Ethereum have the ability to perform “smart contracts”, a concept that began with Nick Szabo, a pioneer of blockchain and cryptocurrency. He gave the example of a vending machine that releases an item after a selection is made and the correct value is deposited. The goal of a smart contract is to reduce the need for humans to process and verify an agreement. A software protocol automates and self-executes an action when certain conditions are met. The box, left, gives an example of how a smart contract could be used in a property transaction.
Summary Wall Street is already using Bitcoin technology to issue stock and transfer private securities, the International Blockchain Real Estate Association has more than 900 members, and ever-increasing numbers of property professionals are looking to get connected. It is time for the real-estate sector to wake up to the cost savings, efficiencies, fraud reductions and conveniences of the technology. C
Ragnar Lifthrasir is the Founder and President of the International Blockchain Real Estate Association ragnar@ibtcrea.org
www.ibtcrea.org www.rics.org/futures
Related competencies include Leasing/letting, Property management, Purchase and sale
NO V E MBE R 2 0 1 6 2 9
RICS P ROP E RT Y JO U RN A L
CO M M E R C I A L G R E EN L E AS ES
A lease of life Sara Wilkinson reports on the increasing popularity of green leases in Australia and the lessons that other countries can learn
T
he city of Sydney’s Lord Mayor Clover Moore announced in December 2015 that its top commercial landlords had cut 45% of their emissions since 2006, saving AUS$30m a year. Sustainable Sydney 2030 is the city’s vision for a green, global and connected city, with a target to cut greenhouse gas emissions by 70% from 2006 levels by the end of the next decade.
Better Buildings Partnerships The Better Buildings Partnership (BBP) is one of several initiatives to help achieve this ambitious target. BBPs, which exist in Canada and the UK as well as Australia, represent a collaboration between property owners, managers and other influential parties, and they play a key role in improving the performance and sustainability of buildings. The Sydney BBP was launched in 2011 with 14 founding members including AMP Capital Investors, the City of Sydney, Lend Lease, the University of Sydney and the University of Technology Sydney (UTS). They have since been joined by organisations engaged in building and property management and by key policy advocates and government departments such as the Green Building Council of Australia, the Property Council of Australia and the New South Wales Office of Environment and Heritage. Collectively, the BBP is responsible for over half the office floor space in Sydney’s central business district. The BBP aims to increase owners’ capacity to promote sustainability across their operations by developing skills and knowledge and harnessing interest. In the medium term, the BBP encourages members to participate in planning and decisionmaking for projects contributing to Sustainable Sydney 2030. The programme is intended to inspire the broader population and built environment sector to lead market transformation, with Sydney serving as a global exemplar of best practice in sustainability for buildings, precincts and urban development. Commercial landlords have an important role to play in improving the energy, water and waste efficiency of Sydney’s buildings. When working to enhance the sustainability of their buildings, landlords face the issue of the split incentive, whereby they pay for improvements to energy efficiency but it is tenants that benefit from lower energy bills. Given this scenario, where is the incentive for the landlord to make any upgrades? The BBP seeks collaborative solutions 30 NO V EMBER 2 016
and initiatives to overcome such barriers, and work to date has concentrated on issues ranging from green leasing and operational waste to green infrastructure and the waste from tenancy fit-out works.
Improving urban resilience Is it possible to build urban resilience and mitigate climate change in commercial properties through the adoption of green leases while adding value to owners’ assets? The answers seem to be yes. A UK–Australian study by the Universities of Oxford and Reading and UTS drew on information from the Sydney Better Buildings Partnership and found that more than 60% of all leases signed in Sydney’s central business district contain green clauses – a fourfold increase since 2009. Green leases explained A green lease establishes a framework for landlords and tenants to achieve and sustain energy efficiency and other sustainability goals during the lease term, with the aim of improving buildings’ economic and environmental performance. Green leases typically include information about: bbwhat environmental measures will be taken under the lease bbhow the parties will collaborate to achieve these measures bbwho will monitor fulfilment of the measures bbwhat ensues if the targets go unmet. Green lease clauses address environmental issues to varying degrees: for example, the lease may make requirements in respect of energy efficiency. While leases have not conventionally included environmental issues, partly because of conflicting landlord and tenant objectives, the research shows how green leases are increasing cooperation on sharing environmental goals between landlords and tenants, acting as a local law that serves to increase environmental accountability and opportunities. Image © Shutterstock
C O MME RCIAL GREEN LEASES
Sydney
Lessons from the research Researchers examined five case studies in Australia and the UK, where green leases were first introduced in 2006, to understand how such leases are applied in commercial offices and retail property. The study found that the leases are a valuable framework for improving cooperation between the parties, which can include the sharing of energy data, targets for improvement and – in very rare cases – costs for building upgrades. Green leases can be applied to both new and existing buildings to improve performance.
Office take-up in Sydney These leases have a higher rate of take-up in the office sector compared to the retail sector in Australia and the UK. In both countries, the adoption of green leases is driven by landlords rather than tenants, although the Australian government and retailer Marks & Spencer are noteworthy exceptions. The Sydney BBP published the BBP Leasing Index in December 2014 to cover office leasing in the central business district, and it shows that green leases made up 15% of all leases in 2009, rising to more than 60% in 2013. Leases from the public register in New South Wales were analysed using the Sydney BBP’s model lease clauses to define ‘green’ terms. Around 500 of 7,000 leases were sampled randomly depending on tenancy size and building quality. Leases were examined for the presence of one of 22 model clauses, and a model lease score was devised. This grading was based on the
Green leases are a valuable framework for improving cooperation between parties
breadth and strength of the lease clauses, the former defined by how much is included in or covered by the clause, and the latter by how binding the clause is and whether the dispute resolution process would be triggered by breaching it. BBP found a fourfold increase in some forms of green leasing between 2008 and 2014, and 27% of standard leases included one or more of the 22 green clauses . Not surprisingly, the top tier of the market has seen higher take-up, with more than 80% of leases demonstrating best practice leasing in 2013/14 in prime stock, and 44% of leases including one or more model clauses. Popular clauses related to cooperation, recycling, waste and consumption. Despite this growth in the numbers of green clauses used, however, clause strength lags. The study’s lead author, Dr Kathryn Janda from the Environmental Change Institute at the University of Oxford, said: “Green leasing is a promising tool that tenants and landlords can use to develop joint environmental actions, with little or no involvement from government. It can foster greater cooperation in shared premises, and help organisations achieve environmental goals. More research is needed to measure the outcomes of this approach.” The study concluded that clauses ranged from ‘light green’, which impose a general duty to work together on environmental matters, to ‘dark green’ ones, which are more ambitious and impose specific environmental rating targets. In Sydney, the numbers of green leases in office buildings has increased quickly; however, parties still hesitate to push for legally enforceable dark green clauses because of fears of heightening the risk of a dispute. Given the influence of the BBP’s members and Sydney’s ambition in respect of meetings its 2030 goals, it is not surprising that take-up here has been good. However, while Australia is leading is the adoption of green leases, it is paramount is to increase adoption of enforceable dark green clauses to enable meaningful change. The property markets in the UK and Australia support BBPs, and the study found that the organisations were key to fostering green lease activities in both countries. The study highlighted several areas for future research, noting there is as yet no international standard for what a green lease is and does. Given the transnational reach of many businesses and organisations, a tiered rating of green leases could be developed that develops more nuanced processes and thresholds for environmental ambitions, outcomes and enforceability, much like BREEAM and NABERS have for green buildings. In this way, greener leases can be spread to other markets, inspiring others to adopt best practices. C
Janda, KB, Bright, S, Patrick, J, Wilkinson, S, and Dixon, T. (2016) ‘The evolution of green leases: towards inter-organisational environmental governance’, Building Research and Information 44.5–6. http://bit.ly/29OgT9U www.betterbuildingspartnership.co.uk www.betterbuildingspartnership.com.au
Related competencies include Landlord and tenant, Leasing/letting, Sustainability
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CO M M E R C I A L C O -WO R K I N G
enting out desks in a communal office space with shared facilities – referred to as “co-working” – is an increasingly popular choice, with a recent Cushman & Wakefield report revealing a boom in such locations. London now offers more than 800 choices, reflecting growth at a rate of 10% per year, with many of these located in dynamic former warehouses or factories rather than a traditional office floor in a tower block. Compared to a conventional landlord and tenant relationship, the model allows a high degree of flexibility as agreements are generally short-term, in the order of weeks or month-to-month arrangements; a month’s notice is typical. There are also co-working offerings to suit most budgets, enabling businesses to get operations off the ground without delay or commitment to long-term liabilities. An added benefit is the sociability of a co-working space – many start-ups and small businesses appreciate the value of being able to collaborate and cooperate with those who have similar values. Large corporations also recognise the advantages of the flexibility for accommodating short-term project teams for comparatively low fixed costs, and the corporate sector has identified the benefits of rubbing shoulders with dynamic start-ups.
Co-working v serviced offices licences or leases In a traditional serviced office environment, rooms or suites are made available to occupants and the occupant will have exclusive use of that space. In a co-working space, on the other hand, all the available space is likely to be shared, with “members” rather than “occupants” having a right to use a given number of desks or amount of space for a certain number of people and hours over a specified period. For the property owner or manager, co-working can be more efficient. The number of memberships for a co-working space will exceed the available number of desks on the basis that not everyone will, or indeed can, use the space at the same time. While short-term arrangements are possible, a business taking a licence or sometimes a lease on serviced offices would traditionally be locked into a 32 NO V EMBER 2 016
Come together Co-working spaces are increasing in number and attracting major players as well as start-ups. Rachael Rigamonti and Guy Wilmot offer legal advice for landlords longer-term arrangement, with leases lasting typically for at least three years, allowing the property owner to keep the tenant on the hook for rent and other liabilities for an extended period. While offering certainty for businesses with an established plan for the immediate future, as well as control over the space and how it is used, it also presents a greater financial risk. A landlord is keen to pass liabilities on to a tenant, so the latter is always well advised to carry out full due diligence – they need to negotiate the best position possible and be aware of the risks, costs and limitations of their licence or lease. The cost to the tenant of taking a lease may ultimately amount to less on a per-desk-space basis when compared with a co-working membership arrangement, but they need to balance this with the significant investment of time and money at the outset, both in terms of negotiating a bespoke lease Image © iStock
arrangement as well as the administrative burden of sorting telephone lines, utilities, internet, contractors and so on. There is also the ongoing responsibility for the building’s upkeep, which will divert the user’s attention from their core business. Co-working tends to offer a simple and clean arrangement with no maintenance obligations for occupiers, as well as low or no legal costs when compared to negotiating a lease. Although there is no reason that the arrangement cannot last a long time, its flexibility prevents a user paying for space and facilities that are not required at particular times.
Pitfalls to bear in mind Typically, an agreement, entitling a member to non-exclusive rights to use an amount of space with specified benefits will be drafted in favour of the provider, with little or no room for amendment. Occupiers should tread carefully, keeping an eye out for hidden charges and
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unfavourable terms in the small print; however, reputable providers should provide variable pricing structures based on a range of additional services on the basis of a no-hidden-costs policy. Ultimately, there is little security, and this is unattractive to a business that requires a consistent base from which to work or the need to brand or mark their working spaces.
Approaching agreements as an owner Operating a co-working space entails much more hands-on management, and more developed businesses may need more permanent use of space. Members may expect a programme of events, for instance, such as evening socials, talks and presentations. The long-term income stream generated by offering co-working space is perhaps less certain than a long lease to a tenant with a good covenant strength. This will be a particular issue where a lender is involved. A robust co-working agreement prevents any user gaining security of tenure, which would reduce the market value of the property and restrict what the owner could do with it. To avoid this, such an agreement by its very nature should not allocate any particular area to a user. Where a lender is involved it will likely require strict control over the form of agreement and any ability to vary it, so as to minimise the risk of inadvertently granting security of tenure. Where the landlord itself has a lease, that document will need to cater for such flexibility of use. A sophisticated arrangement can allow the superior landlord to share in the risk of occupancy levels, with a turnover rent system based on the income generated.
Planning law Mostly occupiers will all fall under the same use class in planning law, authorised by the original permission. However, there will sometimes be occupiers of parts that have a different use, so an owner will need to consider whether the existing permission is wide enough to cover this. If this is not the case, options include applying for temporary permission where the use is likely to be controversial, or even relying on permitted development rights should they be applicable – they are now very wide, even more so than they were a few years ago, so ought always be
checked. If the property is new and the owner’s business model is for shared use space then flexibility should be sought in the planning application to minimise the need for variations as far as possible.
Confidentiality and data protection An attractive co-working environment will usually contain considerable space for occupants to interact directly. As there may be no defined space set aside for individual businesses, the risks of information or data being disclosed by one member to another are greater than in a traditional office. While many members’ businesses would be more than happy to share some information about their technology, operations and intellectual property with others – indeed, this is seen as one of the key benefits of these kinds of arrangements – there will usually be other information such as trade secrets or sensitive intellectual property that they wish to keep confidential. Issues Personally identifiable information held by members about employees, customers and so on will be subject to data protection regulations. This means that members who hold personal information, which is likely to be most of them, will be subject to, among other things, a duty to keep personal information secure and not disclose it without the consent of the data subject. An operator of a co-working space should be aware of these obligations. The risk is that, as with confidential information, sharing physical space could lead to the unwitting disclosure of personal data. To an extent, this can be dealt with in the terms of use or membership agreement for the co-working space. One relatively straightforward step is for these to include a requirement that members respect the confidentiality of information that relates to other members and to their staff, customers, guests and so on. The relevant term could start with a presumption that information is confidential unless it is not intended to be or it is in the public domain. There are challenges with using confidentiality clauses in the membership agreement. Obligations are not binding unless confidential information is specifically subject to them and “identifiable” as such. Including a
confidentiality term in the agreement is one way to impose this obligation, but the information does still have to meet the “identifiable” benchmark. Purely as a matter of good practice, policies and guidelines for a co-working space should encourage members to use non-disclosure and other confidentiality agreements before communicating particularly sensitive information to each other. Nonetheless, these agreements can be difficult to enforce. Online and offline security Steps should be taken by the owner to ensure any IT infrastructure provided is secure. In particular, the wifi provided should meet the highest level of security standards consistent with a useable system. Generally, co-working providers avoid offering shared equipment, which presents an inherent security risk, and instead operate on the basis of “bring your own device”. Guidelines and policies should emphasise the importance of members ensuring that they do not leave devices on the premises and that any such devices are password-protected. The very nature of a co-working space discourages the use of paper filing and records as the space is generally not available. Accordingly, the membership rules or guidelines should discourage paper filing and instead promote secure electronic filing. To the extent that a member errs in leaving sensitive paper materials in a co-working space, confidentiality terms in the membership or user agreement should help protect it. Members should also be encouraged to remove sensitive information from whiteboards and other shared collaborative resources. C
Rachael Rigamonti is Partner in the Commercial Property Group and Guy Wilmot is Partner in the Corporate and Commercial Group, at Russell-Cooke rachael.rigamonti@russell-cooke.co.uk guy.wilmot@russell-cooke.co.uk
Related competencies include Corporate real estate management, Data management, Landlord and tenant, Leasing/letting, Planning
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A DV E RTI S I N G
Telecoms Forum Conference 24 November 2016 Jarvis Hall, RIBA, London Guiding you through the latest policies, market opportunities and future trends impacting the telecoms sector. Highlights for 2016 include: • Hear more on the much awaited reforms to the Electronic Communications Code and how this will impact key stakeholders. • Understand how the next business rates revaluation which takes place on 1 April 2017 is likely to affect you and what you should be aware of when advising clients. • John Lillistone from Arqiva covers small cells, DAS and their differences in terms of functionality as well as how the cost of coverages is changing.
Book your place online today:
rics.org/telecomsconference
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“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
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 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 3 4 NO V EMBER 2 016
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RESIDEN T I A L
residential
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R E S I D E N TI A L E N FR A N C HI S E M E N T
Anna Favre and Andrew Kafkaris explain why “share of freehold” claims can actually prove divisive
Love thy neighbour
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ases where leaseholders of flats find themselves wilfully excluded from collective enfranchisement claims for the freehold have taken neighbourly disputes to a new level. But there are options available to those shut out of such a claim. The Leasehold Reform, Housing and Urban Development Act 1993 gives “qualifying tenants of flats” the right to acquire the freehold of their building as part of a collective exercise. The procedure is triggered by service of a notice on the landlord and then follows a prescribed route set out in the legislation. Problems arise when a sufficient number of “qualifying tenants” – that is, leaseholding flat owners – have the ability to make a claim for the freehold but choose to exclude certain neighbours. The 1993 act presently offers no remedy for a qualifying tenant who wishes to participate but whose wish is rejected by the other participants in the claim. The disappointed flat owner cannot allege that the freeholder has, in selling its interest, breached the right of first refusal under the Landlord and Tenant Act 1987: collective enfranchisement claims are specifically exempted. Their only recourse is to make a claim for a new lease under Chapter 2 of the act, to be concluded when the collective enfranchisement claim ends. A future option is that they try to persuade sufficient flat owners to join them in making a further collective enfranchisement claim to take the freehold from the existing freeholder. One oddity of the act is that there is no impediment to flat owners mounting a series of back-to-back collective enfranchisement claims seeking to seize control from one another. This has become a common scenario in prime central London properties. Sadly, legislation intended to address this injustice was never introduced. The
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Inexplicably, it is mandatory to invite all leaseholders to participate in a “right to manage” claim, but not in a freehold enfranchisement claim right to enfranchise (RTE) provisions proposed under the Commonhold and Leasehold Reform Act 2002 required the RTE company to invite all qualifying tenants in the building to participate in the claim. It is now clear that the relevant legislation will not be implemented, so the injustice continues. Inexplicably, it is mandatory to invite all leaseholders to participate in a “right to manage” claim, but not the more absolute freehold enfranchisement claim. So what other recourse do those shut out of the process have? Practical suggestions include: bbjoining any tenants’ association for your building: attending regular meetings can give you invaluable insight into potential issues that might trigger a desire to enfranchise collectively bbtalking to your neighbours and expressing an interest in being involved in any collective claim and other joint leaseholder initiatives pursued: communication is vital bbconsidering the motives behind the collective enfranchisement: if it is largely being done to gain management control of the building, then the ostracised leaseholder may benefit from a successful claim to acquire the freehold without the cost and obligations of involvement in the newly formed freehold company – in other words, the
non-participant can ride on the coat-tails of those participating in the freehold purchase and need not comply with the often onerous landlord’s covenants. But what happens if you have a short or onerous lease? The act offers help in the form of the right to a lease extension. This right is conferred on individuals or companies who have owned a long lease of a flat – that is, more than 21 years at original grant – for at least two years, referred to in the 1993 act as qualifying tenants. A qualifying tenant has the right to extend the lease by 90 years and to a peppercorn ground rent, so an onerous ground rent can be eradicated into a more marketable interest – admittedly at a cost reflected in the premium payable to the freeholder. Less well known is the fact that there is no limit on the number of times this right can be exercised. It is possible to extend the lease to 900 years-plus if you want, and for those familiar with the valuation methodology, the cost plummets after the initial 90-year extension. These abstract ideas should illustrate that, with good-quality advice and the right strategy, being shut out of a collective scheme may not be as bad as it first appears. But whatever the outcome, neighbours will continue to fall out. The only solid remedy for that is to be nice to people. R
Andrew Kafkaris MRICS is Director of Bruton Street Management Anna Favre is a partner with Pemberton Greenish LLP andrew.kafkaris@brutonstreet.co.uk a.favre@pglaw.co.uk
Related competencies include Conflict avoidance, management & dispute resolution procedures, Landlord and tenant, Property management
R ESIDENTIA L LEGI S LAT I ON
A stormy passage Jeremy Blackburn dissects the provisions of the Housing and Planning Act 2016
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fter a lot of toing and froing, the Housing and Planning Bill finally made its way through both Houses of Parliament. Many consider the final act to be the product of significant concessions, somewhat controversial and laden with post-enactment regulations. But the act will undoubtedly have significant implications for all professionals working in the residential sector in England and Wales. The large number of regulations made meticulous scrutiny of the bill a difficult task, which means that there is a lot more to consider and further work will be undertaken by Parliament and other stakeholders. However, there are several set provisions that could have lasting ramifications for the housing and planning sector.
Housing It is beyond doubt that the Conservative government used this act to confirm its belief in homeownership. There are copious examples of this, such as the starter homes initiative, the extension of right to buy to include housing association tenants, and the requirement for councils to consider the sale of vacant stock – the latter on a sell and replace basis. The housebuilding industry and first-time buyers alike will welcome these provisions, but there is little in the act to suggest that there will be better conditions for those wishing to downsize or for ‘second steppers’. Starter homes, for example, will have to be new build and will only be available to first-time buyers who are aged under 40. There are other conditions: the dwelling must be sold for at least 20% less than market price, while the total is capped at
RI CS P RO PERTY JOUR NAL
£250,000 outside London and £450,000 in the capital. Owners will not be allowed to sell the property at full market price until after a set time period – likely to be at least five years, subject to technical consultation. This caveat will not be so welcome for young families who purchase a starter home but later need to upsize within this time period. The target for 200,000 new starter homes, defined as “affordable housing over the course of this parliament”, is a drop in the ocean in terms of the UK’s housing needs. RICS’ historic policy is that the UK government needs to focus on all housing tenures, not just new build for homeownership. The starter home initiative, coupled with the stamp duty land tax changes, again financially assists the lower end of the market – affirming the Conservatives’ pro-homeownership doctrine. Similarly, the extension of the right to buy will increase homeownership at the expense of low-cost housing for rent. The obligation on councils to replace any retained higher-value houses as they become vacant is adequate, although the replacement affordable home can be a starter home. It is also intended that the receipts should be ringfenced to fund the aforementioned extension of the right-to-buy initiative, rather than serving as a council revenue generation tool. The definition of “higher value” will be determined after consultation. Looking to the letting sector, the proposal for a rogue landlord database and a requirement for letting agents to keep client monies in separate business accounts marks the start of the much-needed regulation of the sector. However, there need to be more details on monitoring and enforcement, and RICS practice standards far exceed this latter measure. The government could make significant improvements to the landlord–tenant experience if further professional standards were introduced.
Planning There are a number of provisions that should boost the delivery of homes. The introduction of planning permission in principle is a welcome move that should speed up the delivery of housing, as will the promotion of self-build and custom housebuilding. An increase in development participants will also streamline the system, assist SMEs and create and maintain jobs. Other initiatives to increase housebuilding include granting planning permission in some circumstances under the nationally significant infrastructure projects regime, and the register of brownfield sites suitable for housing development. However, to reach the zenith of a national brownfield map, this register will need to include both private and public sites.
Conclusion The act had a turbulent journey through Parliament, which explains why there are still open-ended provisions and regulations that need tightening. As always, RICS will ensure the voice of its membership is heard through consultation responses and parliamentary evidence sessions. R
Jeremy Blackburn is Head of RICS UK Policy jblackburn@rics.org
Related competencies include Housing strategy and provision, Planning, Valuation
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R E S I D E N TI A L TR AD I TI O N AL B U I L D I NGS
One in four UK buildings is at risk John Edwards argues that traditional buildings are in need of better treatment and understanding
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early all buildings are economic assets that should also be healthy places to occupy; but they are at risk if not treated properly. Such risks often arise, however, because of a lack of understanding and inappropriate treatment rather than as a result of insufficient investment. Traditional buildings make up about a quarter of UK stock and most surveyors will therefore come across them at some time. They are also at greatest risk because we treat them as if they were modern structures. Categorised as those built before 1919, traditional buildings have a permeable fabric and therefore usually solid walls; modern buildings comprise impermeable layers of construction that can have air gaps and membranes to prevent and control the movement of moisture.
Understanding the problem Most traditional buildings perform well until they fall into disrepair and suffer adverse intervention. This means that when problems such as dampness are observed, we should be investigating the cause rather than installing vapour barriers. If we do so, the problems remain hidden, often returning and perhaps causing even greater damage. Understanding building defects is a surveyor’s function, but when it comes to dampness many delegate that responsibility to a damp-proofing contractor, which often results in chemical injection damp-proof courses (DPCs) and cement renders. This may be common practice, but is not best practice. Best practice instead means following BS 7913: 2013, which gives authoritative guidance on how to deal with traditional 38 NOV EMBER 2016
Traditional buildings are categorised as those built before 1919, of permeable fabric and usually with solid walls and historic buildings. Section 6.3 emphasises the need for understanding a structure’s performance and building pathology in making well-informed decisions about treatment. This would provide sufficient understanding to ensure that any proposed works are both technically feasible and beneficial. Section 6.10.1 of BS 7913 states that dampness is often caused by the external ground levels being higher than the internal floor levels or by the insertion of modern non-porous materials. Such materials can include DPCs and membranes, cement render, cement mortar repointing and impermeable solid wall insulation (see image 1). Installing vapour barriers will trap moisture and could cause any timber present to rot. It could also result in increased heat loss; BS 7913 states in section 5.3.1, on sustainability, that: “Elements such as walls can be over a third less energy-efficient if damp.” Trapped moisture also lowers the wall’s temperature, which means that there can be situations where the lower surface temperatures can result in condensation, particularly where internal areas have been partially treated with a new internal render, thus forming a thermal bridge. With such obvious disadvantages to treating dampness with moisture
barriers that are cited as problematic by authoritative guidance, it is difficult to understand why surveyors would recommend damp-proofing contractors without identifying the cause themselves. It must surely be in the interest of sustaining buildings and their owners that surveyors recommend the most appropriate treatment.
The real challenges Of course, many professionals end up surveying buildings that have been inappropriately retrofitted or ‘improved’, which may then present challenges. It should be relatively easy to survey traditional buildings that have not been altered or have hidden defects, but these are few and far between. Most have received a series of alterations involving impermeable materials; many may not exhibit any problems on inspection – especially if they have just been refurbished – doubtless resulting in a clean bill of health. However, the survey process can highlight potential problems, often as a result of impermeable materials being incorporated in and on the building fabric. In surveying such buildings, common forms of inappropriate repair work include cement rendering, especially when it has been brought down to the ground as it bridges any DPC present (see image 2). If there is no evidence of internal dampness, be aware that it still could be lurking underneath the internal cement render, trapping moisture and potentially causing all the invisible problems mentioned previously. Many other types of work trap moisture in the building fabric and prevent it from evaporating; for example, replacing suspended timber floors with concrete incorporating polythene damp-proof membranes directs moisture in a concentrated form around the perimeter,
R ESIDE NTIAL T RA DI T I ONA L BUI LDING S
which is when it rises up the walls. The common solution for this ‘rising’ dampness is the installation of chemical injection DPCs and internal cement render. The remedy is to remove the concrete floor and its membrane.
Energy-efficiency retrofits Today, surveyors are also faced with buildings that have been retrofitted with energy-efficiency measures, such as solid-wall insulation, and it is important to understand how this changes the hygrothermal performance of the building and the dangers to which it leads.
Any solid-wall insulation should be of a permeable kind, but even that may carry risks. Consider the weather exposure zone in which the building is located. UK weather exposure zones are derived from an assessment of the distribution of wind-driven rain and detailed on a map in BS 8104: 1992, and also in Approved Document C of the Building Regulations for England and Wales. Structures in exposure zone one do not carry the same risks as exposure zones three and four, where external wall insulation could become affected by prolonged and persistent heavy wind-driven rain. These
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again cannot be readily seen, but being aware of them enables an understanding of the possible consequences. Thermal bridging occurs in all traditional buildings to some degree, but the risks could be much greater. If the area in the void between floors and ceilings has not been insulated, then the whole horizontal strip could act as a thermal bridge and therefore result in moisture concentration.
Technically feasible solutions From a technical perspective, endeavouring to return a traditional building to its original performance would be the most desirable solution. However, it takes a good understanding of building pathology to appreciate the knock-on effects of undertaking some works to achieve this rather than others. It is not usually feasible to restore a building to its original performance for practical and economic reasons, but there are many technically feasible solutions to problems such as dampness that do not involve impermeable materials. These include lowering external ground levels, replacing cement render with lime, or replacing cement mortar pointing with lime mortar and existing concrete floors with ‘limecrete’; these are all cost-effective solutions that need to be carefully detailed and are not normally associated with the work of damp-proofing contractors. Understanding the problems and solutions associated with traditional buildings is not – or should not be – a specialist activity. All surveyors need to be aware that they should always delegate such structures to the experts who understand them. R
John Edwards FRICS is Director of Edwards Hart Chartered Surveyors and lead author of BS 7913: 2013: Guide to the conservation of historic buildings john@edwardshart.co.uk
1 Three retrofitted DPCs have been installed, two of a chemical injection type and one electro-osmotic. However, the property is still suffering from dampness rising around the edge on the internal retrofitted concrete floor, high external ground levels and moisture trapped by use of cement mortar pointing 2 Cement render typically cracks, which allows moisture in, but the relatively impermeable nature of the render prevents that moisture from evaporating. The render brought down to the ground causes dampness to rise and bridge the DPC Images © John Edwards
Related competencies include Building pathology, Construction technology and environmental services, Housing maintenance repair and improvements
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R E S I D E N TI A L S U RV EYS
Member alert
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Graham Ellis summarises changes in the new RICS HomeBuyer Report and updates to RICS Home Surveys ICS Home Surveys services are being extended to include the additional option of a HomeBuyer Report (HBR) without a valuation. This emphasises RICS’ message that “a valuation is not a survey”; the video “Choosing the right survey” (http://bit.ly/1Gy4d48) also explains the different survey levels available. RICS survey services, although designed mainly for homebuyers, can also be used by sellers and occupiers. Since 2012 there have been three such services: Condition Report (CR; Level 1), HBR (Level 2) and Building Survey (BS; Level 3). The CR and BS have comprised a survey only, while the HBR included a survey and valuation as standard.
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Services available The new range of services will comprise: bbCR – survey only bbBS – survey only bbHBRS – survey only bbHBRSV – survey and valuation. Following longstanding industry and consumer confusion between survey and valuation, as well as member feedback, four services are scheduled for later this year. Besides the CR and BS, which are both survey-only services, the HBR will comprise two options: HBRS (survey only) and HBRSV (survey and valuation). Although the methodology of each will remain unchanged, surveyors undertaking the HBRSV will need to be have joined the RICS Valuer Registration scheme (VR). Supporting documentation for the new HBRSV, HBRS, CR and BS has been updated where relevant to accommodate advice on consumer cancellation rights and liability caps. Changes in surveyor practice have been kept to a minimum so as not to disrupt current inspection and report-writing practice. RICS members undertaking the HBRSV will continue as before, including working to Red Book standards. Surveyors undertaking the survey-only version do not have to be valuer-registered or consider Red Book issues.
Changes Practice notes, which are now known as professional statements, have the same mandatory status. Both they and the RICS Home Survey report formats have been updated. The Image © Alamy
R ESIDE NTIAL S URVEYS
professional statements now reflect both Consumer Contracts Regulations and caps on liability. There are some administrative changes, and members must seek their own detailed legal advice as RICS is not insured to provide this. This may involve greater engagement with a prospective client – the RICS guidance note Surveys of residential property (www.rics.org/resisurvey) advises on where to find the updates in the professional statements. Briefly, changes to each statement can be found at: bb3.1 before making a legal contract bb3.2 the contract letter bbRICS Home Survey Information Sheet bbDescription of Service bbstandard terms of engagement bbSection K Valuation, the Surveyor’s Declaration, is removed from HBRS bbAppendix A – sections relating to valuation – is also removed from HBRS bbAppendix D bbAppendix E. There is also a change in the leasehold properties advice addendum where the unexpired term of lease assumption is changed from 70 to 85 years The RICS website and other information sources are being assessed to ensure all pages and downloads relevant to RICS Home Surveys are updated to accommodate the changes.
Managing client expectations Surveyors and firms should consider how they offer the HBRS and other RICS services to prospective clients. They should always advise on the most appropriate survey as set out in Surveys of residential property 5.1.1, “Client enquiry – managing expectations”, ensuring that they understand the different service levels and options, together with their respective key features and benefits. If when engaging with a client it is clear that a Level 2 survey is the best option but the client does not require a valuation, then the HBRS will fit the bill; alternatively, if the client opts for a valuation for their own purposes (a lender will require a valuation on their system as a completely separate process to the survey), then the HBRSV will suit. The appropriate Description of Service must be sent to the client. Members are recommended to consider quoting a proportionately higher fee for an HBRSV to reflect the extra work and skill required, cost of VR administration and increased risk and liability in facilitating the valuation element. A single HBR licence agreement will cover both options so there is no extra charge to VR members offering both services. If a CR or BS is most appropriate and a client wants a valuation, this must be undertaken as an extra service under separate cover.
Besides offering impartial assessments of properties, RICS Home Surveys also help you adhere to industry best practice standards There are three levels of survey report. bbCR (Level 1): this is suitable for smaller and newer properties, this serves as a valuable “MOT” for homeowners looking to assess the condition of their home. It does not include reinstatement cost, diagnosis of defects, or additional advice on repairs and maintenance. bbHBR (Level 2): the most popular report for buyers. An economic but detailed report, suitable for most residential properties. There are now two options. • Option 1: HBRS (survey-only version) describes each element of the property ratings, comments on defects, advises on repairs and maintenance, offers an overall opinion and summarises condition ratings. It excludes estimates for repairs and any comprehensive description of the construction or detailed advice on specific defects. • Option 2: HBRSV (survey and valuation) describes the condition of each element of the property, comments on defects, advises on repairs and maintenance, offers an overall opinion, summarises condition ratings and provides a market valuation and reinstatement cost. It excludes repair estimates and any comprehensive description of the building’s construction or detailed advice on specific defects. bbBS (Level 3): a comprehensive report, including a survey of visible and potential problems of the structure and other components of the building and grounds. It is designed for large, older or unique properties and those in obvious disrepair. This service includes a diagnosis of defects, detailed advice on repairs and maintenance, a full description of the condition and construction of each element of the property and a section on energy efficiency, together with an overall assessment, including an overall opinion and a summary of condition ratings, repairs and suggested further investigations. R
Graham Ellis MRICS is Associate Director of the RICS Residential Professional Group gellis@rics.org
RICS Home Surveys Besides offering impartial assessments of properties, these also help you adhere to industry best practice standards. Each report provides a colour-coded condition rating system that highlights any serious problems and specific risks. Appropriately experienced members – AssocRICS, MRICS and FRICS – are eligible to apply for a copyright licence to deliver the CR, BS or HBRS, but must have joined VR to deliver the HBRSV. Members in Scotland have access to a Scottish version of the RICS HomeBuyer Report (Scotland).
To apply for a copyright licence, please call +44(0)24 7686 8555 or email licences@rics.org
Related competencies include Building pathology, Purchase and sale, Valuation reporting and research
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R E S I D E N TI A L D R AI N S
What’s going on down here? In the second in our series on surveys, Martin Beattie explains the importance of using a certified drain surveyor
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amaged drains can be the source of many problems other than the unpleasantness associated with resultant blockages. Most private drainage systems are built of vitrified clay and are around 100 years old; they commonly suffer from joint displacements, fractures and breaks, all of which allow exfiltration and infiltration of liquids into and out of the surrounding material. Over time, the washing away of fine material from the surrounding earth results in void areas, and what was a relatively minor issue is exacerbated into a major problem. At some point, the drain is likely to require repair or replacement, but this may also have a detrimental effect on nearby structures. Such erosion close to building foundations can lead to more serious structural issues. A HomeBuyer Report will typically cover all aspects of the property: the interior, exterior, services – gas, electrics and water – and the surrounding grounds. It makes sense to recommend a drainage survey in the form of a CCTV investigation, especially if there are signs of movement or damp, and this will be conducted by a specialist contractor. Some surveyors recommend these investigations as a matter of course; a drain is an important part of a property’s infrastructure, yet difficult to survey
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Damaged drains can be the source of many problems other than the unpleasantness associated with resultant blockages without the correct equipment, so this process is not normally carried out by an RICS surveyor. There has traditionally been an issue with the quality of the drainage contractor’s information, because there was no agreed standard throughout the domestic or commercial drainage sector and little in the way of certification; the criteria for using a particular contractor would probably have ranged from recommendation to cost. This has been largely resolved with the introduction of Certified Drain Surveyor (CDS) status by the National Association of Drainage Contractors (NADC).
In conjunction with the Water Research Centre and the Environment Agency (EA), an EU Skills-registered course has been established to train and certify drainage contractors working at domestic and light commercial sites. The course is based on the Manual of Sewer Condition Classification, which assesses drainage defects and the general state of the system. There has also been input from the EA on the increasingly important issue of misconnections and resultant watercourse pollution. Although the course focuses on condition assessment, there are other modules that concentrate on drain Image © iStock
R ESIDE NTIAL D R AINS
Frequently asked questions Q: Who stands to benefit from a drainage survey? A: Everyone concerned with the property. Q: When should these surveys take place? A: Before exchange of contract, or as soon as possible to prevent delay to the sale if defects are found. Q: How do I find a certified surveyor? A: Visit the NADC website at www.nadc.org.uk and use the search box on the front page. Q: How can I be sure that a surveyor is fully certified? A: Always ask to see the certificate and ID card issued by the NADC – non-certified companies will not have these and will not carry the certified contractor logo on their listing. Q: Who is responsible for ensuring that this information is collated? A: The building surveyor should ensure that their clients have a survey, but it is ultimately the buyer’s responsibility: never buy a property without having a full drain survey carried out by a CDS.
ownership and mapping, drainage law and investigation, as well as selection and specification of the correct repair techniques. The result, after rigorous examination, is a qualified drain surveyor working to a nationally recognised objective standard. Operatives who have completed this course receive a certificate and an identification card, while their details are held on a national database for potential verification purposes, ensuring quality and security. Using software of a reporting industry standard is also encouraged. This ensures that the drainage contractor’s CCTV condition report not only complies with water utilities’ specifications but also enables a report with images, defect grading and colour coding. It is important that this is easily understood by the customer. Contractors will then base any remedial recommendations on the report. Employing an NADC CDS ensures the work will be carried out correctly, and their report, which is valid for five years, will normally include:
bbinformation relating to ownership – whether it is private or belongs to the water company – and thus responsibility bban accurate drawing bbcorrect investigation techniques bban easy to understand, concise condition report with images and footage bbaccurate remedial recommendations concerning any pipe/manhole or other drainage asset using the Sewerage Rehabilitation Manual/Drain Repair Book grading systems bblegislation and regulation concerning repair: Building Regulations, Part H bba complete understanding of the regulations and issues that relate to misconnections, pumping stations, sewage treatment plants as well as drainage fields bbstructural condition reporting/analysis bbmapping/drawing to show drainage system locations and components bbdetection of vermin/rat infestation in the drainage system.
Advantages for all parties A survey might be recommended as a consequence of a known issue, the need to establish ownership or at the request of a mortgage lender or insurance company. These reports will satisfy and reassure all parties involved, including solicitors who are conducting CON29DWs (Water Searches). The reports will enable the following:
bbhomebuyers will be made aware of drains that may be in very poor condition bbthe local water company will be forewarned about any defects with its asset, saving time and money associated with repairs and preventing the buyer from inheriting problems bbinsurance companies will be informed of the true condition before deciding to provide cover for drains. The important thing to remember is that if a drain survey is recommended, then it should be carried out by a competent person. A qualified NADC CDS will provide that confidence for both you and your client. R
Martin Beattie is Vice-Chairman of the National Association of Drainage Contractors info@nadc.org.uk www.nadc.org.uk
Related competencies include Construction technology and environmental services, Housing maintenance repair and improvements, Valuation reporting and research
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RICS P ROP E RT Y JO U RN A L
R E S I D E N TI A L VAL UAT I O N
m Secretarial support and paper-based offices are so last century
Fiona Haggett looks at the challenges in valuation for residential secured lending
Things ain’t what they used to be
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When I entered the profession as a young woman in the 1980s, I found that it was a male-dominated world with long-established approaches and processes. The first signs of change came at the turn of the century; offices were becoming digitised, individual secretarial support was diminishing and comparable data came more from the computer and less from handwritten index cards. As technology evolved, valuers had to adapt their working practices to accommodate these 44 NO V EMBER 2 016
changes. Physical offices closed, paper site notes went digital, administrative support was shared, the emergence of the big panel management houses began and the small, localised nature of work – in which the bank branch manager had given you your instructions – was no more. Some struggled with these changes and left the profession, while others moved with the times. But these changes were not optional. In a world where information is more readily available and exchanged, where risk management is an ever higher priority, where government influence and bank lending policy can affect value in whole sectors of the market and where litigation is a very real possibility, the valuer who does not adapt is vulnerable and exposed. The crunch came with the 2007 crash. Never before
had valuers faced such a threat. A number of firms went out of business under a deluge of so-called “confetti letters” and a steep rise in their professional indemnity insurance premiums. Those that survived had to sharpen up their practices. RICS commissioned a report into the problems faced at this time and the subsequent valuer shortage. A cross-sector group was set up to ensure ongoing dialogue between all stakeholders; as this forum continues to work to safeguard the profession, individual valuers must promote it as a safe pair of hands and also keep up to date with new requirements.
Where are we now? A shortage of valuers and an availability of data means many lenders have turned to automated valuation models (AVMs) to assess low-risk
lending, some even for initial purchases. The industry is welcoming an influx of valuers, thanks to the AssocRICS qualification, and lenders are establishing a model that involves lower-skilled data gatherers who can inform a desktop valuation. All these changes present opportunities. As secured lending and the property markets get more complex, there is a place for a hierarchy of skills, improving the status of fully qualified valuers and removing the low-skilled work, thus enabling professionals to focus on the more complex cases. As lenders move towards non-disclosure and use of AVMs on purchase cases, the public is beginning to understand the limitations of the mortgage valuation and will increasingly look to professional valuers and surveyors for advice. Lenders are also facing unprecedented complexity in the residential property market. Increased government intervention brings with it value implications and they are looking to professionals for advice on the impacts of this, both in terms of current lending and also in relation to their back books.
The big topics Currently, lenders and valuers are facing a range of issues, including the following. Diminishing leases Houses built in the 1970s and 1980s that were sold on 99- or 125-year leases are approaching the 80-year point at which “marriage value” becomes payable. Together with the change of the Red Book assumption from 70 to 85 years in 2015, this means lenders are increasingly focusing on the impact on value and on their back book of these diminishing assets. Valuers need to take all
R ESIDE NTIAL VA LUATIO N
possible steps to establish the lease details, where applicable, of the properties that they are valuing, and understand the dynamics of the area in which they value. They should ask themselves the following questions. bbOn what basis is the property being purchased? bbDo buyers know the lease length and its implications? bbWhat is the basis of sale of the comparable evidence you are using? Does it have similar lease terms? bbHow much will it cost to extend the lease and what is the impact – if any – on value? bbDoes the property meet the lending criteria for your client bank? bbIf this is the case, how do you reflect a short remaining term under the limitations of a mortgage valuation? bbIs the property adequately maintained and is it appropriately managed? bbWill the ground rent escalate to unreasonable levels over the loan period? The buy-to-let market The buy-to-let market has seen the greatest government intervention in recent years. Many of the following factors could affect value. bbIs the property a house in multiple occupation (HMO)? bbIf so, is the area where it is located subject to licensing? bbDo you know what an article 4 directive is? Does it affect the subject property? bbWhat is the energy performance certificate (EPC)
rating? If it is E or below, what is the impact of the Energy Act 2011? bbIs it a commercial or a residential valuation? bbWhat method of valuation should be used? Comparable or investment? These are only some of the questions that must be answered before a valuation can be given. It is no longer sufficient just to gather and adjust comparable evidence to put a figure on the property. New-build properties and related government schemes The new-build sector has changed in recent years. A lack of transparency in transactions, the rise of buy to let – to the detriment of owner-occupied sales and sometimes the local market too – high-profile fraud cases and hefty losses in the last downturn have made what was once a straightforward valuation a high-risk exercise. How should valuers approach such instructions? What information do they need? Should new build be valued from the bottom up or from the top down? How do you deal with incentives and what or how much is the initial occupation (new-build) premium? These are just some additional issues now faced by the valuer. Off-site and modern methods of construction In the UK, houses have been built the same way for more
than a century, but new materials and approaches are making identification of a building’s construction more complex. Residential valuers must be able to confirm if any property fulfils the criteria in their client’s policies and also understand the long-term strengths and weaknesses of any given construction type. Office-to-residential conversions There has been an unprecedented rise in the conversion of office and industrial buildings for residential use; many are high-spec, well-executed projects that create desirable homes in good locations. But some are poorly located, low-quality conversions, or of an unsuitable construction type. Lenders are becoming increasingly concerned about this market and looking to valuer expertise to advise them. Are we equipped to provide this advice? Affordable housing There is a widely acknowledged housing crisis, with high prices and a lack of affordable homes; successive governments continue to develop initiatives to address these issues. Right to buy, help to buy, shared ownership, shared equity and now starter homes all present different challenges for the modern residential valuer, who needs to understand the implications of these schemes and value or advise accordingly. Sustainability factors The UK government has signed up to address energy issues. EPCs and the Minimum Energy Efficiency Standards, with their implications for the property market, are already in place. What next? Will the government adjust taxation to reflect a property’s energy performance? Lenders
m Diminishing leases – a big issue for lenders and valuers Images © iStock
are already looking at sustainability factors, with some considering lending more advantageously on energy-efficient properties. Will this affect value? Will any such shift result in a green premium or a “brown penalty”? A valuer should be sensitive to the nuances in the market and ready to reflect changes appropriately.
Conclusion A valuer who practised in the 1980s could be forgiven for being awed by all these factors. But the world has moved on and valuers who are currently practising are proving their worth by upskilling and specialising. Technology is not taking jobs away; rather, it is providing an opportunity to address the risks faced by the residential valuation sector, while at the same time helping make the role more interesting and highly regarded. To capitalise on these opportunities, valuers must be prepared to keep abreast of the changes and ensure they are adequately trained to meet the emerging challenges. RICS is working with the sector to produce guidance on a number of the elements detailed above. Guidance on HMOs and buy-to-let properties has already been published, with further advice planned for new-build and leasehold valuations, starter homes and right to buy. These will be supported by CPD roadshows across the country later this year. R
Fiona Haggett FRICS is RICS UK Valuation Director fhaggett@rics.org
Related competencies include Housing strategy and provision, Valuation, Valuation reporting and research
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RICS P ROP E RT Y JO U RN A L
R E S I D E N TI A L P L AN N I N G
Becoming streetwise Yolande Barnes explains how a “complete streets” approach to housing estates could help tackle London’s growing housing demand
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n the mid-1980s, though it went unnoticed at the time, the slow and steady long-term decline in the number of London Underground passengers ended. All the planning hitherto had been for a dwindling service, with managers cutting investment, staff and train numbers. By the late 1980s, traveller numbers were growing again – and growing fast. Tube journeys, totalling 1.2 billion a year, are now more than double the level they were in 1980. London Underground was not the only organisation to be taken by surprise. The renaissance of the City with the return of wealth-generators was anticipated by neither London’s politicians nor the real-estate sector. Whether admitted or not, planning of the inner city in the post-war years had been about managing population decline and, although new housebuilding reached a post-war high in the 1960s and 1970s, demolitions had been at an even higher level. In 1984, London’s population density was 23% lower than it had been in 1939. Inner London’s population was half its former peak, and it is still 30% lower – not so much for lack of housing demand as lack of supply. London’s population expansion of nearly two million since the mid-1980s has not seen a corresponding rise in new houses and flats: that tanker is taking much longer to turn around.
London challenge The well-rehearsed challenge for London is to build sufficient housing of the right type, in the right place at an affordable price or rent for all residents, not only those able to compete at the top of the market; estate agency Savills estimates 46 NOV EMBER 2016
as many as 65,000 units per year are required. But providing additional housing in London to meet the needs of a growing population means that land has to be found for building, and it all appears to be used already. In common with every other established global city, London has seen the vast proportion of its viable land already developed. This presents a potentially huge political problem because a lot of that land already contains people’s homes, and even the supply of workspace seems threatened. The land that is more straightforward to develop, such as derelict industrial sites with good public transport connections, was built on long ago. It could be argued that much of what was built in the prosperous period of the 1990s and 2000s was constructed at inappropriately low densities. The search is now on for sites to create new neighbourhoods and new opportunities to build many more homes. This means both the re-use of land and intensified land use have to be considered if more housing of any tenure and any price point is to be built. There is good news and bad news. The good news is that, in theory, if all neighbourhoods in London with good public transport connections were built just to average housing density, compared to other similar neighbourhoods, there is space for another 1.46 million new homes, according to London First and Savills Research’s Redefining Density. The bad news is that this land is already occupied by people and businesses and valuable amenity space. People who already have homes – of all types, in all locations – will have to budge up if we are to accommodate everyone. It has become clear that, in the past, some of London’s land has not been built
out to its full potential. That is not only in terms of density but also the quality of built environment we have created. These sites include, but are not limited to: bb retail warehouses in central and well-connected areas bb industrial sheds in central and well-connected areas bb suburban housing that is near to transport nodes bb railway lands bb local-authority and former local-authority housing estates.
Completing London’s streets Savills’ recent paper Completing London’s Streets and subsequent research has found that it would be possible to add new housing to some local-authority and former local-authority housing estates while retaining existing homes and/or commercial space as well as enhancing the sense of place. In other cases, the configuration and layout of previous development means that a certain amount of demolition is necessary, but this must be done with great sensitivity, recognising that it will affect people’s homes and communities. This must be just as much – if not more – about improving the places where people live as well as adding homes. Savills thinks that it is very important for landowners and the built environment
RI CS P RO PERTY JOUR NAL
k PRP’s masterplan for the Oval Quarter in south London would involve the complete regeneration of the area by creating an urban village with community facilities including a function hall, café and crèche
sector to understand the implications of this research not as advocating the wholesale demolition of local-authority housing estates but a “complete streets” approach to any housing development because this appears to provide better outcomes for landowners, landlords and residents than many current developments. What this means is outlined below.
Better homes Savills has worked on the principle that new housing for London does not always have to involve demolition of existing homes but, when it does, every Images © PRP
existing householder of any tenure should be provided with an equivalent or better home in the same but improved neighbourhood, which contains more housing for everyone. Where new homes are provided on non-residential sites, the research assumes that 35% of these will be social housing. In order to test a complex hypothesis, the infill and repair of streetscapes on housing estates was not considered in the Completing London’s Streets study, although Savills has since carried out such research, which is due to be published soon. Instead, the research looked at the following questions.
1. What type of development might be best if the wholesale redevelopment of an entire local-authority housing estate was being considered? 2. Would it be the contemporary approach of replacing old blocks of flats with new mid- and high-rise ones at higher density in a very similar configuration (an approach Savills termed “block renewal”)? 3. Or would it be better to create a street pattern that reconnects isolated estates with the surrounding streetscape, containing mid-rise, high-density terraced houses and modern mid-rise mansion block-style housing, and even the occasional tower, on streets (an approach Savills referred to as “complete streets”)? 4. How many additional homes might be provided (of any tenure) in each case? 5. How would this be scaled up if applied to all housing estates that could potentially be redeveloped? The research looked at a selection of representative housing estates across London to discover: bb the existing housing numbers bb how well connected and permeable these estates are bb how well connected and permeable they could be made bb how many more homes could be NO V E MBE R 2 0 1 6 4 7
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R E S I D E N TI A L PLANNING
provided on the same land by “block renewal" and “complete street” scenarios bb how much more workspace could be provided under each scenario bb how much the two scenarios would cost to build bb which of the two scenarios would residents and landlords value more highly, including social housing. The findings were very clear (see Table 1). If existing housing estates were to be rebuilt, significantly more homes would be supplied under either scenario; the density per hectare was very slightly higher for complete streets, though, than block renewal. However, the complete streets homes would cost significantly less to build per hectare of land. And they would be more highly valued by residents, providing a higher end asset value for the local authority or social housing landlord as well as owner-occupiers. This is important for local authorities and housing associations because it would enable them to provide more homes. As the complete streets approach should prove more viable and therefore easier to fund than contemporary block renewal development, more social and affordable housing should be provided on such a site, given the appropriate financial structures. There would also be more retail space and workspace, potentially offering greater life chances to residents, especially if managed and let at affordable commercial rents. If Savills’ estimates are correct, there could be capacity on around one in five London estates to increase the number of homes from 136,000 to 236,000. The study does not specify whether these homes would be social, affordable, intermediate or open market, rented or owner-occupied, as the viability of each tenure type and particular numbers will differ from site to site. So, the question regarding the complete streets approach has changed from whether it is better or more valuable to “Why on earth is it not always done?” 48 NO V EMBER 2 016
k Regeneration of Oval Quarter will provide 808 new homes and 172 refurbished properties
Table 1 Comparative results under alternative scenarios Location-weighted average
Existing estate
Contemporary regeneration
Complete Streets
Number of units per hectare
78
130
135
Total end value per hectare
£11.5m
£40.0m
£48.1m
Build cost per hectare
–
£21.8m
£19.9m
Commercial space (sq. ft) per hectare
8,831
8,831
10,014
Sexy architecture Why would the UK real-estate sector keep constructing a form that is more expensive to build, which could well be more expensive to run, may depreciate faster and that will certainly have a lower end asset value than much of London’s most popular, existing street fabric? Surely it is not just because it is ‘sexy’ in architectural circles? After all, our model is not predicated on architectural style – pastiche or otherwise – but simply form and geography. It is a form and geography that has proved to be extremely durable and flexible, serving not only London for centuries past but many other cities across the globe too. The quality of city streets has never been more important than in the digital age: witness how Shoreditch has been the cradle of London’s technological revolution, rather than Canary Wharf. Tech cities are street cities, not out-of-town campuses. Even Silicon Valley is struggling to keep talent from being attracted by the bright lights of San Francisco. So how long can London thrive if it hangs on to late-20th-century notions of single-use, stand-alone buildings in a Images © PRP
landscape, rather than flexible, durable building blocks in a streetscape? How long will buildings purpose-built for the 20th century survive in the digital age as the pace of change accelerates even faster? How relevant is the high-rise versus mid-rise debate if neither face proper streets and are only served by inhospitable service roads? Savills’ report is about much more than housing estates and housing numbers: it is part of a much bigger and wider range of work that is vital for the future not just of London’s environment, its economy and its people, but those of many other cities too. R Yolande Barnes is Head of Savills World Research ybarnes@savills.com
Completing London’s Streets is available from http://bit.ly/1RJmO26
Related competencies include Housing strategy and provision, Planning
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R IC S P ROP E RT Y JOU RN A L
PERSON A L
PROPER T Y
personal property arts + antiques
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P E RS O N A L P R O P E RTY ARTS C O N S U LTAN C Y
Claude Monet; Argenteuil, oil on canvas (1875)
An experienced eye
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Claire Grindey discusses the value of art consultants’ and advisors’ skills ir Kenneth Clark is still probably the most renowned ‘art consultant’. As Surveyor of the Queen’s Pictures, his responsibility for maintaining the royal collection was informed by his expertise as one of the foremost art historians of his generation. But art consultant or art advisor has become a more widely used title in recent years. The global art market, the contemporary art boom and art investment have together seen an increase in the number of consultants. This also reflects the rapidly changing market, to which more traditional auction houses are adapting. Even before we factor 50 NO V EMBER 2 016
in Brexit, the art world has seen some unprecedented changes of late: earlier this year, Sotheby’s purchased an art advisory business for a reported sum of $80m, building on the increasing shift from auction sales to private treaty and the advisory business. So how do art consultants show their worth and build trust with clients? The traditional role of experts has changed largely in response to the contemporary art market. Some new collectors seek out big-name artists who have become household brands – Picasso, Monet, Hirst, Bacon and Richter to name a few – whose respective styles are all instantly recognisable. Marketed globally online, the works command record-breaking prices that hit the headlines. Image © Shutterstock
P ERSO NA L PR OPE RTY A RTS CONS ULTANC Y
Many skills
Valuation
Expertise is needed to research and authenticate a work of art. In the classical art and antique market, attribution relies on years of experience and the ability to research. Some collectors still pursue connoisseurship, as their purpose in collecting is not simply investment. In vetting and authenticating works of art, experts play an important role, given that the growth of art fairs has outpaced many sales elsewhere. Importantly, a good consultant will use their own network of specialists and others’ knowledge to help to avoid costly mistakes. Many former auction house experts have set up on their own, advising, dealing and acting as consultants. As private sales grow, a consultant can help to broker private sales that avoid overexposure to the wider market. And as art has become an asset class, there are also many advisors who follow the market without necessarily having significant knowledge or expertise. In this respect, they are brokers enabling or managing deals. Determining value independently, without having a financial interest in the sale, can ensure that a fair price is realised. Making clients aware of the wider market and various trends can be invaluable too. Some contemporary works have no secondary market, and some sales are quite simply retail. These are among the common pitfalls that buyers tend only to consider when they decide to sell. An RICS-certified consultant ensures that fair market values are estimated, international valuation standards are respected and there is no conflict of interest in purchasing a work where the consultant is financially or otherwise motivated to sell a work at a higher value than it warrants. Access to closed networks and specialist knowledge can help collectors find private works of art that are not readily available on the open market – a particular feature of the contemporary art world. Consultants can advise on consignments and on the risk to owner and seller, including ensuring that anti-money laundering checks are also conducted. Advising on the provenance of object ownership and the country of origin can add value to many works of art. When there are gaps in documentation of provenance, or such documentation is non-existent, then research is paramount. Ownership and title are perhaps the most challenging factors that a consultant should navigate. Works that are fresh to the market can have an added value. In an unregulated marketplace where any operator can pass around images of potential works for sale, and some agents fish for a deal without having title or buyer in place, knowing the market and avoiding overexposure are vital. Establishing both title and ownership is a legal requirement. However, a legitimate title will not be sufficient if, for instance, it later comes to light that the work was improperly appropriated during wartime. There are cases where stolen works might be offered, or the person offering a work is not actually authorised to sell it. Since the seller of an artwork often remains undisclosed, it is important to carry out the same due diligence as is required when purchasing property. Art has become an asset class, and buyers want to have the same confidence when making transactions that they would have with other property. Art and luxury items – be they wine collections or classic cars – are personal property, and in some cases banks and specialist finance firms accept art as collateral for a loan.
There have been a number of experts leaving auction houses this year, setting up as consultants and carrying out valuations. RICS abides by international valuation standards, the Red Book, specifically for personal property and arts and antiques professionals; see VPGA 7 Valuation of personal property, including arts and antiques (http://bit.ly/2bjlvXy). The purpose of the valuation will of course change according to sale or insurance value. It is always important to obtain a correct value; paying too much can result in a higher premium, whereas not paying enough will leave you short for a replacement value. For example, some luxury jewellery houses no longer produce limited or vintage designs, and it can be difficult to buy a like-for-like replacement or to find an artisan to remake it. Setting the sale value is important to find a correct route to market. A large auction house may not necessarily be the best place for a lower-priced auction item. Some valuers will offer a walk-through valuation, only updating larger items. Value will be determined by using comparables or similar sale items. However, sales records for the private market or works that have not come to market for a long period are increasingly unavailable to the public, so it takes real specialist knowledge to determine a fair market value.
Condition Along with title, authentication and provenance, condition is another area where a consultant can add value. Helping to give an independent assessment of the condition can affect the value of an item in terms of potential restoration costs. The effect can be even more significant if an item has been changed or adapted to such an extent that it misleads a buyer and is not what it is purported to be. Compliance processes such as carrying out due diligence for art theft and looting, and obtaining legal documentation for the Convention on International Trade in Endangered Species (CITES) and export licences are also some of the areas with which a consultant may assist. Recently, ivory items exhibited at a Miami art fair were destroyed as a result of the changing CITES laws in the USA. Being up to date with legislative measures that would impede the normal movement of works of art is also important. RICS promotes standards and best practice, and having an RICS professional can help to navigate these issues. P
Claire Grindey is an art consultant and member of the RICS Personal Property Working Group claire@clairegrindey.com
RICS is hosting a conference with the Association of Professional Art Advisors on art market standards, codes of conduct and ethics on 7 October. The panel includes the British Antique Dealers Association, Transparency International UK, the Ingram Collection and Mishcon de Reya. For more information, see: http://bit.ly/2bavNsu
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RICS P ROP E RT Y JO U RN A L
P E RS O N A L P R O P E RTY O N L I N E AU C T I O N S
Keeping the e-customer satisfied Ivan Macquisten examines what it takes to thrive in the world of online auctions and sales
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nline sales have been with us in earnest for more than a decade, and the international market is now well on the road to maturity. A new generation cannot remember a time when you could not conduct transactions by mobile or tablet, let alone by desktop. To them it is the norm, so businesses that are unable to offer a seamless service between these platforms will simply not appear on their radar. As this generation ages, so its influence grows, and if you want to engage and retain it as a client base, you had better get your act together.
Customer-friendly Assuming websites continue to be the default medium for transactions – and this is not guaranteed as apps become more dominant – online auctioneers or sales platforms must make it easy to register, easy to bid, be reliable in accepting timely bids and offer a first-class delivery service. Fail to do any one of these and your rivals will leave you standing. It is a highly competitive and increasingly crowded marketplace. Technology development accelerates the pace of change, and new players can join without the baggage that existing operations bring with them. Transparency is also key: customers want to know what the charges are, the terms of payment for buyers and sellers, the method of payment, the guarantee that you will get what you are paying 52 NO V EMBER 2 016
for, and the terms and conditions for returning unwanted or damaged goods. Auctioneers also need to be hyper-conscious of buyers’ rights under the Consumer Contracts Regulations that govern online auctions (see Property Journal, September/October 2016, p.50), especially where they do not have the chance to inspect the goods in person before sale. Get it wrong and it can be a minefield – but at least the new rules, introduced in 2014, provide a concrete base on which to build buyer confidence. Online auctions are no different from any other kind of business in one regard: it can take years to build a client relationship and five minutes to destroy it. I have recently stopped using one platform because a delay in conveying my bids to the auctioneer meant that although the message on my screen confirmed that I was the successful bidder, the hammer fell on the underbid – a hopeless situation. Developing and retaining a customer base is all about building your brand and trust in it. What can you do to make sure that your site is added to the favourites list of every user? Barnebys, the Swedish auctions aggregator with markets in the USA, UK, Germany, France, China and Scandinavia, published a report in August focusing on behavioural trends among buyers and sellers at auction. Key findings include the hardly surprising fact that transparency boosts confidence and conversion rates. In this context, transparency does not mean revealing the identity of buyers and sellers – calls to publicise the identity of sellers and
buyers at auction fail to recognise the damage this would do to the market, and they may additionally come up against privacy laws. Instead, the term refers to the level of detail and accessibility in providing information about items for sale and how to go about buying. The report also found that those who buy at auction online, as opposed to in person, do so more frequently. Where it really comes into its own, though, is in showing how to develop your market among millennial buyers – 60% of them use mobile devices to access the site. That is any business’s future.
New players Platform charges added to the traditional buyer’s premium can make the costs of bidding at auction online stack up, even if these can be offset against the physical costs of visiting auctions and the convenience of being able to view and bid online at several auctions at once. This is leading to market fragmentation, although that presents opportunities to intervene. Fine Art Exchange (FAX), billed as a peer-to-peer platform for collectors to carry out transactions with each other discreetly, launched earlier this year, and its charges are extremely competitive with those of more established platforms. Where transactions are made between collectors rather than between dealers
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and collectors, the Artist’s Resale Right (ARR) will not apply. As ARR amounts to 4% of the entire transaction price for qualifying works up to the equivalent of €50,000, this is a serious consideration on top of the sale price and buyer’s premium (plus VAT). The FAX buyer’s premium on the other hand is just 7.5% – roughly half of the average buyer’s premium rates or even less – and attracts no ARR. The site has some way to go yet in building traffic, but marketed in the right way there is no reason to doubt its potential. Another service launched this summer is Forum Auctions, a hybrid house that has taken the unusual step of putting a simple but highly effective list of core values on its website. These range from promising to keep clients’ money in separate accounts – not all auction houses do so – to treating its own staff properly and, importantly, acknowledging when it makes mistakes and rectifying them promptly and fairly. This might seem to be an exercise in stating the obvious, but is actually a powerful declaration in favour of honesty and transparency that builds trust and reassurance while showing that the house understands what is important to its customers. Expect others to follow suit.
Established sites While newbies are throwing up some interesting twists on traditional online Image © iStock
models, let’s not forget about those who have been around for some time, already have substantial traffic and, importantly, attract serious buyers and sellers with better-quality consignments. The-saleroom.com, long established under the ATG Media brand, dominates the UK low and middle market where most online sales take place, while Live Auctioneers leads the way on the other side of the Atlantic, diversifying into fashion and homewares. Another key player is Invaluable, recently boosted by additional investment. Meanwhile, the German-owned Auctionata has recently merged with Paddle 8 to create a formidable force. The crunch point for all of these will be revenue growth as costs increase and margins are squeezed in a crowded marketplace. Running a first-class online auction operation with excellent fulfilment is not a low-maintenance proposition.
younger generation, who also delight in the opportunity to buy unique, quality items. This is not about cheapness, but value for money. The British market is far more developed than its French counterpart, although this means that there is greater opportunity for growth across the Channel where, astonishingly, a fairly substantial number of provincial auctioneers still do not have websites. Timed sales, with their lower cost base, are easier to administer but can be a disconcerting experience for the uninitiated because little happens in, say, a seven-day sale until the last few hours when bidders pounce, so it is a matter of holding one’s nerve. However, for some bidders, timed sales offer a less intimidating route to market than the high pressure of an auctioneer calling the bids and bringing the hammer down before they have had time to think about it. Retail portals are very much in play too, the likes of 1stdibs.com catering for the wider design and decoration market as well as for art lovers. As with online auctions, transparency can be an issue here for trade buyers selling on to clients, who can easily find out what they paid for their purchases. No doubt about it, such transparency hits margins as clients insist on better deals. So many things are going on that is often hard to keep up. But some things never change: success depends on sound business principles, giving the customer what they want and making it easy for them to use your service. Those who want to stay ahead would do well to keep a close eye on behavioural trends as defined by their online data rather than depending on survey results. That is where they will find out what is really going on. P
Markets around the world Each of these businesses needs to take into account differing priorities across international markets, priorities that seem to vary depending on the maturity of online engagement. In the USA, which is perhaps the most mature of online markets, digital auctions bring a competitive edge to pricing that is attracting an increasing share of the
Ivan Macquisten is Director at business and media consultancy ImacQ ivan@imacq.com
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