Property Journal IN CO RP ORAT I N G T H E C O M M E R C I AL P R O P E RT Y J O URNA L, R ESID E N T I A L P ROP E RT Y J O U R N A L A N D T HE A RTS S URV EYOR
Thinking outside the bin Exploring new approaches to commercial waste PG.
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COMMERCIAL
RESIDENTIAL
ARTS
Shopping for funds
Homes for all
Taking cover
Global lessons for the challenge of housing supply
Setting agreed values in insuring fine art and antiques
Alternative finance sources to reinvigorate the high street PG.
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PG.
36
PG.
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November 2014
rics.org/journals
UPF R O NT CONT ENTS
RI CS P RO PERTY JOUR NAL
contents C ON TACTS
UPFRO NT
COMMERCIAL
5 Opinion
13 Taxing times
Advisory group: Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Johnny Dunford (RICS), Martin Francis (BNP Paribas), Simon Hooper (Edward Symmons), Lorraine Howells (RICS), Vivien King (Malcolm Hollis)
6 Upfront
14 Parting company
RESIDENTIAL
Greg Harrison provides an overview of the key questions that should be asked before entering a new arrangement or area of work
Editor: Claudia Conway T +44 (0)20 7695 1605 E claudiaconway@rics.org
Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org Advisory group: Peter Bolton King (RICS), Tony Bowron (Bromford Housing), Andrew Bulmer (RICS), Paul Cutbill (Countrywide), Graham Ellis (Greenhouse Surveyors), Georgiana Hibberd (RICS), Chris Rispin (BlueBox Partners), Philip Santo (Philip Santo & Co), David Smith (Anthony Gold Solicitors) ARTS
Simon Rubinsohn looks at the influence of RICS survey data
8 On a firm footing
10 All change?
Permitted development rights for converting offices into housing have been in force for a year; Nicola Furlonger reviews the challenges that have arisen and the lessons learned over this time
Gillian Banks outlines where and why tax can hit home sales
Helen Crossland outlines the rights and risks for employers in embarking on pre-termination negotiations with staff
16 Legal Q&A
Legal experts answer common queries
17 Top priority
Pierpaolo Franco explains the reasoning behind RICS’ launch of executive level training for the built environment industry
Editor: Jan Ambrose T +44 (0)20 7695 1554 E jambrose@rics.org Editorial adviser: Johnny Dunford 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: The 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: Gill Rastall Designer: Karen Warren Creative director: Mark Parry Advertising: Charlotte Turner T +44 (0)20 7871 5734 E charlotte@sundaypublishing.com Design by: Redactive Media Group Printed by: Page Bros
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CO MME RCI A L
20 Talking shop
Two case studies from Hong Kong show how property strategy and well qualified property managers can contribute to a successful mall, wherever it is in the world
22 Performance challenge
Graeme Murray discusses how a technical review of energy ratings can often achieve an improved classification, with consequences for valuation
26 Shopping for funds
John Barker looks at alternative funding options that could help to reinvigorate Britain’s high streets
28 Beyond the dustbin
Peter Jones explores the impact of new approaches to commercial waste
31 Building support
Stephen Shallcroft underlines the importance of forming positive relationships across a business in becoming a more strategic facilities manager
32 Passport to opportunity
Guillaume Fiastre explains how fund managers will need to change the way they work to gain advantage from a controversial European directive
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. To change your preferences, visit www.rics.org/mydetails
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UPFRONT C O N TEN TS
contents R
A
RES I DE NTI AL
36 BRICS and mortar
Housing is a universal challenge demanding new solutions, say Duncan Maclennan and Julie Miao
38 Sound effects
Les Pickford summarises an NBHC Foundation review into homeowner feedback on noise in new homes
40 What the eye doesn’t see…
Philip Santo examines a query that arose following a partial demolition
Front cover: © iStock / Shutterstock
A RTS
42 Balancing act
Vivien King considers how legislation, the planning system and the courts all play a role in protecting biodiversity and the built environment
43 Taking the heat off
Dr Grant Bourhill discusses a new project to test the effectiveness of retrofit packages for the UK’s housing stock in the drive to cut energy costs
44 In the picture
The Valuation Office Agency is looking to improve private rental statistics, says Gary Trent, and invites RICS members to contribute their knowledge
46 Reinstating your boundary
James Kavanagh presents a guide on how to reinstate a boundary following flood damage and where to go for advice
50 Protecting your image
Amanda Gray continues her look at art e-commerce and highlights the issues of reputation and due diligence
52 Taking cover
Insuring against floods, fires and theft are all part of the specialist services offered for fine art and antiques, says Andrew Davies
54 On the record
How to cut the risk of losing valuable artworks to thieves by careful cataloguing
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
RI CS P RO PERTY JOUR NAL
OPINION RICS’ regular member surveys influence an impressive array of businesses and national institutions, says Simon Rubinsohn
Your voice matters
I
I often use this column to convey my own thoughts either about the state of the economy or the real estate world but I thought that it might be interesting to spend a little time focusing on you, the RICS membership. Those of you who take the time to complete either our monthly (residential), quarterly (commercial and construction) or half yearly (rural) surveys not only provide the organisation with a huge amount of market intelligence but also relevant insight that policymakers are eager to get their hands on. Before I go any further, I should say that if you do not already contribute to the survey it is not too late to start. I am always on the lookout for greater member participation mindful that the larger the sample, the greater the credibility of the output. So if you are willing to give your views on one of the markets we currently run surveys on,
please email me. Filling in the questionnaire should take no more than five minutes.
The value of views Apart from the rural survey, which contains a mix of opinion and hard data, all the other surveys are essentially based around sentiment. That word can often be something of a turn-off – why rely on the views of individuals when there are real figures showing pricing and activity in circulation? I can understand this, but have over the years been taken aback by just how good the collective thoughts of practitioners in certain industries have been as a predictor of what the hard data will eventually show. This has been true both in the UK manufacturing and the service sectors, where the monthly purchasing managers indices (PMIs) are closely watched by investors and policymakers alike. But it is equally so with the RICS suite of surveys. I know that our residential product gains a disproportionate amount of airtime, which is perhaps inevitable given the appealing nature of the subject matter, but the leadership properties of the commercial market survey are as good if not better. Significantly, the key RICS series provide a three quarter advanced signal as
to where rents and capital values are headed (as measured by the Investment Property Databank). It is not just me championing this material. North Row Capital actively uses our, or should I say your, sentiment indicators in the management of its Liquid Property Fund. Meanwhile, a number of third party distributors are now accessing this data in response to overwhelming requests from investors. Another way of understanding the significance of all the surveys is to see the regard in which they are held by the Bank of England. Not only does the body get an early sighting of the results but it also regularly quotes RICS in its various publications as well as, critically, the minutes of meetings of the Monetary Policy Committee. It is pretty clear from reading any of the bank’s output that the feedback from RICS members is one key element considered as part of the interest rate decision each month.
Reports of recovery So what is the current mood of the membership that responds to the various surveys overseen by RICS Economics? As you might imagine, the general picture depicted is one of recovery to a greater or lesser extent. London clearly emerged somewhat earlier from the doldrums than other parts of the country but even the laggards now seem to be deriving some benefit from the improved economic climate. Interestingly, while there is a little more caution
being expressed by members working in the capital who focus on residential property, that is not the case for those either in the commercial space or the construction industry. Finally, I should also point out that the data that we compile from land surveyors is so highly regarded that it is now being used by both the Department for Environment, Food and Rural Affairs and Eurostat as official data. This is some achievement and, in my view, clearly demonstrates the value that is associated with the profession. That said, those members who complete this particular survey are probably placing greater importance at the current time on the continuing buoyancy of the rural land market; the latest (mid-year) gauge of the temperature of the sector suggests demand remains firm with prices expected to continue moving upwards. b Simon Rubinsohn is Chief Economist at RICS and regularly provides comments for national newspapers including the Financial Times, The Guardian and The Telegraph srubinsohn@rics.org
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UPFRONT U P DAT E
UPDATE Smart cities present market opportunity A new report by the Future Cities Catapult (FCC) highlights how the UK is well placed to take advantage of the estimated £200bn global market for products and services that improve the way cities are planned and operated. The FCC predicts that accelerating this momentum will lead to more jobs, more revenue and the opportunity for the UK to solve some of the world’s biggest challenges.
The report, How can the UK innovate for the world’s cities? (http://bit.ly/1pEtMEj) defines, for the first time, the scale and depth of the future cities capability in the UK. Produced by the FCC and Arup in association with UK Trade & Investment, it reveals that more than 32,000 enterprises across the UK are already addressing the challenges posed by the huge scale and pace of urbanisation worldwide.
There are now more than 400,000 architects, civil engineers and urban designers in the UK with the expertise to provide solutions for the world’s cities. Many others, including data analysts, software developers, academics and financial and business services professionals are also engaged. It is estimated that future cities activity is already worth over £16bn to the UK.
As well as plotting the scale of the UK’s capabilities, the report identifies cities, in addition to London, at the forefront of developing products and services for cities globally, including Bristol, Birmingham, Newcastle and Manchester. For example, London-based Space Syntax uses urban data, spatial technology and predictive analytics to forecast the effects of planning and design
Crowdsourcing disused sites Countryside campaigners are calling on the public to identify disused land across England that could be suitable for new homes. The Campaign to Protect Rural England (CPRE) is launching a scheme to map brownfield land in a bid to highlight thousands of empty sites in villages, towns and cities. The digital initiative, #WasteOfSpace runs until January 2015 and people are being asked to nominate a brownfield site in their local area – for example, an empty shop, disused post office, or abandoned factory – by tweeting or emailing photos that will be added to an interactive map online. A CPRE report earlier this year warned that the government’s planning reforms are unnecessarily damaging the countryside (http://bit.ly/1ur4Vb2). Only a quarter of local authorities propose to prioritise brownfield sites
6 NOVEMBER 2014
over greenfield because national planning policy does not give them enough support to do so, it said. The government has since introduced incentives for developers to build 200,000 homes on brownfield land by 2020, but CPRE says there are thousands of more sites that should be unlocked.
CPRE said creating create a live map will help politicians and developers to identify sites and exceed their targets. Chief Executive Shaun Spiers said: “At the last count, there was enough brownfield land in England to accommodate at least 1.5 million homes. With so much wasted space available it is nonsensical that 700,000 new homes are currently planned for our open countryside, 200,000 of which are in the green belt. Using brownfield land and empty buildings is a win-win, making our towns more valuable and saving our precious countryside.” n To nominate a site and add it to CPRE’s WasteOfSpace map of England, send an image of the site (as simple as a quick snap on a smartphone) and either a postcode or rough street address to wasteofspace@cpre.org.uk; @CPRE with the hashtag #WasteOfSpace or Facebook #WasteOfSpace
UPFRONT UPDATE
In brief... RICS training Residential building surveys – a practical workshop
5 November, London, 10 December, Manchester
decisions on the movement and interaction of people. A university spin-off, it has provided strategic consultancy services to property investors and developers, public municipalities, community groups and building operators. FCC board member and former chief executive of WS Atkins Keith Clarke said: “With its deep academic skills, institutional strength, engineering depth and its own world-leading Climate Change
Act, the UK is ideally positioned to not only adapt but actually more importantly, mitigate to ensure we stay closer to two degrees than the horrendous scenarios of three degrees plus. It is a revolution we have never seen before, bringing enormous opportunities for creative and progressive development of systems, technologies and society.” n For more information, see https://futurecities. catapult.org.uk
Neighbourhood planning engagement urged A new RICS information paper has been published to alert members to the increasing importance of the neighbourhood planning regime introduced in England under the Localism Act, and more particularly business neighbourhood planning where RICS members are already closely involved. Neighbourhood plans establish general planning policies for the development and use of land in a defined area. When completed, these plans form part of the statutory development plan of the relevant local authority and therefore have full weight in the determination of planning applications. All areas undertaking neighbourhood planning are encouraged to actively engage with local landowners, retailers, private companies, shops and businesses and their employees. However, in significant local business areas with high densities of commercial premises such as high streets or town centres or business parks, it may be appropriate for the area to be designated a business neighbourhood. n Neighbourhood planning: involving businesses and landowners, 1st edition: http://bit.ly/1r1jWOB
As valuation work has reduced, many residential practitioners have increased the proportion of condition assessment products to fill the gap. This one-day course will deconstruct the residential building survey so practitioners can review and evaluate their own approach. Moving into Condition and Homebuyer Reports and other ‘level two’ services is not usually a problem. Building survey reports can be more challenging, calling for more extensive inspections and longer reports. The nature of the advice also demands a deeper understanding of technical issues, without which practitioners quickly become vulnerable because clients and courts have higher expectations. n To book, visit http://bit.ly/1trHwc3
Public sector property asset management
22 October, London, 12 November, Nottingham More than ever, public sector property must deliver modern and effective services from the most efficient property asset base possible. But how do you make sure that the way you manage your business will
deliver this, year on year? The answer is to embed effective asset management across your organisation. This course will cover the key elements of effective and efficient property asset management in the public sector, based on the latest update of the RICS public sector property asset management handbook. It will focus on how these elements should become an everyday part of the way you manage your organisation. n To book, visit http://bit.ly/UATK2X
Property development strategies
12 November, Bristol, 21 January 2015, Birmingham This one-day course will develop your knowledge and understanding of the appraisal of a development opportunity, from the initial concept through to deciding to build the scheme. Delegates will consider all the factors that impact on the decision-making process, including site appraisal, planning, development appraisal and development finance, to gain an understanding of how all these elements interact and how the developer can manage the process. This course is suitable for anyone working within, or having an interest in, the built environment who would like to gain a greater insight into the development process and financial appraisal. n To book, visit http://bit.ly/1uqK5ZF
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UPFRONT L EGA L
On a firm footing Greg Harrison provides an overview of the key questions that should be asked before entering into either a new arrangement or a new area of work
A
t the outset of a new contractual relationship or the launch of a new service, surveying firms need to positively influence their long-term risk profile. Below are some key issues that should be addressed at the outset to help mitigate risk: bb Are you being paid a fee that accurately reflects your work, your expertise and the associated risks? bb Understand your client base and be wary of working for clients whom you know or fear may be litigious. Undertake due diligence on the ownership and financial stability of the party with which you are contracting. Share information with your peer group and other professional advisers and be alert to warning signs, such as a firm that is clearly struggling financially, as evidenced for example by their report and accounts. bb Manage clients’ expectations from the outset. Do not agree to timelines that you know you cannot meet, do not operate outside your area of expertise and ensure that your client understands the nature of the service they are receiving. If you feel that your client or potential client is being unreasonable, explain your concerns in writing and keep records of all communications. bb Do you understand who your client is and to whom you owe a duty of care? bb To whom are you potentially liable in respect of a report? In considering potential liabilities, much will depend on the particular facts of the case and whether the surveyor can fairly be said to have behaved in such a way as to indicate that they are assuming responsibility to the person relying on the report. Other factors to be taken into consideration will include: • whether there was any direct contact between the surveyor and the third party (exchanges of 8 NOVEMBER 2014
questions and answers are therefore likely to be relevant) • the terms of the retainer, which may well specify who is the client and who may have a direct cause of action against any professional advisers involved in the project • the terms and any caveats stated in the surveyor’s reports; the purpose of the advice; and the extent to which the surveyor is aware of the manner in which the advice is published and the extent of its publication. Take for example, the recent case of Hubbard v Bank of Scotland where the Court of Appeal found that a surveyor who prepared a mortgage valuation was under no obligation to advise the borrower to obtain a full structural survey. In dismissing the appeal, the court found that the surveyor had been instructed to prepare a valuation report, and not a full survey. As a result, the surveyor’s duty was more limited than had they been instructed to prepare a full survey. bb Ensure that you undertake due diligence on other contractors, e.g. architects and project managers. This should include an assessment of their financial standing, their professional indemnity insurance (PII) and referencing conversations with your peer group. This should help to reduce the likelihood of finding yourself in the position of ‘last man standing’ in the event of claim.
Undertake due diligence on the ownership and financial stability of the party with which you are contracting Images ©
bb Ask yourself whether the manner in which a contract is being run or a potential client conducts their business enhances the likelihood of a claim arising. For example, when assessing whether to take on instructions from a new lender: • What steps are taken to assess the borrower’s ability to repay the loan? • What types of loans are being offered – first or second charge? • What are the typical default rates? • What are the typical loan-to-value ratios? • What is the nature of the lender’s client base – high net worth or those who are less financial stable? • What types of properties are loans being offered on – buy-to-let, sub-prime retail, development sites? • Be careful about re-addressing reports to ensure you do not end up with multiple claims from the same report. If you are going to re-address a report then consider writing to the other recipients, asking for confirmation of whether any reliance has been placed on the report and, if not, withdrawing it. If lending has already been advanced by the earlier recipient, then think carefully about re-addressing the report. bb Before entering into any service agreement, ensure that you have read and understood the contractual documents. If necessary, seek a second opinion from your insurance broker or solicitor. You should pay particular attention to the liabilities you are being required to cover. Does the contract, for example, require cover for ‘all losses costs, damages or expenses whatsoever incurred’ or unlimited assignment which can be particularly important in the event of securitisation and/or after market transactions. It must be noted that neither of these would be covered by a standard RICS-compliant PII policy. bb Are any liabilities that may arise covered by your PII policy both in terms
UPFRONT LEG AL
Surveyors should ensure that in any given situation they are aware of the potential liabilities that could arise of the nature of the work and the limit of indemnity required? Remember: • Are you exposing your business to potential class actions? These are a real possibility if the report you are providing is to be made available to, for example, a group of investors who then rely on it when making an investment decision. Where the potential for class actions exist, substantial risks arise around aggregation and the policy excess structure (e.g. a ‘per claim‘ excess could be disastrous for an insured surveying practice, although it could potentially increase the indemnity available) • Is there any need for you specifically to disclose to your insurer that you are intending to undertake work of this nature? • Are there any restrictions, exclusions or terms of your PII that mean that you may not be covered for this type of work? • Do you need to amend your indemnity limit? Remember that any increase in limit should be maintained for at least six years thereafter. bb Are your terms and conditions up to date and fit for purpose? Serious consideration should be given to the negotiation of exclusions, limitations of liability and restrictions on the classes of person entitled to claim. However, not all exclusions will be effective in law. What will and will not
be held to be effective will be dependent on a number of factors including the identity of the parties, the nature of the transaction, the availability of insurance cover and the reasonableness of the exclusion. bb Are your business systems and procedures designed to enable you to manage either a new contract or a new type of work as efficiently as possible? Failures in systems and procedures are a common cause of claims. They often fail to evolve with a business and can counteract rather than support attempts at managing risk. bb Be conscious of the impact of political, social and environmental events on risk. While these factors are largely uncontrollable, being aware, for example, of the impact an economic downturn can have on the likelihood of litigation increasing may empower you to temporarily withdraw from a particularly sector. Taking issue with a particular element of a contract or instruction will not necessarily yield positive results. However, surveyors should ensure they are aware of the potential liabilities that could arise, are fully conversant with what is required from them and who they are acting for, and have taken all practical and reasonable precautions to mitigate those risks. Surveying firms, or indeed any professional advisers, have a much better chance of positively influencing both the nature of contractual agreements and the risk profile of a particular instruction or work category in the early days of a relationship. If, for example, you accept unlimited liability or particularly broad contractual agreements now, you are effectively making a rod not only for your own back but also for those of other surveying firms. b With thanks to Rob Crossingham of Weightmans LLP for his help in writing this article Greg Harrison specialises in handling professional indemnity insurance for the Property and Construction sector greg.harrison@howdenwindsor.com
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UPFRONT P E R M I T T ED D EV ELO P M ENT
All change? Permitted development rights for converting offices into housing have been in force for a year; Nicola Furlonger reviews the challenges that have arisen and the lessons learned over this time
O
ver the past year, the UK government has continued to announce new initiatives for ongoing reform of the planning system, loosening controls and removing the requirement for planning permission for many types of developments. The driving objectives are to incentivise development and deliver new housing. The 2014 Budget proposed the introduction of a three-tier, pyramid-shaped planning system, whereby, at the top, only the largest of developments (and smallest in number) would require ‘express’ planning permission. At the base of the pyramid would be those developments that would be subject to permitted development rights (PDRs) – meaning no planning permission would be needed. The middle tier would comprise those developments that benefit from PDRs, but required a simplified ‘prior approval’ check by the local planning authority (LPA) before development can proceed. A vanguard for this middle layer was introduced in May last year, allowing offices to be converted to residential use without planning permission. One year on, there are clear opportunities and lessons to be learned from this PDR ‘experience’.
Removing conditions The premise of PDR is simple and by now, well known. As set out currently, until 30 May 2016, the government has granted a national planning permission for changes of use from office accommodation to residential. With no requirement for planning approval, few of the potential requirements and resulting conditions and obligations apply; most notably, for affordable housing. The often onerous demands of the planning application 10 NOVEMBER 2014
process are also removed, replaced with a simpler prior approval ‘check’. With these new freedoms, developers and owners of office stock can make decisions about the future use of their property based primarily on market factors, largely unencumbered by the planning process. There are a series of pre-conditions to benefit from the PDR. The building must have been in use on 30 May 2013 for offices (within the B1(a) use class) or when it was last used prior to that date, and the new C3 residential use must ‘begin’ by May 2016 (more on this later). The building cannot be listed or be a scheduled monument, nor can it be part of a ‘safety hazard’ or ‘military explosives’ area. Some restrictions attached to a previous planning permission for a building could prevent use of PDR – an issue to watch. Some 33 geographical areas are excluded from the PDR, the result of a hotly-contested application process by local authorities. Notably, these include the commercial cores of London and Manchester but also include other more surprising areas across southern England. The PDR has not been a popular measure among many LPAs, which are concerned about the loss of office stock. Some have used their own powers to remove the PDR in parts of their areas through Article 4 directions, among them Brighton and Richmond. Ministers cautioned against the ‘disproportionate’ use of such powers. It must also be remembered that operational works and changes to the external appearance of a building will still require planning permission.
Prior approval challenge Before beginning an office building conversion, a developer must apply to the LPA for a determination as to whether
prior approval is required in respect of three issues: transport impact, flood risk or contamination risks. What is intended is that an applicant makes a relatively simple submission that will allow the LPA to make its decision within 56 days – confirming that prior approval is not required or is granted, or that prior approval is refused. No decision within 56 days means that development can proceed – effectively automatic approval. The LPA will consult ‘sparingly’ during the process, including with neighbours and potentially statutory consultees. It may also seek additional information during the course of the application to clarify impacts and proposed mitigation. But it should all be done and dusted in the 56 days. However, experience to date has shown that while the process is quick, it can be far from simple – and may entail 56 days of difficult negotiation and additional information requests; with the looming threat of a refusal if LPA requirements are not met within the timescale.
UPFRONT P ERM I T T ED DEV ELOPMENT
Developers wishing to de-risk their development should take the completion date seriously Proportionate planning The government’s Technical consultation on planning, July 2014 states:
This convoluted process has been the result of various factors, including imprecisely worded and misapplied regulations; and, underlying these, resistant LPAs attempting to keep control of too wide a range of factors. There has also been significant variation between authorities, for example, over the submission requirements, ranging from accepting an application on the basis of a simple boundary plan, a written description and existing floor plans and others asking for fully detailed proposed unit layouts. Importantly, an inspector considering an appeal case in January confirmed the former, simpler submission as the appropriate approach. There has also been dispute over the factors that an LPA can take into account in considering a prior approval application. Vague reference in the regulations to LPAs being entitled to have regard to national planning policy “as if it were a planning application”, led to them being considered against a far wider range of factors than was
intended – for example, amenity and play space requirements. This also resulted in conditions being attached going far beyond the three determining issues. Many applicants were taken by surprise by LPAs also seeking section 106 obligations in connection with a prior approval determination; one London borough uses these regularly to enforce car-free housing. Fifty six days can be an ambitious timescale to complete a legal agreement.
Be prepared Lessons have been learned by the government, LPAs and the development industry. The regulations were fine-tuned in April this year – and government guidance issued – to clarify information requirements and ensure that prior approval applications are considered only against the three issues. It was also clarified that planning conditions may be attached to a prior approval decision, again to deal only with the three issues. The start of the process saw n many LPAs unprepared. As time has
“This is the third package of new permitted development rights brought forward by this government. This underlines a desire to see a reduction in the number of developments for which a full planning application is required. The increased use of a prior approval allows a greater opportunity to grant national planning permissions for those areas of development that are likely either to be low impact or to assist meeting wider growth objectives. “We are committed to supporting increased housing supply. Improvements have already been made to the planning system to remove unnecessary delays to new housing development. To encourage further housing development, the government is now seeking views on broadening the range of premises that can change use to housing through permitted development. “To support development we need a proportionate and fair planning system that boosts growth and reflects the changing nature of our economy and society. Developments vary in size and complexity and it is appropriate, therefore, that the consideration given by local planning authorities should be proportionate to the proposal. “The government is committed to making it easier for applicants to navigate the planning system. The three-tier system helps to further focus the planning process and recognises the role of local authorities in considering major developments and those with the greatest potential impact on localities.”
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UPFRONT P E R M I T T ED D EV ELO P M ENT
There is a risk that the focus on conversion is diverting developers away from building new purpose built, higher quality stock n passed, improved understanding and more experience in dealing with the applications means they are better able to advise on, and undertake the process. From a developer perspective, the key lesson from year one is to be prepared. Understand the process before an application is submitted, talk to the LPA, and make sure the submission deals up-front with issues that may arise (e.g. flooding or drainage problems; how refuse trucks will access the site). That way, last minute surprises are avoided.
Opportunity and success Despite the pitfalls, there is evidence that the measure is delivering on its promise to support an increase in housing supply and bring empty properties, and some not so empty, into productive use. Prior to implementation, an October 2011 study by Nathaniel Lichfield & Partners (NLP) with Child Graddon Lewis architects and others, Departments to apartments (http://bit.ly/1mXYo66), assessed the opportunities for office-to-residential conversion. It pointed to a stock of post-war office buildings in London’s commuter belt and in regional centres as being ripe for conversion. Data has borne this out, with significant activity in outer London. Richmond, for example, validated 19 applications within just over a month from the measure being introduced – by July 2014, this had translated into 215 prior approvals that would deliver around 500 new dwellings. By 31 August 2013, Merton had approved 31 prior approval applications that, if implemented, would result in 175 new apartments. Harrow granted prior approvals between May and December 2013 that would add 483 new dwellings. Centres away from London have also seen considerable numbers of applications. Brighton City Council determined enough prior approvals between June 2013 and February 2014 to see the creation of 202 housing units. Information from Leeds City Council 12 NOVEMBER 2014
confirmed that 24 applications were received by March this year, with approvals potentially leading to an additional 113 dwellings – mainly focusing on smaller secondary office stock in suburban areas. There are signs of some unintended consequences, with LPAs perhaps holding more tightly onto stock that might normally be appropriate for redevelopment for housing. There is also a risk that the focus on conversion is diverting developers away from building new purpose built, higher quality stock. What is clear, assuming the statistics convert into reality, is that the PDR is going some way to achieving the government’s desired contribution to housing delivery.
Extended future In its consultation on the changes to planning, published in July, the government announced its intention to extend the time for ‘completing’ developments with prior approval under the existing PDR to 30 May 2019 (currently the regulations specify that, to benefit, the residential use must have begun by 30 May 2016). This will deal, for the time being, with the uncertainty over what it means to have ‘begun’ the use. While case law suggests that the units may not need to be occupied, government guidance states that the development must be completed. At the same time, the government announced that the PDR would be replaced in May 2016 by an alternative version. This would still offer a national planning permission for office to residential changes of use. However, as currently proposed, the existing geographical exemptions would be replaced with a new consideration in the Images © Nathaniel Lichfield and Partners
prior approval process relating to “the potential impact of the significant loss of the most strategically important office accommodation”. This may be considered as a backwards step by many, dealing as it does with the principle of the change of use; and, despite assurances, exposing the process to further risk of debate and disagreement. What is clear is that the PDR is here to stay for some time.
Looking forward The office-to-residential experience is showing that, despite teething problems and continued complexities, there are opportunities for the right building, in the right location, at the right time. The government clearly feels the measure is a valuable one; new PDRs (with a prior approval process) to change from retail to residential and agricultural to residential have already been introduced this year (www.nlpplanning. com/nlp-insight). At the time of writing, government is consulting on the introduction of further PDRs, including changes of use from warehousing and light industrial to residential. The office to residential experience has proved a test bed for what is evidently going to become a familiar part of the planning landscape. b Nicola Furlonger is Associate Director at Nathaniel Lichfield & Partners nfurlonger@nlpplanning.com
Related competencies include Planning
UPF R O NT TA XI NG T I M ES
TAXING TIMES
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Gillian Banks outlines where and why tax can hit home sales
When you sell your home there is an assumption that it will be tax free. Generally, that is true because there is a relief for your only or main residence – private residence relief (PRR) – but there are conditions, qualifications and complex rules. bb Gardens are also tax free, provided they are not more than 0.5ha. If the home is large, a larger area suited to its character should also be allowed. But paddocks, woodlands etc will not be. bb The home must have been your residence. A holiday home might count, but a house you rent out generally will not. bb You can usually have only one main residence at a time. If you own more than one home you can choose which is your main residence by electing to HMRC within two years of acquiring the second. Married couples and civil partners may only have one main residence between them. bb If you are away from the home, for example working abroad, those periods will count as occupation. The last
18 months of ownership or a home that has been your main residence will also count. bb When the home is sold, the gain is calculated and apportioned between periods that count (occupation or deemed occupation) and those that do not. Capital gains tax (CGT) is charged on the gain that is not covered by PRR. After the annual exemption (currently £11,000), the excess is taxable at up to 28%. HMRC has taken a number of cases to court in the past couple of years to challenge claims for PRR. Most centre on the quality of the occupation of the property – e.g. was the property actually a residence of the individual, or was any occupation only for a temporary purpose? New tax charges on residential property were introduced in April 2013. There is an annual tax on enveloped dwellings (ATED) i.e. properties worth over £2m (at 1 April 2012) held in companies, certain partnerships and collective investment schemes (see Property Journal June/ July 2013, p27). Stamp duty land tax (SDLT), at 15% on purchase of property into an ‘envelope’, is much higher, and CGT is payable on sale. If the owner is a UK resident company, they would normally have paid corporation tax (now at a rate of 21%) on
gains, but now pay CGT at 28%. Non-UK resident companies previously would have had no liability to tax on this type of property. ATED has proved ‘successful’ in that it has raised five times the tax forecast. However, the government was seeking to discourage enveloping, and the scale of revenue raised indicates this has not worked. The legislation was not designed to encourage existing envelopes to be dismantled, which, along with other non-tax reasons for holding property in companies, means that most have remained in place. ATED (along with the other related charges) will be extended to properties worth more than £500,000 from April 2015, with increased SDLT charges from 20 March
Government intends to introduce a CGT charge on non-UK residents who dispose of UK residential property
RI CS P RO PERTY JOUR NAL
2014. There are exemptions – for example, where properties are let to third parties or used to house employees etc – but an annual return is required because such relief needs to be claimed, increasing the administrative burden for small businesses. This aspect is under consultation. In the 2014 Budget the government announced its intention to introduce a CGT charge on non-UK residents disposing of UK residential property. Under the new proposals, on which consultations ended in June, most overseas persons, including individuals, trusts and companies will be affected, although there would be exemptions for certain collective holders such as widely held Property Authorised Investment Funds, foreign equivalents of REITs and certain types of communal accommodation. It became apparent during the consultation that there are a number of practical difficulties with the proposals, including how residential property should be defined, interaction with other tax charges on the same gains and the removal of PRR elections. This latter proposal could have a big impact on wholly UK individuals owning more than one home. Affected individuals might have to keep or reconstruct details of their and their families’ whereabouts and this could place pressure on HMRC and the courts in resolving unclear cases. It remains to be seen whether an administratively simper way can be found. b Gillian Banks is tax director at PricewaterhouseCoopers LLP gillian.m.banks@uk.pwc.com
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UPFRONT U N FA I R D I S M I S S AL
Helen Crossland outlines the rights and risks for employers in embarking on pre-termination negotiations with staff
Parting company
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ome employers may remember the time when it was possible to have a frank chat with an unwanted or underperforming employee and hand them a cheque in exchange for leaving the business, without fear of reprisals or claims. Provided the conversation that accompanied the financial incentive was stated to be ‘off the record’ the employer was safe in the knowledge that they enjoyed the benefit of ‘without prejudice‘ protection. This meant that if the employee went on to bring a claim against them the conversation or proposed golden handshake could not be used in evidence. The position changed radically several years ago when employment tribunals determined that for such conversations to qualify as ‘without prejudice’ and so be inadmissible in court, they had to be in anticipation of a legal dispute. The upshot was that employers could only safely have an off the record conversation with an employee about their possible departure if there was a genuine legal dispute between the parties, for example following the conclusion of a formal internal employment procedure such as performance or sickness management, disciplinary or grievance proceedings. The rationale was that if the employee was still employed, the parties ought still to be viewing the relationship with an open mind, and not anticipating the employee’s termination or a legal dispute. If an employer did make an employee a financial offer to leave in the heat of the moment and in the absence of a genuine dispute between the parties, this could then lead to a successful claim for constructive dismissal, or to a claim that they had been sacked unfairly, which would not be defendable. The lack of any formal proceedings would simply add to the compensation award the employer would be ordered to pay. The commerciality and realism of the above approach has always been questionable, and clearly there are benefits to both employers and employees of being able to have an honest ‘cards on the table’ conversation in which terms for a speedy and amicable departure can be explored.
Discussion route In recognition of this, in July 2013 the government introduced pre-termination negotiations, which are a new take on ‘without prejudice‘ conversations. These permit employers to have 14 NOVEMBER 2014
It is safer to conduct the negotiations in the opening stages of an employment procedure, making the risk of ‘undue pressure’ minimal discussions with employees about their possible exit from the business, without there being a legal dispute in the offing and subject to strict guidelines being followed. Pre-termination negotiations will normally involve the employee being offered a financial package which, if agreed, should be conditional on the employee signing a settlement agreement (formerly compromise agreement). Such discussions, if conducted properly, will be excluded as evidence in any ordinary unfair/constructive dismissal proceedings that ensue, for example, if the employee rejects the financial package offered and resigns and/or considers themself dismissed. However, they come with significant ‘health’ risks. Most significantly, if an employee lodges a tribunal claim containing more than one complaint – in other words, they claim for unfair dismissal and discrimination, while any pre-termination negotiations would be inadmissible for the purposes of the unfair dismissal claim, they could still be referred to in the discrimination claim. Because it is common for employees to bring discrimination and other complaints alongside unfair dismissal proceedings, pre-termination negotiations will only properly be excluded for evidential purposes if a standalone unfair dismissal claim is brought.
UPFRONT UNFA I R DI S MISSAL
employer’s objective is to persuade the employee to leave. The employer may, for instance, say: “If you go, we would like to pay you a sum that gives you a financial cushion, whereas if you stay, I cannot guarantee what will happen.” To this end, it is safer to conduct the negotiations in the opening stages of an employment procedure, such as performance management proceedings, when both parties may genuinely consider the employment relationship capable of being rescued, making the risk of ‘undue pressure’ minimal. Of course, if the pre-termination negotiations fail, the employer may still proceed to terminate the employment after completing the correct legal procedure.
Negotiation tips
The obvious difficulty is that when the negotiations take place, the employer may not know what other claims the employee intends to bring. Indeed, the individual employee may not know that they have grounds for discrimination or other claims, since this may only emerge once they have seen an employment lawyer. The possibility of a discrimination claim is just one element that should be taken into consideration. If the employee considers they have, for example, a whistleblowing claim having raised health and safety concerns, or have been sacked owing to trade union involvement, then pre-termination negotiations will also be admissible. Also qualifying are situations where the tribunal considers the employer has acted unreasonably: bb by placing undue pressure on the employee, i.e. by making it clear dismissal is inevitable if they do not accept the offer bb by giving the employee only days/hours to consider the offer bb by using threats, intimidatory or aggressive language or behaviour when making the offer bb if the offer is due to a discriminatory reason bb if the offer follows the employee having threatened to ‘blow the whistle’ about the employer’s business or practices.
ACAS code ACAS has produced guidance for employers regarding pre-termination negotiations recommending that the employer should: bb give reasons to the employee for the proposal bb offer the employee a reasonable time to consider the offer (including any settlement agreement) bb allow the employee to be accompanied to the meeting at which the offer is presented. Realistically, however, there will always be an element of pressure in any ‘off the record‘ conversation, where the
Before embarking on pre-termination negotiations, employers should take legal advice and consider the following: bb do not start negotiations until you have commenced a formal employment procedure bb send the employee a written invitation to attend a formal meeting within the relevant employment procedure bb simultaneously invite the employee to confirm whether they would be interested in entering into pre-termination negotiations, and if so secure their agreement to this in writing, confirming they are entering the discussions voluntarily and are not aware of any employment claims; only once this agreement is obtained should you put forward a settlement offer bb set out any proposed terms in a settlement agreement, and mark all correspondence ‘without prejudice and subject to settlement agreement’ bb give the employee at least seven days to make a decision on whether to accept the offer bb if the employee rejects the settlement offer and terms cannot be negotiated, or if the employee suggests they are the subject of discrimination at work or under undue pressure to accept the offer, close down the pre-termination negotiations, return to the employment procedure and exhaust this fairly before terminating the employment by another route bb introduce pre-termination negotiations procedures in your staff handbook; employees, of course, are entitled to start the procedure themselves.
Conclusion Pre-termination negotiations can be a highly effective means of ending an employment relationship, where the employee is willing to accept the option of a termination package over an employment procedure that could be stressful, unpredictable or damaging to their future employment prospects. Employers need to approach such negotiations on the understanding they may not achieve the desired result, but similarly their commercial value should not be overlooked as a means to ensure an employee’s clean and swift departure from the business. b Helen Crossland is a Partner at Hamlins LLP hcrossland@hamlins.co.uk Related competencies include Conflict avoidance, management and dispute resolution, Managing people
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UPFRONT L EGA L Q & A
Legal Q&A Q
I have an office building that is empty and earmarked for development but I am worried about squatters moving in. Should I use a property guardian?
> Elizabeth Greaves and Shanna Davison
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Since squatting in residential property was criminalised in 2012, an empty commercial building is particularly attractive to squatters. As a result, a growing number of owners are paying agencies to install ‘guardians’ into their empty buildings to deter squatters. It works like this: the owner engages a guardian agency, which is cheaper than paying for 24-hour security guards. The agency grants licences to pre-vetted guardians, who stay in the property until the development is ready to proceed. The guardians pay the agency to live in the property, typically at a reduced rent, as well as covering utility bills and council tax. Sounds good, right? However, these schemes are not without controversy. What is the legal status of guardians and what rights could they acquire over your property? Licence terms The agencies promote flexibility for the owner to have the property back when required. To achieve this, they need to make sure that the guardians do not have a lease. A lease grants a right of exclusive possession for a defined period of time, in exchange for payment of rent. Tenants under a lease enjoy certain statutory rights, for example, the landlord must maintain the property in a state fit for habitation and the tenant cannot be evicted during the term except in certain circumstances. By way of contrast, a licence is no more than permission for that person to occupy the property for the time being. The statutory protections do not apply. However, simply calling the agreement a licence does not make it so. To be fair, most agencies appear to have taken advice on this issue and their licences include the right to make regular inspections and to change the allocation of rooms in the building. If this is done in practice, the agreement is likely to be a licence. Potential pitfalls Even if the guardians are granted licences, two substantial problems arise. Many agencies pledge to have the property empty within two weeks’ notice. Most licences fall within the Protection from 16 NOVEMBER 2014
+info Elizabeth Greaves is Trainee Solicitor, Hogan Lovells elizabeth.greave @hoganlovells.com Shanna Davison is Associate, Hogan Lovells shanna.davison @hoganlovells.com
Eviction Act 1977 which requires at least four weeks’ notice in a prescribed form to terminate. If not done, the agency and the owner commit a criminal offence and could face up to two years’ imprisonment. If the owner is a company, the directors and managers could be liable. If the guardians do not leave once notice has been given, a court order will be required to evict them, adding further delay and costs. Less reputable agencies may turn their backs at this point and leave the owner to apply to court. The second problem is that if at least three guardians live in the property, who are not members of the same family, it will usually be a house in multiple occupation, which may need to be licensed. Failure to apply for a licence could lead to a fine of up to £20,000. In addition, certain criteria must be met, such as installation of smoke alarms, producing a gas safety certificate and ensuring that the furniture and appliances are in a safe condition. For properties that are not designed for use as a residence, the costs of complying with these requirements may be higher than employing security guards. Going ahead? Despite these risks, in practice is seems that guardians are happy to leave when asked. However, the guardians will leave the property unattended at various times, for example, to go to work. If squatters do attempt to enter the property, the guardians are not under any obligation to try to stop them. If you have a building where it is crucial that squatters are kept at bay, a guardian may not offer enough security. If you do decide to go ahead, you should consider the following: bb find a reputable agency that: • regularly enters the property and moves the guardians around to stop them obtaining a lease • restricts the guardian’s use of the property to a residence to avoid a business renewal under the Landlord and Tenant Act 1954 • agrees to pay the costs of evicting guardians through the courts, if necessary • provides four weeks’ notice to the guardians to leave the property. It is a bonus if they agree to leave before then, but you should prepare for the worst case scenario where you will have to get a court order to get your building back bb ensure that no more than two people are assigned to the property at any time. b
UPF R O NT T RA I NI NG
RI CS P RO PERTY JOUR NAL
Top priority
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Pierpaolo Franco explains the importance of new RICS executive training programmes within the built environment industry
As the economy and real estate markets continue to bounce back from the deepest recession in modern times, more and more organisations are looking for ways to help transform their business, seize new market opportunities and support long-term profitable growth in the global marketplace. Forward-thinking leaders in the real estate, property and construction industries are turning to executive education programmes as a powerful tool to help them build the knowledge, skills and insight they need to drive their businesses forwards. Furthermore, today’s leaders are also recognising that executive education has a key role to play in establishing and maintaining world-class standards of excellence within their organisations. The global building and construction industry is undergoing dramatic change. Projects are becoming increasingly complex and competition in the marketplace is intensifying. To succeed, organisations must ensure that they focus on quality standards while improving efficiency, mitigating risk and identifying how they can achieve competitive advantage. Alongside this, the industry faces a burgeoning
Business challenges
The industry faces a skills crisis as the last of the ‘baby boomers’ retire from the workplace skills crisis as the last of the ‘baby boomers’ retire from the workplace. Many of the leaders in waiting do not have the confidence and skills to take over the reins, typically as a result of the lack of training and development during the recession years
when budgets were pared back to the minimum. Having focused on costs during the global financial crisis, leaders are now turning to growth opportunities, in particular those arising from new infrastructure plans, urban development, population increases and emerging economies. As the industry prepares for a period of expansion, with organisations either entering new geographies and sectors or consolidating their footprint in these areas, there is an acknowledgement that leaders and managers need a broader and more in-depth knowledge and skills base. Executive education is coming to the fore due to its ability to help the industry create a much needed global framework of knowledge.
Dedicated programme Up until now the majority of executive education programmes across the world have been designed for the industry sector, and focus primarily on leadership and general business topics such as finance, marketing and business development. But now, as a leading professional body in the built environment sector, RICS is ideally positioned to provide this unique global solution. The programmes address a select range of topics covering all relevant aspects of the construction industry, and include leadership and finance training blended as part of the programme rather than as discrete topics. Using this approach, leaders gain both essential NOVEMBER 2014 17
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UPFRONT T R AI N I N G
n leadership and commercial skills, as well as the high-level technical knowledge and insight they need to develop effective strategies and navigate through the complex commercial environment they are operating in. RICS is seeing an increase in demand for executive education programmes in the UK and Europe. And there is even more of an appetite in emerging markets such as Brazil, China and the Middle East where the demand for talented leaders as managers outstrips supply. While today’s talent crisis is a global issue, research shows that talent is even more scarce in emerging markets where companies are struggling to keep pace with the new business opportunities being created. Without doubt, building a skilled and knowledgeable workforce is one of the most critical challenges facing organisations today. The good news is that leading companies are committed to investing in their talent through a combination of strategies that focus on recruiting the right people, giving them the right development tools and opportunities and ensuring 18 NOVEMBER 2014
Executive courses RICS is offering open programmes for leaders, senior directors and ‘next-in-line’ business leaders in London, Dubai and Brazil, including: bb Property valuation and finance bb Real estate development and management bb Project management, controls and performance management. Fast-track programmes are also available. n For more details, visit www.rics.org/ onlineacademy or www.rics.org/training
they are retained. As a result, executive education programmes are becoming an important component of innovative and competitive talent management strategies. High-quality executive education can deliver a whole host of benefits to the business as well as the individuals undertaking these programmes. For the overall business, executive education
can result in improved business performance and greater profitability. For both senior business leaders and HR organisations it provides a strong weapon for attracting, retaining and managing executive talent, as well as ensuring that the right people are equipped with the skills and knowledge they need to fulfil their roles more effectively.
Building confidence So what about the individuals? Most executives praise the programmes for giving them greater insight as well as the confidence to develop new ways of thinking to tackle business challenges, helping them to add value to their organisation while building a successful career for themselves. Our programmes are designed for senior business leaders and directors of local and global corporations and SMEs, as well as
successors or ‘next in line’ business leaders. Using case studies and best practice methodology executives gain practical experience in solving problems as well as a deeper insight into and knowledge of all aspects of the business, not just the areas they are immediately responsible for. Other benefits include unrivalled access to the RICS network of global academics, practitioners and industry peers and the opportunity to be part of a collaborative global industry network. Deeper levels of leadership and management development are typically delivered in each programme through the use of self-analysis tools and personalised one-to-one coaching sessions. Executive education in all industry sectors is clearly undergoing something of a boom with technology set to become an increasingly important driver and enabler. Face-to-face learning provides an ideal delivery format for executive education, with technology and blended learning initiatives (combining face-to-face and online delivery methods) enhancing the learning experience, enabling greater access to learning programmes and providing busy executives with the flexibility to manage their studies alongside their work. As recovery continues to gather pace and companies compete to engage employees more effectively to give them a competitive edge, executive education will continue to make its mark and prove itself as a valuable business and career development tool. RICS is pleased to be supporting the industry in this important area. b
Pierpaolo Franco is RICS Global Director of Training Products pfranco@rics.org
Related competencies include Managing people
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COMMERCIAL
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com mer cial NOVEMBER 2014 19
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COMMERCIAL M AL L M AN AG EM E N T
Talking shop Two case studies from Hong Kong show how property strategy and well-qualified property managers can contribute to a successful mall, wherever it is in the world
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ash-rich shoppers from the People’s Republic of China (PRC) are shaping the strategies of mall developers in Hong Kong, and expanding opportunities on the mainland. Most developers have identified visitors from the mainland as the source of growth in their malls. Extensive research has been conducted to identify the needs of this group in order to create the right mix of tenants. Opening hours, languages, payment methods, choices of food and beverage, transportation and product deliveries have been introduced to many local shopping malls, creating a shopping experience more tailored for mainland visitors. Maureen Fung, General Manager of Leasing at Sun Hung Kai Properties (SHKP) and Chairman of the Institute of Shopping Centre Management in Hong Kong, believes that managing a shopping mall portfolio is no different from managing a group of companies. But because a shopping mall is a physical asset, it is vitally important for industry practitioners to also understand the principles of real estate management. Chain retailers are willing to pay a premium because they are generally backed by private equity funding, publicly listed companies or multi-national conglomerates. Taking the traditional rental income maximisation approach, it would be easy to create a number of identical shopping malls with the same portfolio of retailers. SHKP takes an approach of aligning its interests with the tenants’ by charging rents based on the sales turnover of each of its shops. Decentralised management allows each mall to develop its own tenancy mix, which can better meet the demands of its community and visitors. In the case of one mall, aimed at younger, highly fashion-conscious shoppers, instead of making sales pitches to chain retailers, SHKP built a multi-million dollar exhibition site, inviting targeted retailers that carried relevant 2 0 NOVEMBER 2014
products. Rather than looking simply to maximise rental income, the objective was to create a trade mix that would appeal to the younger generation. Local residents were also consulted on what they would hope to see in this new mall. Hundreds of thousands of transactions are captured on the SHKP database of retail activity every day. Leasing approval is based not only on the basic rental income or brand prestige from potential new tenants, but also on whether the products would have a good chance of being welcomed by the shoppers, based on the consumer behavioral data. Population demographics are also significant, for example ageing, in deciding how to meet the needs of a changing customer cohort.
Meeting market needs In Hong Kong, travel permits introduced in China in 2003 created a new challenge. Clearly this would be an opportunity for retailers, but there were many questions. Where would the shoppers come from and how would they get across the border? What products would be welcomed by these visitors and what services would they need for a friendly shopping experience? How should the tenants be prepared? What kind of food would appeal to them? What would be the main reason for coming across the border? SHKP approached these questions via extensive market research. The logistics of travel was a hurdle that discouraged interest and research clearly indicated that organised shopping tours would be an appealing prospect. Therefore, identifying property close to the border with plenty of parking space for passenger coaches was essential
The most significant difficulty in Shanghai has been the lack of qualified personnel Images © SHKP
to serve this market, and Taipo was the obvious choice. Back up services such as the promotion of Unionpay systems (the only domestic bank card in the PRC) to tenants was also needed, as were money exchange facilities, setting opening hours to cater for early arrivals and the hiring of Putonghua-speaking ambassadors.
Broader skills sets SHKP is also involved in mainland China with its upmarket flagships, Shanghai IFC Mall and iAPM Mall, both parts of retail-office-residential projects. There, according to Fung, the most significant difficulty has been the lack of qualified personnel. Malls have to be developed from scratch, with the project team not only having to deal with the customer service and the marketing of the property, but also the physical asset management, valuation of properties, facilities management contract and leasing management as well as talent development (see Property Journal, July/August, p20-22). “These are core competent skill sets I look for when I hired my senior executives, in addition to their track record in marketing and promotions,” says Fung. “Take myself, for example; I hold a marketing degree, but since I started working for SHKP, it was clear to me that I am in the real estate industry, and if I wanted a career in this field, I ought to gain a solid understanding of property development, transaction,
C O MME RCIAL M A LL M A NAGEMENT
management and valuation. That’s why I took time to earn my Masters degree in real estate management and then subsequently my Chartered Surveyor qualification with RICS. The chief executive I appointed for Shanghai IFC is also a surveyor.”
Building relationships Sino Group is another Hong Kong property developer benefiting from the record number of visitors to Hong Kong. According to the Census & Statistics Department in 2013, the value of total retail sales in Hong Kong was $494.5bn, increased by 11% in value and 10.6% in volume over 2012, thanks to a record 54 million visitors from around the world, 72% of those from mainland China. Its property portfolio encompasses residential properties, offices, industrial buildings and shopping malls and the group has developed more than 200 projects in Hong Kong, China and Singapore, The group manages around 5 million sq ft of retail space in Hong Kong. Its aim with malls is to maintain long-term relationships through a tenant service programme supplying advice regarding shop location, in-store decoration, customer services, range of merchandise and promotional activities. With lucrative business potential, developers have become more willing to invest in enhancing the shopping experience, which has led to increased domestic consumption as well. Shopping
malls are rebranding themselves to attract local residents. With more local retail outlets, transport expenses are reducing, helping to boost personal consumption in shopping, dining, entertainment and leisure. Ronnie Chan, Sino Group General Manager (Leasing), says: “We work in partnership with our tenants. When we approach them, we will have already prepared an analysis of where the shop location should be in accordance to shoppers’ buying behaviour, what kind of decoration would best appeal to their target customers, which lines of merchandise they should display to reap the maximum return on investment, and how could they manage sales operations efficiently to improve their bottom line.” A team of designers works closely with them on planning, decoration, lighting, window display to align with the overall appearance and ambience of the mall. Good customer service also pays dividends; concierges of flagship stores provide a milk heating service so that parents do not need to rush home to feed their babies. Mobile phone charging services have become commonplace, and some malls even help customers to send local faxes and emails. All of these services help to improve dwell time within the malls.
Boosting visitors Apart from the qualitative feedback, Sino collects other quantitative data
such as sales receipts, visitor traffic and media reports, which can be analysed into meaningful property strategies. For example, according to Sino’s visitor survey, only 70% of shoppers would move on from the ground floor to the first floor, with a further loss of footfall for subsequent floors. In order to boost visitor traffic on the higher floors, flyover escalators have been introduced where shoppers can ride up two floors, which has proved successful in improving custom in these areas. Mall spaces are often leased as venues for art exhibitions and community service activities. In April to June 2012, Sino Art hosted the Transformation of the Qipao cultural exhibition at its Olympian City 2 mall to promote the unique legacy of this traditional Chinese costume, with a display of vintage dresses, free workshops for children and celebrity talks arranged to attract shoppers from outside the district. Chan says: “As a shopping mall, we see this exhibition as a way of leveraging on our group’s core business, which is essentially spatial and asset management, to add value to the community. It was a pleasant surprise, however, to see a surge in visitor traffic from groups of customers we would not normally have access to.” Chan adds that a shopping mall manager needs to handle different management functions. Most academic institutions offer courses on subjects such as marketing promotion, mall positioning and tenancy lease management. Like Fung at SHKP, she sees that because shopping malls are physical assets a qualified shopping mall manager should also be knowledgeable enough in communicating ideas on planning and development, facilities management, asset valuation and building safety to the contractors and in-house property departments. On completion of the property, the manager should be at the forefront to work with the leasing division to allocate tenant mix and design category ratio according to community profile. C
Related competencies include Corporate real estate management, Economic development
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COMMERCIAL EN E R G Y R AT I N G S
Graeme Murray discusses how a technical review of energy ratings can often achieve a improved classification, with consequences for valuation
Performance challenge
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he impact of The Energy Act 2011 will hit the property sector hard from April 2018, when in most cases it will become illegal to lease a commercial or residential property where a minimum energy efficiency standard has not been achieved. This is believed likely to be an Energy Performance Certificate (EPC) rating of E, meaning that many properties falling beneath this level will be unlettable, or ‘obsolete’. Surveyors should also be aware that in the case of domestic properties, the Act introduces a right for tenants to request energy-efficiency improvements that a landlord will be unable to unreasonably refuse, by the earlier date of 1 April 2016. As leases of obsolete buildings potentially become void, the ensuing results can include a fall (or considerably slower rise) in values, a less secure asset or ultimately the withdrawal of funding. But while the impact can appear extreme, there is much that the building surveyor can do now to reduce the client’s risk.
Upgrade costs With an estimated 18% of commercial property currently failing to meet an EPC rating of E or above, values of less energy-efficient properties will be – and in some cases are already – affected due to the seemingly unrealistic cost of upgrades and the threat of obsolescence. At CBRE, we are already seeing major commercial landlords and institutional investors responding by conducting reviews of property assets and putting in place material changes. In London and other regions where values are high, this response is not only a legal necessity but a worthwhile investment. It is in the areas and sectors where capital expenditure costs potentially exceed revenue, that the Act can pose a real threat. Approximately two-thirds of the UK commercial property market is leased, with the majority of let buildings having several occupiers. Although the legislation does not come into effect for four years, owners of such buildings should imminently consult leases (many of which run beyond 2018), to determine where responsibilities lie and ensure that buildings meet requirements. Consideration should also take into account whether a statutory compliance covenant exists, which could oblige the tenant to carry out the necessary improvements.
Steps to managing EPC risk
1 Portfolio analysis to allow fund managers to identify high-risk assets and develop an action plan to either dispose or improve the property in a structured manner. 2 Desktop reviews of existing EPCs and assessments of uncertified assets to ensure that any capital available is invested effectively to minimise the risk. 3 EPC risk assessment to be carried out in conjunction with other asset management tools such as life cycle replacement plans, planned preventative maintenance and air conditioning inspections. 2 2 NOVEMBER 2014
4 Consider funding options such as: Enhanced Capital Allowances: a scheme that enables businesses to claim a 100% first year capital allowance on investments on certain energy saving equipment, against the taxable profits of the period of investment. Allowances are typically aimed at commercial property. Renewable Heat Incentive: a payment for generating heat from renewable sources. Systems installed since July 2009 will be able to claim tariffs from the appropriate registration date. The equivalent scheme for
residential property was launched in summer 2014. Feed-in Tariffs: energy generated from a renewable or low-carbon source such as solar photovoltaic or wind turbine is paid for by the energy supplier, even if already used. 5 Improvement programmes can be carried out while tenants are in occupation although this can be costly, disruptive and involve compromises in the end product. If lease events allow, it is more effective to carry out the works on a vacant property as part of a general refurbishment project.
Images © CBRE
C O MME RCIAL ENERGY R ATING S
Case study: One Christchurch Way, Woking
Green leases are gradually emerging as a means of contractually agreeing (rather than imposing) standards of sustainable asset management on the landlord and/or the tenant. Such leases can address inequities of investment and return in which the landlord has responsibility for capital investment but the tenant benefits. While the objective of sharing the tenant’s savings creates an incentive for the landlord to undertake sustainable investment, there is a risk that the tenant is placed under onerous liabilities in relation to repair. Therefore, it falls to the surveyor to determine the impact of such clauses on the value or yield.
Accuracy issues Surveyors should be aware that EPCs are being reviewed and challenged during the Technical Due Diligence process. In CBRE’s experience, smart clients are no longer taking EPCs at face value or treating the process as a tick-box exercise, which has highlighted that a significant number of historic EPCs are inaccurate. The process of completing an EPC for a commercial building requires information to be collected and assessed using approved software. All data fields should be completed as accurately as possible, because if an element is not known the software reverts to a ‘worst case’ scenario. As such, many EPCs have been compiled with scant information by inexperienced assessors or simply undertaken cheaply, often resulting in a rating below what could have been achieved. Consequently, many properties that appear to fall below the minimum standard may actually comply: they are simply misrepresented. The impact can be significant, causing either price chipping or the collapse of deals. CBRE was recently asked to look at a transaction that was near collapse due to a poor EPC rating. Following the intervention of our Sustainable Engineering team, the EPC was improved from an F to a D simply by running a more thorough thermal model and the deal was rescued, saving the client a substantial sum. Our case study of four retail units in London’s Covent Garden (see overleaf) exemplifies this: originally rated as F and G, the units were recertified as C and D following a review on behalf of the vendor despite the only major change being the way the lighting had been assessed. EPCs were first issued in 2008 and expire after 10 years. It is worth bearing in mind that any transaction today may have an EPC dating back to 2008, and therefore will need to be recertified shortly after the 2018 deadline.
Size: 25,600sq ft The client wanted to centre this major refurbishment scheme on improving the building’s sustainability credentials, making the building more attractive to prospective tenants. The existing asset had an EPC rating of F thereby placing it at risk from the Energy Act’s proposed minimum standards to be introduced in 2018. The client required the asset to be future proofed against this and to change the EPC rating from a negative into a positive. The challenge was to deliver a sustainable refurbishment that would stand out from the competition within the local market without affecting the competitiveness of the rental value. Key aspects A bespoke sustainability framework for the project was developed to allow the various strategies to be considered and assessed by the project team. bb Integration of an external solar screen to create a visual feature, install passive solar shading and minimise the need for air conditioning. bb The screen enabled the removal of the existing solar film, refreshing the retained glazing and significantly improving the amenity of the tenanted space. bb Energy, thermal and day lighting analysis was carried out to inform the design process and establish the optimum solution. bb The engineering design was carried out by an in-house team to ensure that the agreed strategies were incorporated and the project delivered successfully. bb The EPC rating was improved from F to B as part of the refurbishment project and reduced the projected carbon emissions by over 50%. bb Shortlisted for AJ Retrofit Awards 2013.
While much of the talk about the Energy Act can be alarming to property owners, few buildings are genuinely obsolete Due to changes in Building Regulations, it is quite possible that a building with a good rating achieved pre 2010 may be at risk of obsolescence by 2018: already we are seeing buildings previously rated D now being given an E rating due to the more stringent benchmarks, and after the changes in regulations in April 2014 and again in 2016 that same building could potentially fall to an F when recertified. With such potential variation and scope for inaccuracy, it is unsurprising that ratings of C and D are also being questioned NOVEMBER 2014 23
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COMMERCIAL EN E R G Y R AT I N G S
Case study: Long Acre, London Size: 6,000sq ft The client was looking to dispose of a number of high end retail boutiques in Covent Garden. The units had recently been refurbished and fitted out to a high standard. As part of the sales process it was identified that the recently completed EPCs were very poor, making the ratings a significant risk with regards the viability of a successful transaction. It is not unusual for poorly rated assets to have been incorrectly assessed. As such, CBRE Building Consultancy was approached to review the accuracy of the EPCs and if necessary reassess the units.
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to ensure that purchasers are not exposing themselves to significant financial risk should the ‘good’ rating actually turn out to be ‘bad’ post 2018. Dilapidation settlements are likely to be affected by the change as landlords look to pass EPC risk onto tenants. As already mentioned, we are likely to see an increase in green leases as a result, with clauses requiring improvements to be carried out and EPC ratings maintained. Similarly, tenant fit-out guides will become more common and more rigorous. Some landlords will need to achieve a high EPC rating to allow for the possibility that some factors under the control of their tenant – such as the choice of lighting – will bring down the rating and potentially lead to obsolescence.
Sources of information In 2012, the Investment Property Databank (IPD) launched Eco-Portfolio Analysis Service (EcoPAS), a benchmarking service that identifies and highlights the potential environmental risks in a real estate investment portfolio. It has the support of RICS, which recommends that the sustainability inspection checklists are used in standard valuation practice. Because all future valuations should take the requirements of the Act into account, the RICS guidance note Sustainability and commercial property valuation is an extremely useful document. This states that in order to respond appropriately as markets change, valuers should continuously seek to enhance their knowledge of sustainability. It summarises ‘sustainable buildings’ as having been designed or refurbished to achieve longer life cycles, featuring different resource use or ecological footprints or having design features that impact on factors such as the heat island effect, internal natural light distribution, natural ventilation, water and storm water management. To help surveyors translate these aspirational objectives, specifically in relation to energy and water efficiency, the RICS Building Surveying Professional Group recently published the RICS professional guidance note Sustainability: improving performance in existing buildings. Rather than recycling the wealth of data already available, this document seeks to integrate sustainability into the design and construction process in a way that will be familiar to the building surveyor. It includes a simple road map to highlight key issues at each stage of the process and a checklist based on individual building elements with an initial indication as to whether the work might have a short or longer ‘payback’ period. 24 NOVEMBER 2014
Key aspects bb The initial review identified that all G rated units had been incorrectly assessed with regard the lighting and air conditioning installations. Default values had been entered thereby misrepresenting the asset. bb A reassessment of each unit using the appropriate data and software showed that the units were actually rated between C and E and as such no longer a transactional risk.
While much of the talk about the Act can be alarming to property owners, few buildings are genuinely obsolete: there is nothing to prevent an older building achieving a good rating assuming that it has been carefully reviewed, and where necessary, adapted, with energy efficiency in mind. The case study of One Christchurch Way, Woking (above), shows how a 25-year-old building (previously an F rated asset) achieved a B rating through a focused refurbishment programme without impacting on the budget. I would recommend that building surveyors remain continually on the lookout for confirmation and clarity surrounding the Act. Although we expect the legislation to go ahead in 2018, ‘green’ politics is not devoid of U-turns and just as the proposed change could be reversed, it could also be intensified. Remaining well informed, planning for change and responding positively should be high on building surveyors’ agendas over the next four years. C
Graeme Murray is Head of Sustainable Engineering at CBRE graeme.murray@cbre.com
IPD EcoPAS http://bit.ly/1heM662 Sustainability and commercial property valuation guidance note http://bit.ly/1fqhhGH Related competencies include Legal/regulatory compliance, Sustainability, Inspection
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GOOD NEWS ON PERSONAL LIABILITY Second claim brought against a valuer this year is dismissed, writes Alexandra Anderson
Valuers will be pleased to hear that, for the second time in 2014, the courts have dismissed a claim brought directly against an individual valuer. In Mavis Russell v (1) Walker & Co (2) Robert Chisnall & Others, the claimant brought a claim against Mr Chisnall, relying on the 2001 decision in Merrett v Babb. By the time Mrs Russell brought her claim, the firm for whom Mr Chisnall was working when he prepared her HomeBuyer Report, Walker & Co, had become insolvent. Nevertheless, District Judge Mulnew rejected her argument that Mr Chisnall was personally liable and dismissed the claim. The judge recognised that the ruling in Merrett had been made with very clear public policy issues in mind, and found that the same considerations did not apply in this case. Specifically, the court found that there was no evidence of dealings between Mrs Russell and Mr Chisnall that might suggest Mr Chisnell was assuming a personal responsibility to Mrs Russell. All of the evidence pointed to her relationship being
with Walker & Co only. The court also referred to the fact that Mrs Russell had chosen to retain a limited company, against whom she had rights of recourse and there was no justification for imposing a personal liability on Mr Chisnall in these circumstances. In light of the hardships facing surveyors in the postrecession years, a considerable number of firms have been forced to cease trading and there has been an increase in claims brought personally against individual valuers. News of this second success story of the year is, therefore, very welcome. Alexandra Anderson is a Partner at law firm RPC. For your professional indemnity insurance needs, email Brian Boehmer at Lockton: brian.boehmer@uk.lockton.com, or call 020 7933 2083
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C RICS P ROP E RT Y JO URN A L
COMMERCIAL A LT ER N AT I V E FU N D ING
John Barker looks at alternative funding options that could help to reinvigorate Britain’s high streets
I
Shopping for funds
It is news to no one that the UK high street model needs updating. After commissioning one of the latest reviews of the high street, published in 2013, veteran retailer Bill Grimsey argues that shopping areas can no longer exist as they are. They “cannot be saved and therefore must adapt” by becoming community hubs with leisure and entertainment taking a key role, the report concludes. While this is quite a bold statement, there is some truth in it. Currently, the most successful shopping centre locations are those that recognise the support that leisure facilities and restaurants can provide to retailers by attracting visitors and increasing footfall and dwell time. However, it is not just the purpose of the high street that must adapt to survive; the way in which it is funded must change too.
Lending policy As most in the industry will attest, banks are still not lending enough to small and medium-sized enterprises (SMEs) – a group that includes small and 26 NOVEMBER 2014
independent retailers. Despite the government redirecting the focus of the Funding for Lending scheme in November 2013, removing the residential lending element, businesses are still receiving a raw deal. The initiative was designed to incentivise high street banks to lend more to businesses by promising access to cheap funding if they did. Yet despite the announcement that the scheme would only be used for lending to businesses and not home loans, recent Bank of England figures show that the initiative is not having the desired effect. In fact, lending to SMEs actually fell £723m in the first three months of 2014 – disappointing by anyone’s standards. The Funding for Lending scheme is not the first failed initiative from the government designed to help SMEs or, more specifically, the high street. Following retail expert Mary Portas’ review in 2012, the government set up the £10m High Street Innovation Fund to help bring empty
shops back into use. The money was awarded to 100 councils with instructions to spend it “strategically and wisely”. However, as of March 2013 only 7% of the fund (around £520,000) had been spent, according to a Freedom of Information request revealed by the BBC (http://bit.ly/1mXYo66). Now, keen to boost the high street but for some reason ignoring calls for the revaluation of business rates, the government launched another proposal in this year’s Queen’s speech. Among measures to support small businesses, banks would be required to refer businesses that they reject for loans to alternative providers. The question of responsibility, of course, has yet to be fully addressed. Is it really the banks’ responsibility to make such referrals; would such a task not be more suited to a financial adviser or broker? What kind of protection would banks have when signposting other lenders
in terms of compliance and Treating Customers Fairly (http://bit.ly/1tVWFn1), and will they have to carry out the due diligence to ensure the alternative provider is reputable before making any recommendation? These are all questions that will no doubt be addressed before the proposals come to fruition. Furthermore, the Financial Conduct Authority has already announced plans to address how alternative finance should be regulated.
Alternative options There are several avenues of funding available to would-be high street tenants. Crowd funding: This involves sourcing finance from a group of financial backers and there are various crowd funding websites that help businesses to secure the funding they need. Budding businesses will pitch their business idea – or their reason for requiring funding (for refurbishment for example) – in the hope that a ‘crowd’ of people will offer financial investment. Business angels: These are investors who use their own
The range of alternative finance options gives independent retailers and SMEs a lifeline personal finance to invest in a small business. Usually the investor would also provide support and experience. Angels tend to offer between £10,000 and £100,000, although by attracting a group of investors retailers could source up to £1m. Venture capitalists: Many of the biggest names in retail and leisure are now funded through venture capitalists, including UCI Cinemas and Pizza Express. Finance is provided in exchange for an equity stake in the business. Venture capitalist companies do invest in start-ups or new businesses too, as long as they have a competitive edge
or excellent growth prospects. Because they are companies, the sums invested are therefore much higher. In the same vein are private equity firms, although these tend to invest majority stakes in underperforming companies that have great growth potential. Speed funding events: A less common and perhaps more creative way of securing funding, speed funding events give business owners the chance to secure investment by pitching face-to-face to several potential investors in one evening. Peer-to-peer lending: This has soared in popularity in recent years, thanks largely to the dearth in bank lending to SMEs. Through sites such as Zopa (www.zopa.com), borrowers can be matched with individuals who are willing to lend a sum of money at a good interest rate, without the need for a bank or traditional lender to get involved. The loan is repaid in monthly instalments. The range of alternative finance options gives independent retailers
and SMEs a lifeline when mainstream lenders turn them away and the government’s proposal to encourage lenders to signpost these options should go some way towards educating smaller businesses on the finance platforms available to them. This could help to bring some life back to the high street as more new businesses and creative entrepreneurs receive the funding they need to secure units and pay start up costs. However, the barrier they will face, like existing retailers, will be business rates. For
the high street to survive landlords need to be able to secure tenants and while they can negotiate on rent and offer incentive packages, they can do nothing about rates and often it is the rates that now deter tenants. In recent years rents have plummeted while business rates have maintained their pre-crash 2008 levels. The government should be applauded for its work in promoting alternative finance but it must do something to address the rates issue if it really wants to give the high street the support it needs. C
John Barker is a Partner at Hitchcock, Wright and Partners johnbarker@hwandp.co.uk
UK Business Angels Association www.ukbusinessangelsassociation.org.uk/about British Private Equity and Venture Capital Association www.bvca.co.uk Angels Den www.angelsden.com/funding-options Related competencies include Property finance and funding
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COMMERCIAL WASTE TO EN E R G Y
Peter Jones explores the impact of new approaches to commercial waste
Beyond the dustbin
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K personal consumption of physical goods is estimated at one tonne per capita or 70 million tonnes annually, split 50-50 between food/beverages and non-food goods. The substantial global flow of raw material inputs, process chemicals and energy are estimated at up to 20 times the 70 million tonnes sold at checkouts (Wrigley, Wallace et al, 2013 The mass balance movement). The enormous opportunity for improvement lies at the heart of those seeking to establish the concept of the circular economy (www.ellenmacarthurfoundation. org). This is predicated on the law of thermodynamics that matter can neither be created nor destroyed – if not consumed as product it becomes waste. This very high level of material intensity and waste production would not be an issue were it not for the rapid expansion of global population (http://10billion.dannydorling.org) and, more significantly, the estimated 300 million annual addition to the global middle classes demanding western-style living standards. As a result, resource depletion, raw material scarcity and atmospheric pollution have triggered a political review of how the waste economy fits within the service and product economy. In 1997, 85-95 million tonnes of waste were simply buried in 450 landfills at a cost of £7 per tonne in the UK, according 28 NOVEMBER 2014
to HMRC returns. Today, that cost has escalated to £100 plus per tonne with an £80 tax, and a mere 20 million tonnes is assigned to that exit as a result (www.defra. gov.uk). There still remains around 60-65 million tonnes of food, packaging, timber, plastics and other carbon-based waste in the system each year but their end-of-life destination has altered radically. Today those arisings are 50% from households and 50% from industry/commerce (www.wrap.org.uk). For the property and facilities management sector, these trends could be considered under the broad headings of economics and the technology shift and opportunities for client partnering in corporate social responsibility, waste and energy.
Technology shift Compared to the £40bn commercial property sector in the UK, the waste, recycling and recovery sector has a total gross value added of around £13bn (www.esauk.org/esa_reports) and employs 135,000 staff. This belies a quadrupling in the value of the sector over the past 15 years, fuelled by the Landfill Tax. The latter has created an escalating price ceiling of gate disposal fees, which has attracted employee-or capital-intensive processes able to out-compete landfill. New entrants have also attacked the once dominant market share of the ‘Big 6’ Images ©
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End markets
national waste operators, who consolidated their ownership of landfill until 2003. Today, 70% of the 60 million tonnes of carbon-based waste collected is subject to separation and quality control either at the point of generation (creating a wider role in facilities management) or at intermediate material reclamation facilities (MRFs). These handling sheds now number more than 150 sites, typically covering 2ha, and are opening at a rate of 20 to 25 per year. Mechanical, pneumatic, laser and other technologies are used to disaggregate commingled materials and maximise their value for defined, but not always fixed end uses as recyclate or prepared fuels for energy conversion. The existing and planned capacity pipeline for these plants are: bb advanced thermal – 5 million tonnes bb other energy from waste or CHP – 20 million tonnes bb mechanical or biological treatment preparation – 7 million tonnes bb anaerobic digestion and composting – 8 million tonnes bb recycling and sortation – 12 million tonnes. There is debate within the sector as to whether 2020 landfill diversion targets will be met in terms of sufficient process capacity. This is attributable to the lack of any coherent data capture on material flows and because the same tonne of material may be triple handled during collection, quality control in a MRF and in final use.
As the role of landfill declines, control of material passes to the MRF intermediaries because they can optimise their least cost/highest value choice of end market for their recovered feedstock. Those comprise: bb Recyclate: In general, the higher the cleanliness or purity the better the price for specific materials, from £15 for glass cullet up to £350 for segregated food grade plastics and £1,000 for clothing and textiles (www.resourceassociation. com). Typical annual recovery tonnages are 8.5 million tonnes of paper and fibreboard, 1.6 million tonnes of glass, 0.4 million tonnes of textiles, 0.5 million tonnes of ferrous and aluminium scrap, 0.6 million tonnes of plastic and 0.44 million tonnes of wood (www.mrw.co.uk). Fears of gluts for cardboard and plastics are fuelled by the erosion of the 4 million tonne UK import demand from China as its own internal waste economy emerges (Exporting Opportunity APSRG 2013 www.policyconnect.org.uk). Additional economic incentives operate due to the Producer Responsibility targets imposed on the packaging sector since 1995 which signalled the appearance of traded permits between those with surpluses and deficits based on tonnage base use data (Review of Producer Responsibility Regimes April 2013). bb Composting: This is often undertaken in the farming sector with low set-up costs and limited opportunities for high added value sales unless done on industrial scale. Material flows topped out at around 2 million tonnes on thousands
Evidence of falling tenancy lease periods on high energy intensive sites and their reduced attractiveness, particularly to retail, is driving change
of small sites, but composting has lost ground to anaerobic digestion. bb Anaerobic digestion: Wet slurry tank systems convert food waste and similar material to methane gas, which is then burnt in engines to generate electricity or fed direct into the national grid after regulated clean up. Plants typically occupy around 1ha and are optimally scaled for throughputs of 1,000 tonnes per week at a sunk investment cost of around £12m per plant. Thereafter, it is more cost-effective to build multiple plants. A 50,000 tonne plant typically yields 10,000 tonnes of gas plus residues of 40,000 tonnes as a soil conditioner (www.adbiogas.co.uk). Gate fees tend to be £30-£40 per tonne depending on location and the number of sites stands at 110 and is climbing fast. bb Incineration: Energy recovery is a proven technology with 12 plants spread across the UK, mainly catering for local authorities in Public Finance Initiative schemes, although on balance sheet merchant plants do operate. The former are unlikely to be replicated following criticism by the Public Accounts Committee and National Audit Office in July of the Department for Environment, Food and Rural Affairs’ failure to anticipate planning consent challenges. The plants occupy the area of small power stations, process 350,000 tonnes plus each year and cost upwards of £250m. Under the renewable energy pricing proposals they attract higher price support if they recover heat as well – a factor linking them to industrial and domestic heat networks in London and Merseyside (www.chpa.co.uk). Gate fees are £90 plus depending on volume. bb Advanced thermal systems: Higher temperature pyrolytic and advanced gas plasma systems operating up to 2,000°C designed to produce high-quality synthetic gas capable of being burnt with higher energetic efficiency levels in gas turbines, bypassing the intermediate steam cycle of incineration. A 500,000 tonne plant is under construction by Air Products in Middlesbrough and commissioning is expected in late 2014. These are as capital intensive as incineration plants but are claimed to yield 1MW for every 7,000 tonnes processed, roughly double the yield of modern incinerators. n NOVEMBER 2014 2 9
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COMMERCIAL WASTE TO EN E R G Y
bb Exports of processed fuel: Supplementing the export of recyclate the market has expanded from zero to approach 2 million tonnes by the end of 2014. This comprises special recovered fuel (SRF) or refuse derived fuel formed of plastic, card, fabric and other post-sorted combustible fuel. SRF is designed to a specification of particle size, calorific value and moisture content to fill a capacity gap in mainland European (especially German and Dutch) incineration, cement and other energy plants. The capacity surplus is due to ambitious expansion in the 1990s coupled to subsequent successful waste minimisation initiatives in the EU. Specialist shredding and baling plants now operate on the Thames gateway. bb Biomass: Renewables Obligation and Contract for Difference support has seen 3.2 million tonnes of (mainly) wood biomass being used in 10 coal conversion sites with established logistics operators such as Eddie Stobart investing in warehousing and logistics capacity (albeit for imported product) (http://bit. ly/1tHriww).
The enormous opportunity for improvement lies at the heart of those seeking to establish the concept of the circular economy distribution centres and consolidated as a feedstock for co-invested or part-owned anaerobic digestion plants producing electricity for high energy use applications in food sterilisation, packing, chilling and freezing plants. These are classic examples of the circular economy in action and are a
foretaste of things to come. Opportunities for co-location of waste-based renewable energy were explored by the now defunct Advantage West Midlands in a 2009 report identifying mapping methodologies for sources of material supply with Department of Energy and Climate Change data on energy grid loadings (http://bit.ly/1oWciEi). Unsurprisingly, airports, docks, food processing centres, sewage works and the like were seen as prime centres for investigation. Retrofit is always difficult; once leases are structured, attempts to add solar PV, waste to energy and similar initiatives are invitations to create a break renegotiation clause by landlords. However, the climate is changing – literally and metaphorically – and exemplars from BNP Paribas and others are paving the way for more flexible thinking in this complex and innovative process. The humble area of waste is one that you ignore at your peril. C
Client partnering The property sector conundrum in terms of the sustainability agenda has tended to focus on the developer demand to build to minimum cost without regard for whole-lifetime user costs, particularly in relation to energy efficiency, renewable energy provision and running costs at a time of rising fossil energy prices or supply security (http://bit.ly/1oVq4Z6). This tends to operate against the expectations of landlords and Pension Funds interested in mitigating their own carbon footprint and tenants with household brand names ever more discerning about the economic benefits of energy efficiency and renewables generation (www.ifs.org.uk/publications/6915). Further evidence of falling tenancy lease periods on high energy intensive sites and their reduced attractiveness, particularly to retail, is driving change. Most notable of these are Sainbury’s and Tesco where food waste from stores is now being returned to regional 30 NOVEMBER 2014
Peter Jones is is an adviser on long wave strategies to companies interested in waste and renewable energy ecolateraljones@btinternet.com
Related competencies include Sustainability
C C O MMER C IA L FACI LI T I ES M A NAGEM ENT
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Building support Stephen Shallcroft underlines the importance of forming positive relationships across a business in becoming a more strategic facilities manager
F Facilities management (FM) functions tend to be fairly inward focused. But in creating a fit within the business, ‘best in class’ facilities managers understand the need to work with other parts of the organisation to gain a holistic view of ‘what, how and when’ FM needs to deliver. This is where relationships are key to success.
Step out of the silo One difficulty that FM staff promoted from the ‘shop floor’ may have is talking confidently with senior business managers. In addition, while FM qualifications teach people how to tackle the technical aspects of the job, they do not teach them how to converse in the ‘language of business’. Establishing the baseline for what the business needs will come from building the right relationship and dialogue with board-level directors or those reporting to them. By understanding the business vision and plan, these can be translated into FM language and delivered. Stakeholder mapping helps to identify everyone who has
an impact on the business and the head of FM needs the ability to influence them all, albeit to different degrees. As well as HR, IT, procurement, finance and marketing, there will be others such as unions and health and safety. And do not forget any special functions such as document management. This will define how relationships and the organisation’s culture should be built throughout the team. Relationships will change over time but they must be two way. For example, if your project team is involved in introducing new ways of working such as desk sharing, HR needs to assess necessary changes to staff policies. Simultaneously, creating relationships with key influencers and change champions is essential in order to gain wide acceptance to new proposals. Bring them on board and others are more likely to accept a change. Without strong internal relationships it will be more difficult to make a change or understand its impact. You need to listen to all levels of the organisation – try engagement methods such as workshops or ‘town hall’ meetings to gather feedback.
and the Chartered Institute of Purchasing and Supply, to see what is coming around the corner or what is happening elsewhere in the world. For example, the past 10 to 15 years has seen a drive to reduce the number of workstations and increase desk sharing – but I know through my external relationships that some US organisations are now pushing against this trend, instead focusing on providing effective worksettings. I am already thinking about whether and how this might impact my FM regime. Do you have adversarial, contract-driven relationships or do they focus on finding solutions to problems? A learning relationship allows you to look out for what is best for your internal or external client. Most FMs want to be ahead of their clients in innovative thinking – if ideas are fed to you by your client then you are on the back foot.
If there are financial pressures inside the business, you need to understand the impact on your FM budget. Do you have the right relationship with your board? Without it you will be reactive not proactive, which means that you cannot bring best value to your client. For example, it is better to pre-empt or be involved in the decision to fit another 100 people into an office rather than just being told to do it. With proper demand planning, rather than a crisis you are more likely to find a better solution or be able to manage expectations. C
Stephen Shallcroft FRICS is Director of Corporate Real Estate and Facilities Management at ARCADIS and a Member of the RICS Facilities Management Board. He was interviewed by freelance writer and editor Les Pickford lespickford@yahoo.co.uk
Building better relationships Learn from your professional organisation, for example RICS or the British Institute of Facilities Management, but also listen to others, such as the Chartered Institute of Personnel and Development
See more interviews and strategic FM resources at www.rics.org/fmhub Related competencies include Strategic real estate consultancy
NOVEMBER 2014 31
C RICS P ROP E RT Y JO URN A L
COMMERCIAL FU N D M A N AG EM E N T
Guillaume Fiastre explains how fund managers will need to change the way they work to gain advantage from a controversial European directive
S
Passport to opportunity ince the banking crisis of 2008, most new financial regulations and directives have been accepted as inevitable by the property industry. The need for more rigorous standards of management, administration and reporting, if not exactly warmly embraced, is at least widely understood. The Alternative Investment Fund Managers Directive (AIFMD) is different, however. Controversial from the outset, it was even widely denounced at one time as posing an ‘existential threat‘ to the industry in Europe.
New regime AIFMD introduces a tough European regulatory regime. Managers of alternative investment funds (AIFs), both EU and non-EU, will have to apply for authorisation to remain in business with the funds. By implementing the Directive,
32 NOVEMBER 2014
the European Commission hopes to increase supervision of the perceived risks to investors posed by unregulated funds such as private equity, real estate and hedge funds, as well as more general increased monitoring of systemic risk in the broader financial services arena. Opposition began long before AIFMD came into force at the end of July 2013. Indeed, passions ran so high at draft stage around five years ago that the UK’s Daily Telegraph newspaper ran a ‘Ditch the Directive’ campaign. Since then, opinions have been divided opinion on whether it benefits or impedes the market for alternative assets. In a study of asset managers carried out by Deloitte in 2012, 72% said they viewed the directive as a ‘business threat’. However, participants appear to remain committed to European markets as evidenced by a KPMG study of the same period in which 74% of the respondents indicated they would continue to pursue European investments. Certainly, the kind of stringent legislative change that AIFMD represents
Images ©
is widely seen as a challenge to the industry’s historically relaxed attitude to data management. The tight restrictions the regulations impose on the industry have raised concerns that AIFMD could reduce the competitiveness of the EU’s AIF industry. However, a more positive view is now emerging, with a growing recognition that the directive may, after all, be a good thing. And far from putting the alternative investment sector at risk, it should be seen as a major opportunity. Are these new optimists simply wearing rose-tinted glasses – or are they being expedient now that the directive is in force? At the heart of this more encouraging view is the concept of the European passport, which allows fund managers who fall within the new regulations to market to professional investors in EU and European Economic Area countries, with a minimum of additional administrative formalities.
Transparency It is noticeable that in the Deloitte study, despite the majority seeing AIFMD in a negative light, 41% said they intended to use this as a passport to extend fund
C O MME RCIAL FUND M A NAGEMENT
distribution. The idea of a harmonised regime without the need to comply with the complex rules of each different nation is an attractive one. However, this freedom comes with heavy demands for transparency and accountability in managing risk. The directive is impacting several areas of business processes including investment, asset and risk management, fund structure, compensation, marketing and sales strategy, depositary and capital requirements. And up-to-date reporting based on a firm foundation of credible data is becoming a real necessity. The urgency of this is underlined by the fact that many participants in the KPMG study had not determined how to comply with AIFMD by the end of 2012. Many fund managers are now working to achieve this, however and it is estimated that 60% of real estate fund managers have already installed the infrastructure to meet their obligations. Part of the challenge is that, until now, the industry has had no formal reporting requirements. Under the directive, more than 130 pieces of data have to be reported to regulators – significant demands. So how can alternative investment fund managers turn these demands to their advantage? First, they must identify the key areas of their business model that need changing as quickly as possible. Looking at the AIFMD, there are several key areas that need attention: bb Risk management: Fund managers will need to reshape the way they manage their risk. The traditional way is to calculate rather than anticipate risk. Instead of basing investment on past performance, they need to anticipate the consequences of risk in their portfolios, forecast future trends and start migrating from descriptive tools towards more predictive analytical tools. bb Capital requirements and ratios calculation: AIF managers are required to maintain certain capital levels depending on the value of assets under management (AUM). They will also need a system capable of running calculations of several ratios (leverage, solvency, liquidity, for example) to attract major investors. Fund managers also need to develop ways of running multiple and complex calculations of capital ratios through internal or tailored models, ideally testing worst case scenarios to help them maintain adequate capital ratios. These
calculations must reflect degrees of volatility to secure greater leverage and assure solvency and liquidity in case of future downfalls. ● Investment strategies: Besides assessing business processes, fund managers should also consider the different investment vehicles introduced to the European market over the past years. All vary in asset composition, capital requirements, liquidity levels, valuation requirements and so on – and for this reason, assessing current
Opinions have been divided on whether AIFMD benefits or impedes the market for alternative assets investment strategies and selecting the right investment vehicles will be a crucial element of the compliance process. ● Transparency: The AIFMD demands better control over data and more frequent, deeper and responsive reporting. This reflects investors’ needs for more timely, accurate and appropriate information. Fund managers will need systems capable of handling more information faster and presenting it in an easy-to-understand format. ● Remuneration: Firms with AUM over €1.25bn and more than 50 employees will have to form compensation committees under AIFMD. This may mean firms restructuring to stay under this limit. In addition, the heavy focus on the nature, timing and transparency of compensation will be burdensome for firms. Driven by new ‘what if’ analytics capabilities, is the discounted cash flow model to be challenged for supremacy as a cash flow monitoring approach by ‘variable remuneration over the life of the alternative investment fund’? How will firms and compensation plans establish incentive benchmarks for staff as defined by AIF and monitor them for adherence and reporting to AIFMD? These are only a few of the areas that AIF managers need to consider. It is not surprising that PricewaterhouseCoopers has said that the AIFMD will bring an “avalanche of change”. One of the causes of disquiet is that it will put larger fund managers at an advantage because small firms have fewer
internal resources to deal with the initial and ongoing responsibilities.
Managing data One thing is clear; while adapting to this new business environment will be a challenge for fund managers, they will make it even more difficult for themselves if they attempt to make the necessary changes while still relying on outdated data management tools and technology. The spreadsheet-based workflows on which many front and middle office managers have relied until now are inadequate for the post-AIFMD world. Fortunately, platforms are now becoming available that enable fund managers to replace spreadsheets with a central database and allow business data modelling and forecasting in real-time to help anticipate risk. These can enable companies to comply with new regulation with the least amount of disruption. In business terms, the platforms will do even more than this. They will enable fund managers to demonstrate to clients that they are totally in control of their investments – that there is ‘a pilot in the plane’ and it is going in the right direction. What better reassurance to potential clients accustomed to old-style fund managers using paper and spreadsheets? It may be that EU fund managers have only a short window to gain competitive advantage. It is possible that those outside the region may be able to apply for authorisation under the passport system after 2015. It should be remembered, however, that no challenge comes without an opportunity. Only managers identifying the key processes in need of change and acting on them at an early stage will enjoy significant benefits from the upcoming changes in the industry. For those who wish to explore the potential of AIFMD being the EU passport for alternative fund distribution, the pessimism has to stop and the action begin. Only those who adopt the changes and implement the right systems to enable the process will be the winners. C Guillaume Fiastre is Chief Executive at Taliance www.taliance.com
Related competencies include Property finance, Investment management
NOVEMBER 2014 33
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resi den tial NOVEMBER 2014 35
R RICS P ROP E RT Y JO URN A L
R E S I D E N TI A L HO U S I N G P O L I C Y
BRICS and mortar Housing is a universal challenge demanding new solutions, say Duncan Maclennan and Julie Miao
T
he privatisation and deregulation of housing and related finance systems in the Organisation for Economic Co-operation and Development (OECD) economies and the transition experience of former communist economies contributed to an internationalisation of housing policy in the early 1990s. Emerging and transforming economies received advice from the World Bank, the International Monetary Fund and the OECD urging financial sector deregulation, an end to rent controls, the privatisation of public housing and the growth of home ownership across all income groups. The advice was seen as largely one way and in many respects an international consensus on housing policy advice emerged from Washington, London and Paris. That consensus has crumbled post-2008. An awareness of how the housing sector shapes the growth and stability of economies has developed as nations reacted to the global financial crisis. There are new concerns that international advice may have helped squander many of the gains from the previous ‘boom’ by raising prices and instability in housing markets. The old policies are now seen, at least outside of the UK, to be flawed quick fixes with negative long-term consequences. The RICS-funded Global affordable housing report assessed how housing in Brazil, China and India has been impacted by growth and how their governments have shaped housing policies, before considering whether these changes have potential international relevance. Brazil, Russia, India, China and South Africa (BRICS) demonstrate the importance of promoting markets to house emerging demands. But their experience also shows the importance of removing or lessening the inherent failures in market systems and addressing the difficulties of households that cannot afford adequate market solutions. Looking at the BRICS leads back to a wider conception of what 36 NOVEMBER 2014
housing policies are for and what they can achieve, globally.
Affordable housing The term ‘affordable’ is now so elastic that it creates confusion unless referenced to incomes, income distributions and housing costs. Broadly, the research referred to low-income housing problems as the outcomes for the poorest third of households in each country. Fast growth per year in per head GDP (in the range of 5%-10%) typified the BRICS after 2000 and remains their likely prospect until 2030. This has taken place in countries with mainly rural populations and has predominantly exploited agglomeration economies in larger cities. Consequently, all three countries featured in the report saw housing policy as intimately connected to urbanisation, infrastructure and the growth of cities. The housing city change perspective is better articulated in China and Brazil than in many older OECD nations, not least the UK, with a social policy emphasis on housing policy. Economic change is shifting income distributions and geographies. Brazil has the most unequal distributions of income and wealth in South America and growth has increased this, as it has in India. Although there has been a significant growth of the ‘middle class’ in both countries, the rate of growth of poorer households has been even faster. With growth entailing low wages and high housing costs, the informal sector consequently houses half the urban population in these countries. China has engaged growth with more equal income distributions, having both a significant past bounty of socialist housing provision and continuing government commitment to strong social objectives. However, inequalities are growing. In terms of fiscal and policy commitments to reducing adverse social and housing outcomes, China ranks far ahead of Brazil. India has particularly low shares of social protection expenditures in national budgets. In the BRICS, the demand for housing has risen with incomes and is relatively
price-inelastic. Rising prices do little to attenuate overall housing demands, although in all three countries mortgage finance is limited and can be a demandside constraint. High savings rates in China and substantial support from families in purchases are much more evident than in most OECD economies. As housing supply elasticities are low (in the formal housing sector), economic growth and concentrated urbanisation are reflected in rising real house prices and rents. Consequently, housing payment burdens are high, house sizes are small and qualities are low in much of urban housing. Rapid urbanisation has led to informal housing, particularly the favelas of Brazil and slums of India. However, informal housing is not always bad, e.g. slum residents usually have a higher quality of life than their rural counterparts. But slums can only fulfil a developmental potential role if they
R ESIDE NTIAL HOUS I NG PO LIC Y
trigger policy responses that raise ‘escape’ opportunities for all. Sustained house price rises in all three countries after 2000 encouraged housing to be held as speculative assets. In China, this results in stocks of vacant city properties alongside vast shortages, and fears of housing bubbles in China and Brazil since 2011.
Policy perspectives Prior to 2000, neither India nor Brazil had coherent policy programmes. Indian approaches included relatively ad hoc use of controls and tax distortions, whereas Brazil aimed to deliver loan subsidies for essentially middle-income households. China has had extensive and well-managed national support for housing programmes since the early 1980s. Its privatisation of socialist company housing has underpinned the expansion of home ownership to more than 80% of households. The government
has also made major strategic programme shifts as circumstances have changed. For instance, since 2011, the shortage of urban rental opportunities for mobile workers has seen an increase in public housing investment in major cities. Since the mid-2000s, Brazil (through its Mia casa, mia vida programme) has made a step change in its thinking and delivery but has focused spending in the middle of the income distribution. India’s Jawaharlal Nehru National Renewal Mission city-modernisation scheme displays much insight about how to change but is increasingly overwhelmed by new needs. Arguably, it is only in China that low-income housing supply is even keeping pace with rising needs. In all three countries, the past decades have seen a significant shift of housing policy autonomy from national to local governments. However, local interventions in India and Brazil are often undermined by inappropriate regional and national frameworks. Localism in housing policy should lead to more effective land and planning for housing, but this is not often apparent. National policy has invariably focused on demand-side measures. Sluggish supply responses reflect patterns of land ownership and speculation (in Brazil and India), lagging infrastructure provision, inadequate developer funds and long delays in the planning system. Attempts to reform have been largely missing, and land markets and planning appear to have been a greater constraint in Brazil and India than in China. Housing policy expenditures have largely focused on promoting new home ownership rather than creating an efficient set of housing markets. China still has no effective market for second-hand housing and the rental market has been given minimal attention in all these countries. With large and growing populations that are likely to be urban renters, this is a serious oversight. China has demonstrated a willingness to revert to non-market rental provision when it is imperative. A surprising omission in all three countries – especially where concentrated areas of informal housing require renewal of infrastructure, homes and community facilities – is the absence of neighbourhood-based non-profits as vehicles for change.
Wider concerns Housing system trajectories in Brazil, China and India have all been buffeted and shaped differently by successive waves of international economic Image © iStock
growth and crisis. Their path has also been fashioned by differing notions of governments and consumers on what are acceptable living conditions. They have all seen their housing journeys lead to successes in raising middle-income outputs and qualities, but also a growing concern with the affordability of decent housing for the poor. To different degrees, all three countries have made the connection between housing, economic growth and the development of cities, and all three now show signs of aligning policy behind these realisations. But there is an emerging recognition that the narrow market-focused consensus of Washington, London and Paris pre-2008 is no longer adequate to deal with serious housing market failures in rental and supply systems, let alone addressing the housing consequences of increasingly unequal incomes. The BRICS need to make housing policy foundations that reflect the huge transformative processes involved in their economies. And in Washington, London and Paris there is an imperative to recognise the growing global crisis in affordable housing provision and to understand that the stripped-down housing policies adopted over the past two decades may now have key roles in reinforcing these inequalities rather than removing them. Internationally, we need a new conventional wisdom about what housing policies are for and how they can be delivered. In shaping that view, there is much to learn from the BRICS. R The RICS research was completed while the authors were at the Centre for Housing Research at the University of St Andrews and also involved Dr Estela Lutero and Gillian Young Duncan Maclennan is Professor of Strategic Urban Management and Finance at the School of Management, University of St Andrews dm103@st-andrews.ac.uk Dr Julie Miao is Lecturer in Urban Studies at the University of Glasgow
The Global affordable housing research report is available from www.rics.org/bricshousing Related competencies include Housing strategy and provision
NOVEMBER 2014 37
R RICS P ROP E RT Y JO URN A L
R E S I D E N TI A L N O I S E I N N EW HO M ES
Sound effects
Figure 1 Attached homes. Distribution of main types of noise contacts to NHBC (for houses first occupied between 2005 and 2010)
Les Pickford summarises an NBHC Foundation review into homeowner feedback on noise in new homes
The research To see whether these changes had led to reduced concerns, the NHBC Foundation examined noise-related feedback from owners of new homes built since the introduction of AD E 2003. This research focused particularly on noise transmission through party walls and party floors of attached homes (the E1 noise category) and information from occupants of new homes in England and Wales built between 2004 and 2010. 38 NOVEMBER 2014
Noise generated by the fabric and services of the home and transmitted between rooms was also covered, as was feedback on detached homes. Noise-related contacts from homeowners to the NHBC were classified according to the type of noise and its source: bb AD E E1: airborne and impact noise transmitted from an adjoining home bb AD E E2: airborne and impact noise transmitted within a home bb AD E E3: reverberation of sound in communal areas of buildings bb creaking floors bb creaking stairs bb water pipes and WCs bb boilers and radiators bb extract fans.
Key findings Attached homes For new terraced and semi-detached houses and apartments, there was a steady decline in noise-related homeowner contacts. Most of these (Figure 1) were in the E1 category, a priority for AD E 2003 and Robust Details, and contacts reduced significantly over the study period (Figure 2) mainly accounting for the overall reduction. The main findings were: bb attached homes built from 2004 generated progressively fewer homeowner contacts related to noise problems. For attached homes first occupied in 2004, about seven households per 1,000 contacted NHBC about a noise problem. For homes first occupied in 2010, this fell to about four per 1,000 bb this was mainly due
to fewer concerns over transmission of noise from adjoining homes. E1 contacts from 2010 homes (houses and apartments) were less than half those recorded for those first occupied in 2004 bb for attached houses, the ongoing downward trend in E1 contacts is particularly pronounced (for houses first occupied in 2010, only about one in a 1,000 households registered an E1 concern) bb the downward trend in E1 contacts coincides with new regulatory guidance in AD E 2003 and the launch of Robust Details bb for apartments, the improvement trend with E1 contacts is less pronounced, perhaps reflecting the greater technical challenges associated with minimising sound transmission in this housing type; the contacts suggest that many noise problems were associated with party floors rather than party walls bb creaking floors were the next most common cause of contact, but for this and other sources of noise the overall level of concerns was low.
43%
10% 24%
■ E 1 noise transmission (from adjoining homes) – 43% ■ Creaking floors – 24% ■ Water pipes, WC – 10% ■ Boilers and radiators – 5% ■ E xtract fans – 3% ■ E2 noise transmission (within the home) – 2% ■ Other sources of noise – 13%
“Overall, it was very encouraging to see a marked improvement trend in E1 neighbour noise enquiries starting in 2003-04,” says Turner. “The dramatic decline was very good to see.” Detached homes Owners of detached homes were twice as likely as those in attached homes to contact the NHBC about noise. There are many factors for this including: lower background noise, higher expectations, a higher proportion of timber floors and less tolerance of noise.
Figure 2 Attached homes. Homeowner contacts to NHBC on noise from adjoining properties – E1 noise (for homes first occupied between 2004 and 2010) 4.0 Contracts to NHBC per 1000 homes
I
n the 1980s and 1990s, noise transmitted between adjoining homes was a growing problem for occupants and homeowners in England and Wales. “It was leading them to contact the NHBC and make many complaints to local authority environmental health officers,” says Clive Turner, Research Manager at the NHBC Foundation. “These concerns attracted ministerial attention and led to changes in the Building Regulations.” Despite attempts to address concerns through improved acoustic performance requirements in Approved Document E: Resistance to the passage of sound, the problems remained. UK government responded by introducing higher standards for sound insulation in the 2003 version of Approved Document E (AD E 2003). A system of pre-completion sound testing was proposed and in 2004 the use of Robust Details was accepted as an alternative method.
3.5 3.0 2.5 2.0
For new homes from July 2004: pre-completion sound testing required OR option to use Robust Details
All attached homes Apartments Attached houses
1.5 1.0 0.5
Introduction of AD E 2003 2002
2003
Images © NHBC Foundation
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2005 2006 2007 2008 2009 Year that the home was first occupied
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2012
R ESIDE NTIAL NOI S E I N NEW H O MES
Figure 3 Detached homes. Distribution of main types of noise contacts to NHBC (for homes first occupied between 2005 and 2010)
48% 43%
10% 9% 24% 15%
reaking floors – 48% C Water pipes, WC – 15% Boilers and radiators – 9% E2 noise transmission (within the home) – 9% ■ Creaking stairs– 5% ■ E xtract fans – 5% ■ Other sources of noise – 9% ■ ■ ■ ■
The most common problem (48%) related to creaking floors (Figure 3), and could be up to five times higher than those in attached homes. Contacts relating to other sources of noise were typically between three or four times higher. The main findings were: bb homeowners of detached homes were 58% more likely to raise a noise issue than owners of attached homes (between eight and 12 detached households per 1,000 contacted NHBC) bb overall contacts on noise
from detached homes did not indicate an obvious trend (rise or fall) over time bb around one in every 200 detached homes registered a concern about creaking floors, although this figure varied considerably during the study. People in detached homes were three to five times more likely to report creaking floors than people in attached homes bb contacts related to other noise types (Figure 4) were also noted to be at higher levels in detached homes, compared with attached homes, including: • plumbing (pipes, WCs) • boilers and radiators • creaking stairs • E2 (noise transmission within the home) bb contacts relating to these other noise categories showed no consistent trends, although creaking from stairs is an emerging issue. “That there was no obvious decline in noise contacts from owners of detached homes was expected because the interventions (Part E 2003 and Robust Details) had targeted improvements in transmitted sound between adjoining homes. This has acted as a scientific control for the study,” says Turner. “But it was unexpected that detached homeowners are typically more than twice as likely to make a noise enquiry as those living in attached homes.”
Figure 4 Detatched homes. Homeowner contacts to NHBC on other sources of noise (for homes first occupied between 2004 and 2010)
Conclusions The main aim of AD E 2003 was to significantly reduce sound transmission between adjoining homes (requirement E1) and sound transmission within homes (requirement E2). The improving trend in E1 contacts for attached homes shows that AD E 2003 has achieved good progress towards its main objective. Progress for apartments was good but less marked, perhaps reflecting the more complex and challenging acoustic issues created by adjoining flanking structures. Airborne and impact noise transmitted within attached and detached homes (E2 noise) is only rarely reported and appears to be addressed satisfactorily by existing design and construction. In apartments, contacts for E3 noise issues (reverberation of sound in communal areas) is rare and again indicates that existing guidance and construction quality is adequate. Three other noise sources seem important to homeowners: bb for creaking floors (34% of all noise contacts) site investigations indicated that floor decking was not adequately fixed down and, once remedied, homeowners no longer experienced problems bb for water pipes and WCs, noise problems were typically associated with a lack of allowance for expansion or contraction movement and contact with rigid brackets and linings, i.e. issues that would be eliminated by following existing good practice
bb for noise from boilers and radiators, this could largely be eliminated by adjustments to the heating system. These three other noise sources made up the majority of contacts (as high as 72% in detached homes) but many would be avoidable if additional care was taken on site and accepted good practice followed. “The research shows that industry-led intervention, supported by expert applied research, can be effective in delivering government policy ambitions,” says Turner. “As we seek to close the energy use performance gap we could possibly learn some useful lessons from the Part E experience.” So there has been good progress but is there scope for further improvements? “Better awareness/ application of current good practice will help in many cases. This work does not advocate change in regulation or standards. The positive outcomes for attached homes confirm the success of the last regulatory change, rather than identifying a need for further intervention,” Turner explains. “We should pay attention to noise from creaking stairs. We would also like to better understand the situations that lie behind the remaining noise enquiries from apartments. These need not be a characteristic of construction, but could be connected with more extreme behaviours of some neighbouring occupants.” R
2.0 Contracts to NHBC per 1000 homes
E2 noise Creaking stairs
1.5
Les Pickford is a freelance writer and editor lespickford@yahoo.co.uk
Water pipes/WCs Boilers/radiators Extract fans
1.0
Sound progress: A review of homeowner feedback on noise in new homes is available from the NHBC Foundation http://bit.ly/1wwsPDE
0.5
0
2004
2005
2006 2007 2008 2009 2010 Year that the home was first occupied
2011
2012
Related competencies include Sustainability, Property management
NOVEMBER 2014 39
R RICS P ROP E RT Y JO URN A L
R E S I D E N TI A L C AS E N OTES
In his continuing series on the challenges that buildings pose for surveyors and valuers, Philip Santo examines a query that arose following a partial demolition
What the eye doesn’t see…
A
previous article shared the frustrations experienced by many pre-purchase surveyors of not having any further involvement with the properties they have inspected once their reports have been submitted (Property Journal, December 2013). Sometimes, clients will seek further advice and guidance, and instructions to implement or supervise works may follow. These later works can be very illuminating about the causes of unusual symptoms or puzzling defects when previously concealed parts of structures are exposed. This can be of great value when similar circumstances are encountered in future on other properties. Many surveying practices and most large corporate employers, however, do not offer such post-purchase services. Frequently, the cases that surveyors find the most intriguing provide no follow-up opportunity to explore the accuracy or otherwise of suppositions made and conclusions drawn during the inspection, especially if a report leads to a client withdrawing from their proposed purchase. Complaints from clients can also provide useful learning points, although the adversarial background is often an understandable hindrance when trying to adopt a constructive approach during an investigation. With the property discussed in this article, however, a prompt investigation and site meeting with the client successfully concluded matters and retained their goodwill, while identifying helpful pointers for future inspections. It involved an Edwardian detached house (photo 1) that the client had purchased after having a HomeBuyer-type report carried out. This type of report, incidentally, has been defined as a ‘level two’ survey by the RICS Surveys of residential properties 40 NOVEMBER 2014
guidance note, which was published at the end of 2013 to establish standard benchmarks for independent practices not wishing to offer RICS-branded products. Sometime after purchasing the property, the client decided to demolish an original single-storey rear addition and replace it with a conservatory. The demolition work exposed a timber lintel supporting the outer skin of the main rear elevation cavity wall across the full width of the addition (2). Timber lintels are not unusual in properties of this age but the existing arrangement was far from satisfactory. Not only was the lintel affected by wood-boring beetle but it was clearly inadequate for the span and the builder rightly said that it needed to be replaced. The client’s enquiry centred on whether this should have been reported in the pre-purchase survey. Examination of the lintel revealed only a half brick bearing at either end (3) and what initially appeared to be notches cut in two locations. Further examination, plus the evidence of internal joinery finishes still attached to parts of the underside (4), suggested that the rear addition originally had intermediate internal walls running at right angles from the main rear elevation. These walls would have provided the necessary additional intermediate support to the lintel but at some stage they had been removed to convert the addition into a single open space, leaving the lintel to span the full width. None of this would have been apparent during the pre-purchase survey inspection because the underside of the lintel was concealed by the addition’s ceiling. Might there have been any other signs at the time of the survey to indicate that all was not as it ought to be following the earlier alterations? Concealed by the sheet of boarding in 2 is the opening from the kitchen into the addition. Within the kitchen, there were no signs of any disturbance around this opening (5 ).
1
2
3
4 Images © Philip Santo
R ESIDE NTIAL CAS E NOTES
The lintel was clearly inadequate for the span – the client’s enquiry centred on whether this should have been reported in the pre-purchase survey
5
6
Similarly, in the rear reception room, there were no indications of cracking or disturbance to internal plasterwork. However, the internal wall in these rooms was the inner skin of the cavity, so this would not be unexpected. The main area where indications of failure or downward movement of the lintel might be revealed was in the external brickwork (6 ). Again, there was surprisingly little evidence of historic cracking or displacement and certainly no indication of serious or progressive movement. The lintel itself showed signs of only slight sagging, rather less than might reasonably have been expected in the circumstances. It quickly became apparent that there would have been no way during the original inspection for the surveyor to have determined that the concealed lintel was in any way unsatisfactory. The absence of cracking or deterioration to the internal and external walls confirmed that there was no reason to suspect any problems in this area. This was pointed out to the client, who acknowledged the difficulty faced by the surveyor, and the enquiry drew to a satisfactory close. The investigation flagged a specific construction detail to bear in mind when
1 The house, centre, built in the early 1900s, was one of many similar proper ties in a popular localit y
suppor ts were originally provided at one-third inter vals, where notches are apparent in the lintel
2 Demolition of the rear addition exposed a timber lintel spanning the full width of the addition, suppor ting the outer skin of the cavit y wall above. The door way from the kitchen to the lef t is concealed by the sheet of boarding. Intermediate
3 The right-hand end of the lintel shows the bearing point. The timber immediately above the prop is original but only the section of timber above, visible where the facing plank has been removed, spans the full width of the opening
inspecting similar properties in the locality, particularly if internal partitions had been removed within single-storey additions. On a more general level, it also reinforced the benefit of explaining in reports that no comment can be made about the adequacy of concealed load-bearing supports without undertaking exposure works. While not routinely justified, as soon as suspicions are aroused the recommendation to check should be made. A final point to be gleaned from this investigation is that sometimes building components will continue to perform above and beyond expectations. This is an encouraging thought but also something of a concern, because at some point a highly stressed component is liable to fail, possibly with little warning. Inadvertently adding additional stress, perhaps during building works or by a change of use, might prove to be the final straw. It is important that unjustified assumptions should not be made about concealed areas and components, particularly when changes are being considered. R Philip Santo FRICS is a Director of Philip Santo & Co and provides CPD training and presentations psanto@philipsanto.co.uk
4 At the location of the right-hand former intermediate wall, the cavit y is visible to the right and residual mor tar is still present. The whole section, including the original painted joiner y, lef t , was above the addition ceiling at the time of the sur vey 5 There was no cracking or indication of distress
Philip Santo’s second edition of Inspections and reports on dwellings: assessing age is published by Routledge http://bit.ly/XGB2Jl Related competencies include Building pathology, Inspection
in the kitchen around the opening into the addition, concealed by the black plastic sheet , or in the adjacent reception room
6 Minor localised repointing was present in the brick work above the opening but there were no indications of any previous or ongoing problems with the concealed suppor t
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R E S I D E N TI A L L EGA L B R I EFS
Balancing act
Vivien King considers biodiversity and the built environment and how legislation, the planning system and the courts all play a role in its protection
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he built environment is developed by mankind for the needs of mankind. Planet earth houses millions of other species – be they terrestrial, marine or aquatic. But are their needs considered as mankind changes the environmental status quo? There is, of course, nothing new in such considerations. The UK government signed up to the Convention on Biological Diversity in 1992 and was the first country to produce a national biodiversity action plan (now succeeded by the UK Post-2010 Biodiversity Framework). Underlined by action plans for the four countries of the UK and supported by legislation, the framework provides detailed proposals for the conservation of biological resources. Governed also by the EEC Habitats Directive 2002, the conservation of habitats is contained in regulations introduced in England, Northern Ireland, Scotland and Wales. Section 74 of the Countryside and Rights of Way Act 2000 placed a statutory duty on government and ministers to have regard to biodiversity conservation when carrying out their duties. This was extended to public authorities (more than 900 in total) by Section 40 of the Natural Environment and Rural Communities Act 2006. Specific guidance for local authorities and generic guidance aimed at all public authorities affected (e.g. NHS Trusts, government departments, police authorities, the Fire Service, utilities and 42 NOVEMBER 2014
schools) is produced by the Department for Environment, Food and Rural Affairs. Each local and public authority produces its own biodiversity action plan. The planning system provides another layer of environmental protection, e.g. Planning Policy Statement 9: Biodiversity and Geological Conservation. Local planning authorities will require an environmental impact assessment (EIA) for projects likely to have significant effects on the environment, for example, the Town and Country Planning (Environmental Impact Assessment) Regulations 2011 or Scotland Regulations also of 2011. Finally, we have the courts. Applications for judicial review of planning decisions are not uncommon, although Lord Hoffman’s comments in Tesco Stores Ltd v Secretary of State for the Environment [1995] 1 WLR 759 should be borne in mind: “The courts are concerned only with the legality of the decision-making process and not with the merits of the decision. If there is one principle of planning law more firmly settled than any other, it is that matters of planning judgment are within the exclusive province of the local planning authority.” As to whether an EIA is required by the local planning authority, or the authority made an appropriate assessment of the implications on a site’s conservation objectives under the Habitats Directive, were found to be the concern in The Queen on the Application of Long v Monmouthshire County Council and another [2012] EWHC 3130 (Admin). Image © iStock
An unused brownfield site that supported “a diverse and high-quality invertebrate assemblage” was the subject of a judicial review application in The Queen on the Application of Buglife – The Invertebrate Conservation Trust v Medway Council and others [2011] EWHC 746 (Admin). This was not the first attempt by the applicant to overturn a planning permission due to purported inadequate surveys of the site before completion of an Environmental Statement. The court found, however, that as the permission was for outline permission only, and that further Environmental Statements would be required at each detailed planning application stage, it would be “an academic and futile exercise to decide whether to quash the outline permission”. However, the judge stated that he reached his decision on the express basis that each stage of the reserved matters approval process would be preceded by a fresh Environmental Statement and the local planning authority’s consideration of the environmental impact of the proposed development. Taking all this into consideration, it must be correct to say that the needs of species other than mankind receive careful thought whenever the environmental status quo is changed. Some might say that the weighting of the needs of mankind leaves something to be desired, although developers faced with the requirements of bats or newts may not agree. A difficult balance for any local planning authority or court to achieve? R Vivien King is a Consultant to Malcolm Hollis vivien.king@malcolmhollis.com
Related competencies include Legal/regulatory compliance
R R ESIDENTIA L RET ROFI T
Taking the heat off Dr Grant Bourhill discusses a new project to test the effectiveness of retrofit packages for the UK’s housing stock in the drive to cut energy costs
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Domestic buildings account for approximately 25% of the UK’s overall CO2 emissions; domestic space and water heating are the greatest contributors, with most domestic heating currently supplied via gas-fired boilers. To meet energy and climate targets in the future, domestic UK emissions must be substantially reduced by 2050 through a cost-effective combination of increased building fabric efficiency, improved domestic energy management and a decarbonisation of energy supply. Significant investment is required to address this challenge. Around 80% of the UK’s domestic housing stock (26 million homes) will still exist in 2050, with a recognition that it is generally of poor quality. Based on this volume, an investment of £10,000 per home for thermal fabric improvement would cost in excess of £200bn, while still requiring significant expenditure on low-carbon energy supplies and infrastructure. The most cost-effective energy supply approach will depend on a number of issues specific to individual local areas. The most
practical heating solution in one area will not necessarily be appropriate in another. Geographically tailored solutions will be required. To provide an approach that could work for any local area across the UK, the Energy Technologies Institute (ETI), a public private partnership between the UK government and global energy and engineering companies, is working with local authorities to develop software tools as part of its Smart Systems and Heat programme. The tools, defined as EnergyPath and due to be available by 2015, are designed to identify cost-effective and future-proof approaches to domestic emissions reductions, by balancing fabric-efficiency measures with the decarbonisation of energy supply. These will feed into local area strategic plans.
Retrofit approaches One of the important inputs to EnergyPath is the cost and concomitant energy-efficiency improvement of fabric retrofitting across the most prevalent and ‘emitting‘ archetypes in the UK’s existing housing stock. A previous desk-based ETI project examined the UK’s diverse housing stock and characterised it into 40 archetypes. Of these, nine made up almost 50% of the total stock and accounted for over 50% of the UK’s domestic emissions. The project examined Images ©
theoretical approaches to the whole-house retrofit of these nine archetypes, exploring ways of improving both supply-chain and on-site waste. Two retrofit packages were identified: RetroFix (providing predicted average energy savings of 33%) and RetroPlus (providing predicted average energy savings of 50%). It is important to validate that these theoretical packages can be delivered practically – looking at the cost, time and resulting energy-efficiency improvements – given the demand the domestic building stock places on the UK energy system and to provide confidence in the EnergyPath outputs. ETI has, therefore, contracted a project team to demonstrate the two retrofit packages in a small number of archetypal domestic properties. The £475,000 project will retrofit different types of domestic property, identified and prioritised in the earlier project. These are: bb a pre-1919 mid-terrace house bb a pre-1919 detached house bb a 1919-44 semi-detached house bb a 1945-64 semi-detached house bb a post-1980 semi-detached house.
RI CS P RO PERTY JOUR NAL
The ‘whole-house’ retrofit packages will seek to address four areas – understanding consumer acceptability, identification of energy-efficiency solutions, improvements in the effectiveness of the delivery mechanism and supply chain, and demonstrating a commercial viability. PRP is leading the consortium in collaboration with Peabody, one of London’s largest housing associations and community regeneration providers, with the retrofit work being undertaken by VINCI Facilities, a subcontractor to Peabody. The project will take place in Q1 2015 and run to March 2016. Improving the thermal efficiency of the UK’s existing domestic housing stock should provide economic, social and environmental benefit. Understanding the practical cost, timescale and effectiveness of domestic retrofit approaches contributes to the capability to design future-proof and economic local energy solutions, providing comfort to domestic residents while addressing UK energy challenges and targets. At its culmination, the programme should help to create industry and investor confidence to implement improvements on how to heat the UK. R EnergyPath, RetroFix and RetroPlus are registered trademarks of the Energy Technologies Institute LLP Dr Grant Bourhill is Director, Smart Systems and Heat at the Energy Technologies Institute grant.bourhill@eti.co.uk
Related competencies include Sustainability, Housing maintenance, repair and improvements
NOVEMBER 2014 43
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R E S I D E N TI A L R U R AL R E N T STAT I ST I CS
In the picture
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The Valuation Office Agency is looking to improve private rental statistics, says Gary Trent, and invites RICS members to contribute their knowledge
The rental information collected by Valuation Office Agency (VOA) Rent Officers for their statutory role is also being used to build a statistical resource for policy makers, researchers and, most importantly, those working in the private rental sector (PRS). RICS members are invited to play a part in this by helping the VOA to improve the breadth and volume of its rental data and say what they would like to see from the continuing development of PRS statistics. The story starts with VOA Rent Officers. Their statutory status creates both the remit and authority to collect rental information for Fair Rent and housing benefit purposes. Their independence of commercial interests builds the trust necessary to work confidentially with thousands of letting and management agents, corporate and individual landlords, estate managers and investors, who
Greater volumes of rental data for large urban conurbations would increase the potential to disaggregate the statistics to lower levels of geography 4 4  NOVEMBER 2014
contribute rental data on a purely goodwill basis. It is a unique private/ public partnership and a credit to the sector. It helps the VOA to maintain a sample of around 480,000 achieved private rents across England. There is no lack of commercially produced rental indices, market reports and sentiment surveys available. Specialist reports provide insight to particular aspects of the market. However, as the PRS continued to grow and evolve there was a general acknowledgement of a gap in official and national private rental statistics. The VOA experimental Private Rental Market (PRM) official statistics, first published in 2011, began to fill the gap. For the statisticians, it was part of a plan to make the VOA’s data more accessible and achieve National Statistics accreditation. For VOA Rent Officers it was about giving something back and contributing to improvements in PRS information. The PRM statistics present a snapshot of the mean, median, lower quartile and upper quartile gross monthly rent paid for a number of bedroom categories for each local authority in England. Release notes explain the limitations of what are, currently, very simple rental level statistics. Comparisons over time should not be made because changes may be due to differences in the sample rather than true changes in the market. The PRM statistics can be downloaded free from the Publications section of www.voa.gov.uk and are available for reuse under the terms of the Open Government Licence. Regional maps illustrating median rental levels by local authority are available at www.voa.gov.uk/prmmaps. Figure 1 shows two-bedroom rents in the South West. Working to the Code of Practice for Official Statistics, the VOA is taking a strategic and inclusive approach towards further development. Its Residential Statistics Advisory Panel includes the Department for Images Š Valuation Office Agency
Communities and Local Government, HM Treasury, the Bank of England, housing academics and key PRS representatives. I would encourage RICS members to add their voice to the debate. Email statistics@voa.gsi.gov.uk and let us know what you need from our PRM statistics. Feedback to date has resulted in development work on a historical series suited to tracking rental price change
Figure 1 Example map showing two-bedroom median rents for the South West of England
R ESIDE NTIAL RURA L RENT STATISTIC S
In 2013 the ONS started using VOA rental statistics in the calculation of the official measures of inflation
over time. Publication is provisionally planned for December. The value of our work took on a new dimension in March 2013 when, after a long consultation, evaluation and development process, the Office for National Statistics (ONS) started using VOA rental statistics in the calculation of the official measures of inflation – the Consumer Price Index (CPI) and Retail Price Index (RPI).
If ever there was a motivation beyond simply helping to improve PRS rental statistics, it is that weighted actual rents for housing make up 6.2% of the CPI and ‘rents’ 8.6% of the RPI (source: ONS, December 2013). Macro-economic decisions, pensions, train fares, student loans, investments, benefits, rent reviews and much more are influenced by CPI or RPI. VOA statistics also feed into the ONS’s own experimental Index of Private Housing Rental Prices, a regional level quarterly index that tracks rental price change in the UK. Growing the sample and developing official statistics is a symbiotic relationship, the VOA depends on the goodwill and involvement of those working in the sector. For example, greater volumes of rental data for London and large urban conurbations would increase the potential to disaggregate the statistics to lower levels of geography. Please get in touch with your local VOA Rent Officer via www.voa.gov.uk/lettingsresearch. We simply need addresses, property and tenancy details, achieved rents and the tenancy start date. R
More information > Don’t forget to contribute to the RICS Housing Market Survey. Completing this survey counts as CPD and includes you in a twice-yearly draw for an Apple iPad. To ensure it counts, remember to record the activity on the RICS CPD Management Tool
Gary Trent is PRS Stakeholder Lead at the Valuation Office Agency gary.trent@voa.gsi.gov.uk
Related competencies include Leasing/letting, Valuation
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R E S I D E N TI A L FLO O D B O U N DA R I E S
Reinstating your boundary James Kavanagh presents a guide on how to reinstate a boundary following flood damage and where to go for advice
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loods typically destroy established fences and boundary features. Post-flood repairs and damage assessments can often highlight the difficulties of reinstating the line of the legal boundary, which is one of the first steps of making a property a home again, helping to define the occupant’s sense of place and belonging. Specialist chartered surveyors can help with this process and RICS produces public guides on boundaries, party walls and flooding (http://bit.ly/1w9ZwpI) and an extensive ‘neighbour dispute’ portfolio of professional best practice guidance for members. Among these are industry standards Party wall legislation and procedure 6th edition 2011 guidance note and Boundaries 3rd edition 2014. The latter contains extensive advice on boundary restitution and on entering neighbouring land.
Steps to take The RICS Boundaries and Party Walls panel has prepared a list of simple instructions to follow when the clean-up operation begins, to assist in making the reinstatement dispute free. “When you come back to your property after a major environmental event such as a flood, things will look and feel very different,” says panel member Andrew Thompson. “This sense of change will not only affect you, but also your neighbour, making the reinstatement of the legal boundary line difficult. The key to a swift return to normality will be trust and communication between the parties. “Therefore, do not rush or jump to assumptions on the boundary line without talking to your neighbour. Domestic boundary disputes are emotionally intense and after the pain of a major flood, the sensible assistance of an expert surveyor can help to avoid dispute. This will assist all parties to normalise 46 NOVEMBER 2014
Dispute resolution The RICS Dispute Resolution Service provides access to a panel of expert chartered surveyors with experience of resolving neighbourly boundary disputes. This can involve expert determination of the boundary and mediation of a dispute, providing an alternative to formal litigation if any doubt or uncertainly exists between parties on the correct boundary line following a flood. The advantage of alternative dispute resolution is that it is a quicker method, it is private between the parties, and is typically significantly lower in cost than court-based litigation.
relationships, even when communication is already strained,” he says.
RICS top tips bb Before you seek to reinstate a boundary that has lost historic demarcation due to a flood, speak to the other boundary party, if possible bb If this is not immediately possible, record fully what you have done to temporarily reinstate the boundary line and be aware that when your neighbours return they may have evidence or information that may cast into doubt
your initial assumptions on the right boundary line bb Accept that things are going to look and feel very different on your return. Therefore, try to be flexible and open to neighbours’ comments as to the correct boundary line bb Seek to reach an agreement on the boundary line. If this is not possible, try to agree a method of alternative dispute resolution, because this may provide a quicker and more cost-effective solution. It is quite possible that you do not have a real boundary dispute, but due to the flood, things have become unclear to both parties and the assistance of an expert will help to provide reassurance and prevent a real dispute bb People’s memories of exact boundary demarcations are not perfect after a traumatic experience. Look for photographs taken before the flood
R ESIDE NTIAL FLOOD BOUN DAR IES
RICS guidance The purpose of RICS’ new Boundaries: Procedures for boundary identification, demarcation and dispute resolution, 3rd edition guidance note is to: bb give RICS members an understanding of the value and role of clearly identifiable boundaries bb enable, wherever possible, accurate and comprehensible information to be provided by professionals, with as little scope for misunderstanding as practicable bb help in the event of a dispute over boundaries, to set out the facts in a manner that assists the parties, their legal advisers and the courts bb safeguard the interest of clients and promote the public interest. Download the guidance note at http://bit.ly/1kGFmAe
of your house at the boundary. Aerial photographic images via internet sources such as Microsoft Virtual Earth (www.bing.com/maps) and satellite imagery via Google Maps (http://maps.google.co.uk) can help to refresh the memories of both neighbours on the pre-flood boundary line. Also, be prepared to accept that due to the disruptive nature of the flood, both parties may have lost their historic information. However, do not rely on these images for the exact line of a boundary; use them only as an indication of what existed prior to the flood bb Land Registry (LR) Title Plans are at 1:1250 (urban) and 1:2500 (rural) scale and their purpose is to indicate where the physical features are on or about the boundary. These plans do not show the legal boundary line (a line of no thickness) and the LR advises against scaling distances from these plans bb The underlying Ordnance Survey map used by LR is a good indication of the position of physical features that existed at the date of survey. In most instances, the knowledge that the boundary was a defined feature on the ground (or not) will be all that the property owners need to know. It is likely that evidence of that feature will be found when the flood water recedes and the boundary can be reinstated. Ordnance Survey mapping data and imagery can be accessed at http://map.groundsure.com Images © iStock
bb Even when neighbours are in full agreement, it is important to mark that boundary on the ground as soon as you can. Rebuilding the permanent boundary is the ideal, but if that is some way off, temporary markers such as wooden stakes are a good alternative. Many boundary disputes originate from unmarked boundaries and agreement may not always be so easily achieved with new neighbours. If you have used temporary markers, ensure that your fencing contractors use those markers when the time comes to reinstate the boundary.
domestic and commercial properties may have a legal right of access to repair under the Access to Neighbouring Land Act 1992 if this is necessary for the basic preservation of a property after a reasonable request has been refused. This requires an application to the County Court for an Access Order. If this is due to an unreasonable or absent party, a chartered surveyor can provide the report for court purposes, confirming the need for repair and the extent of access required by the court order. R
Cross-boundary repair
> For details of a local surveyor offering specialist advice on post-flood boundary reinstatement, visit www.ricsfirms.com, or contact us at contactrics@rics.org or +44 (0)870 333 1600
Once you have re-established the legal definition of your property, it is possible that due to the significant nature of the flood damage, the repair and reinstatement may need access to or from your neighbour’s land. Good neighbours should agree to access for minor works without complex agreements. But in cases of severe damage, properties may need major repairs, requiring disruptive access onto neighbouring land. Depending on the position and amount of repair work, you may need a chartered surveyor to help with either Notices under the Party Wall Act 1996 or drafting an Access Licence for Repair if the work is more general. While it is hoped that most parties will reach agreement without dispute, both
More information
For more information about boundary and other property matters, visit isurv.com RICS consumer helpline (Monday-Friday, 8.30am-5.30pm): +44 (0)24 7686 8555
James Kavanagh MRICS is Director, RICS Land Group jkavanagh@rics.org
Related competencies include Access and rights over land, Cadastre and land management, consultancy service
NOVEMBER 2014 47
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To ad ve rtise con t a c t C h a r l o t te Tu r n e r +4 4( 0 )2 0 7 8 7 1 5 7 3 4 or c harlot te@su nday pu blishing. c o m 4 8 NOVEMBER 2014
RICS P ROP E RT Y JO URN A L
ARTS
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ar ts NOVEMBER 2014 49
A RICS P ROP E RT Y JO URN A L
ARTS E-C O M M E R C E
Protecting your image Amanda Gray continues her look at art e-commerce and highlights the issues of reputation and due diligence
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aving invested in an online presence to harness the commercial benefits of creating a distinctive brand and identity (see Property Journal, September/October), you should also consider the wider ramifications if something goes wrong in respect of content or the items you plan to sell either as an agent or a seller. Goodwill and a client base take time to build up. Even if your terms of business limit your firm’s liability in terms of opinions or representations given about artworks, for the sake of your reputation it is worth taking steps to prevent issues arising. There are therefore commercial benefits in doing a level of due diligence before content or images go onto your website. This could also minimise the risks of your business being embroiled in costly and time-consuming claims. Questions you should always ask: bb who is consigning to me? bb do they have authority to sell the work? bb where have they got the work from? bb is the work as described? bb are there gaps in its provenance? bb could it be a fake or forgery? The internet brings a new meaning to a transaction conducted at arm’s length – with distance comes the opportunity for problematic transactions and at the worst, illegal trade. The case of the Banksy fakes sold on eBay by Lee Parker and Grant Champkins-Howard (who pleaded guilty to conspiracy to defraud), gives an indication of the negative impact that can be caused to an online art business. The prosecutor in that case, Richard Mandel, stated: “It stands to reason that persistent fraud on eBay undermines the integrity of that now very important marketplace.” You should take all steps to protect your firm from either being implicated or innocently embroiled in another’s criminal activity. 50 NOVEMBER 2014
Other considerations depending on your business include: bb if you deal with antiquities or coins, due diligence on the source of the item is critical – is there potential for the item to have been looted or stolen? Is it correct? Is there a possibility it has been illegally imported? Where is the antiquity from – what regulations or legislation apply from that region or country in respect of the trade in antiquities? For example, Dealing in Cultural Objects (Offences) Act 2003, the Iraq (United Nations Sanctions) Order 2003, or Treasure Act 1996 could potentially apply ● if you trade in contemporary art or photography, is there a risk that the works could be explicit? If so, you should be ensuring that your terms and conditions cover nudity. You should also consider what safeguards you have in place with regards to those who can access your website ● if you sell antique firearms, have you performed the necessary due diligence to establish that the item is antique? Under Section 58 (2) of the Firearms Act 1968, an exemption to the provision of the legislation applies to all antique firearms sold, transferred, purchased, acquired or possessed as curiosities or ornaments. There is no definitive definition as to what constitutes an
The case of the Banksy fakes sold on eBay gives an indication of the negative impact that can be caused to an online art business
antique firearm and has been decided by the courts on a case-by-case basis. In the UK Home Office Guide on firearms licensing law, an antique firearm is of a “vintage and design such that their free possession does not pose a realistic danger to public safety” bb if you are selling sporting firearms, does the purchaser carry a valid, appropriate licence? What import and export regulations apply? Have you cited these licence requirements on your online terms of business? bb if you trade in ivory and endangered species, are you operating within the UN Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), which prohibits the trade of certain specimens for primarily commercial purposes. Within the UK there is an exception for worked specimens acquired prior to 1 June 1947, defined as having been significantly altered from its natural raw state for jewellery, adornment, art, utility, or musical instruments before 3 March 1947 and not worked or reworked since. You also need to be aware of increasing reputational pressure with regard to this trade even if you are operating within the law.
You may want to take practical steps to prevent downloading of images from your website
Copyright It is highly likely that an art e-commerce entity will be using images of works to advertise sale and promote their business. Although there is an exception to infringement of copyright in an artistic work for advertising works for sale, Images © PA Archive/Press Association Images
(Section 63, Copyright, Design and Patents Act 1998), you may want to have freedom to use images of works for further promotional activities for your business. It is therefore recommended that you obtain the necessary assignment or licences, and cover copyright in your terms and conditions. In protecting infringement of works for which your business is the copyright holder, you may want to take practical steps to prevent downloading of images from your website.
Resale rights If your UK art online business sells contemporary or modern artworks, it is advisable that you confirm if the works are a qualifying sale under the provisions of the Artist’s Resale Rights Regulations 2006 (ARR), and therefore a royalty would become due. As stated, an online presence gives heightened visibility and it is important to ensure that you are aware of your potential obligations under the ARR, and that this cost is accounted for in your transaction procedure. Art e-commerce does offer considerable opportunities for art dealers and traders. However, do not throw away your investment – keep an eye on your legal obligations to protect your business to reap the maximum commercial benefit. A Amanda Gray is an Associate at Mishcon de Reya Solicitors www.mishcon.com
NOVEMBER 2014 51
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ARTS I N S U R AN C E
Taking cover Insuring against floods, fires and theft are all part of the specialist services offered for fine art and antiques, says Andrew Davies
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aying even a fraction of an item’s value annually to an insurer, as protection against losing everything, is still viewed by many art collectors as a dull way to spend their hard-earned cash. However, conversely, most collectors regard buying home or car insurance as an obligatory expense. Unlike other forms of insurance, where cover is on a new-for-old basis, due to their often unique nature, fine art and antiques can only be replaced on an agreed-value basis. Despite the fact that fine art cannot normally be replaced with an identical piece, nothing is priceless. A level of financial compensation for an item’s asset value can always be agreed between the client and insurer, as long as it can be justified. As a precaution against possible fraud involving over-valued items, the levels of the agreed value are generally determined by professional, third-party valuations by specialists such as leading auction houses or fine art valuers. These should track with the market and should be reviewed every three to five years, depending on the speed of change in value for the objects concerned. For private collectors, fine art insurance touches on many personal issues, such as the security of their home as well as the emotional feelings that relate to the objects they possess. Confidentiality and security of their information is often the first question clients ask. It is in the best interests of insurers to protect personal and security information, but there are still many common insurance misperceptions. One such falsehood is that insurance companies include clauses in the small print designed to stealthfully avoid settling claims. In fact, today’s insurance market is very transparent and, due to regulation, is generally weighted in the 52 NOVEMBER 2014
client’s favour. You place your trust and confidence in your insurer as, to a certain extent, they place their trust in you. The insurance of valuable, precious and often portable items is particularly susceptible to fraud and insurers like to know their clients and fully understand the risk they are insuring to avoid issues such as misrepresentation or moral hazard.
Choosing the right insurer Art collectors should choose or judge any insurance company by their willingness (in terms of the scope of the policy wording) and capacity (solvency and ability) to pay claims. Although you may have a preferred insurer in mind, my advice would be to engage the services of a broker whose role it is to understand your personal needs and seek the most suitable and economic cover in the insurance market; for this they will receive a commission (normally 25%-30%) from the chosen insurer. Your existing general broker could search the market or use a specialist broker to place the business on their behalf. This becomes more likely for larger private or corporate risks such as museums and galleries, but it is rare to be insured without any broker involvement at all. London has the advantage of being both a leading centre of the international art market and the international insurance market. Fine art insurance developed from
Serious fires can often be avoided, although conflagrations such as the one at the Glasgow School of Art can still occur
1 19th century marine cargo insurance and still retains some quaint characteristics and gentlemanly conventions originating from the face-to-face meetings when a broker ‘brokes’, (explains or ‘sells’ the risk), to the underwriter for their consideration and best rates. The London insurance market is truly worldwide and multiple locations can easily be insured on one policy. An international collector with homes in London, New York and the South of France can have a worldwide policy written on an all-risks basis. Specialist insurers know and understand that their policies have to be flexible enough to cover normal collectors’ activities, whereby at any one time, part of a collection may be with a conservator, framer or restorer, in storage, on transit to an exhibition or going to or from an auction house. As long as the insurer is made aware of significant movements and recommended experienced firms are used for transit, there should be no additional premium charges. Specialist associated services such as shippers and packers, conservators and restorers as well as specialist fine art loss adjusters can all be found and directed from London. For the best rates, collectors can impress their insurer by demonstrating well-considered risk management and control of collections, inventories or databases including digital images. These records aid in both the housekeeping of any collection whether it is a small private one at home or housed in a museum or gallery and also improve the chances of recovering stolen items (see page 54).
ARTS I NS U R ANC E
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What’s in a claim? Broadly speaking, claims are events that can be described as happening at a specific time. A flood on Monday, a fire on Tuesday and a painting stolen on Wednesday are the makings of a lousy week, but all can be covered, as opposed to actions over time, such as light fading a watercolour, mould growth on furniture in a damp inappropriate storage area and infestations by vermin from woodworm to mice. Acts of war are normally excluded, as are acts of a nuclear or biological nature. However, in some rare instances there are exceptions to this rule where ex gratia settlements are made. For example, AXA ART recently settled a case where a squirrel had set about chewing up a George III wing armchair before expiring in the process. Serious fires can often be avoided or mitigated with risk management and are on the relative decline, although conflagrations such as the one at the Glasgow School of Art earlier this year can still occur. Professional targeted theft is a similarly relatively rare event, although clients should always take care to avoid the careless ‘opportunist’ theft. On the other hand, the increasing location density of risks and rapid inflation in fine art values has magnified the effect of certain catastrophic events such as hurricanes. Any client, good or bad, can suffer a claim but good risk management can mitigate the majority of unnecessary suits. A good insurer will survey risks and offer specialist advice as well as checking that the information received
1 Serious fires such as the one at Glasgow School of Art can still occur 2 Firefighters rescue valuable works 3 Even priceless artworks must be insured is correct and that standard insurance industry security requirements have been met. The important point is not to rack up regular ‘attritional’ losses that could cause you to lose your underwriter’s confidence. Do not be fooled into treating insurance as another bank account whereby you pay in and expect to get at least the same amount out again. Remember that your claims record travels with you for five years and is a key indicator in an underwriter’s assessment of your risk and their premium calculation. Often the most interesting part of insurance is the set of events that accompanies a claim. The transportation of art and antiques generates a significant number of claims and there is an old adage in the insurance industry that ‘three moves are as good as a fire’. In today’s highly active art market, with so much travelling between blockbuster exhibitions, international fairs and auction houses, the potential for accidental damage caused by poor handling is huge. Such cases include an Elizabethan portrait, which ended up decapitated following a split in the panel as a result Images © AFP/Getty Images
3 of a sudden change in temperature. Another was the result of a badly aimed forklift truck tine, which punctured both the packing crate and the Impressionist painting inside. The materials and techniques used in contemporary art can lead to a whole new world of previously unimagined forms of claims. What do you do if your Manzoni Merde d’artiste cans start to leak; your Fontana painting is found to have acquired 12 new tears to the canvas after being transported; or perhaps your Christo chair has been unwrapped by unwitting customs officials? In this situation, contact your specialist insurer’s claims team as soon as possible. They will have the experience to deal with the most unusual problems, and limit further loss. Sadly ‘inherent vice’, a self-destructive gene found in some artworks cannot be covered. The concept of a block of ice in the desert may be profound but is not insurable. A Andrew Davies is a chartered surveyor and survey manager and art historian with AXA ART Insurance in London andrew.davies@axa-art.co.uk
NOVEMBER 2014 53
A RICS P ROP E RT Y JO URN A L
ARTS A RT T HEFT
On record
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such as the UN sanctions for Iraq and Dealing in Cultural Objects (Offences) Act 2003 bb liaising with other professional bodies working in cultural property crime, e.g. the UK border force, the Department of Culture, Media and Sport and the Portable Antiquities Scheme.
The unit’s advice to private collectors and those curating larger collections is to ensure that any valuable artwork or antique is accurately catalogued, regularly valued and properly insured (see page 52) and that security is given priority. The evidence is only anecdotal, but in Hutcheon’s experience, “art theft is committed for a number of reasons; on occasion, it is for the intrinsic value of the piece itself”. However, she adds: “I do believe that the more valuable art, which is ordinarily well protected, is stolen to order, as it usually requires an element of planning.” Hutcheon recommends that owners of high-value
Unfortunately, according to Claire Hutcheon, who heads up the unit, it does not have the ability to search records across the UK, nor is there any national recording system for art theft, so it is difficult to obtain statistics to assess how much art-related crime is carried out or solved each year. All she is prepared to say is that “if a piece has been recorded correctly, this will dramatically increase the chance of recovery, albeit this may happen years later”.
If art market professionals believe something is wrong, they should record the details and contact the local police
Cut the risk of losing valuable artworks to thieves by careful cataloguing, says Lesley Davis
The estimated £300m of art being stolen each year is a growing problem for museums, galleries and private collectors as well as auction houses and antiques businesses. To tackle this escalating trade, a new task force was set up in 2013 by the Association of Chief Police Officers, English Heritage and the National Crime Agency. In London, the Metropolitan Police Service (MPS) Art and Antiques Unit has its own art and antiques specialists who record any identifiable item stolen in the capital and take referrals from other UK police forces. It is involved with: bb exhibit theft from London museums, public galleries and libraries, including archives, working with the security teams to prevent crime bb art fraud that significantly affects the London art market bb running security forums with art market groups such as London auction houses and trade associations bb investigating requests made under mutual legal assistance if, say, a stolen piece from abroad resurfaces on the London art market bb advising on cultural property crime legislation 54 NOVEMBER 2014
Keeping detailed records ObjectID is the internationally recognised standard for recording arts and antiques and the guidelines recommend a checklist for those who own or trade in valuable art works or antiques, with information kept on file in a secure place: bb what kind of object is it – painting, sculpture, clock, mask? bb what materials is the object made of? bb how was it made – painted, etched, carved? bb what is the object’s size/weight? bb make a note of any markings or inscriptions such as hallmarks, dedications, maker’s or purity marks, or a title bb does the item have any distinguishing features such as damage, repairs, manufacturing defects? bb does the item have a title by which it might be identified? bb what is the subject of the work – such as a landscape, a battle or a woman holding a child? bb date or period – when was the object made? bb maker – do you know the company or individual?
objects should record detailed descriptions of their art works including good quality photographs from a number of different angles (see panel). Valuers and auctioneers should practise due diligence. They should ask customers about the provenance of valuable pieces, and check their accounts where appropriate. If they have any suspicions, they should also use publicly available stolen property databases. It is also important to practise what Hutcheon describes as ‘KYC’ – know your customer. “Ask for picture identity and photocopy the documents. If an address is given, check it on internet search engines,” she says. “If art market professionals believe something is wrong, they should record the details of the item and contact the local police.” One case dealt with by the Arts and Antiques Unit made the news after Neil Kingsbury pleaded guilty to three charges of fraud. Kingsbury had approached Bonhams and Christie’s auction houses with 13 Egyptian antiques to sell, including a limestone cobra head, which he stated were part of private collections acquired in the 1940s that he had inherited. An archaeologist working in Egypt confirmed that one of the items shown in a Christie’s sales brochure had been stolen from an excavation under her management in Western Thebes. Christie’s immediately withdrew the items from the auction and reported the matter to the Art and Antiques Unit, who arrested Kingsbury. The MPS has recovered the majority of the artefacts and it is intended that they will be repatriated to Egypt. Kingsbury was ordered to pay a fine and costs. A Lesley Davis is a freelance editor and writer lesley@davisayling.media. co.uk
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