Copyright David Lawson - Property Week 2004
The property industry suffers from tunnel vision. Outsiders get locked into stereotypes of sharp-suited agents and gum-booted surveyors, failing to recognize a vast support structure ranging from construction and project management, rating and valuation to finance, insurance and corporate consultancy. Beyond that are regiments of associated professionals like lawyers, accountants and planners specialising in property.
The RICS alone identifies 160 'specialisms' among its 110,000 members. Most would hardly rate a mention in the market reports that grab headlines, yet they are critical to some of the most momentous issues facing investors and occupiers. Changes in leases, energy controls, waste regulations, business rates, planning, building regulations and accounting all come into force over the next couple of years. And it won’t be the sharpest suites that come up with answers.
Even the most mundane transaction involves several skill areas: market report, building survey, lease inspection and loan valuation are the norm. A general practice surveyor backed up by a lawyer often provides the whole package, so it is understandable that most clients are unaware of the range of specialist consultants.
It doesn’t help that these ‘specialists’ are involved in so many different areas. When the RICS reorganised into 16 ‘faculties’ most members joined several. Of the 32,000 in the valuation section, for instance, some 12,000 are also in the planning and development faculty, more than 20,000 are in commercial property and 14,000 in the residential section.
Even insiders can feel a little lost. An investigation by outgoing president Nick Brooke proposed clustering the divisions into three broad groups. Whether this brings any more clarity seems doubtful, particularly as he offered no change in the number and scope of faculties themselves.
One way to negotiate this maze is to see how a major firm like Jones Lang LaSalle organises its skills. Professional services are one of four business areas, along with agency, capital markets and asset management. To a certain extent, this division is for management tidiness. ‘It provides balance, as each division provides 25% of income,’ says head of professional services Paul Boden.
The services are then grouped into six sections. Other firms organise differently, providing across the board skills from the same partners or specialising in areas such as planning or rent reviews, but the JLL structure still offers some guidance.
Landlord & Tenant: involves rent reviews, lease restructuring, re-gearing and renegotiating leases. Both landlords and tenants are advised. ‘This has to be a centre of excellence as generalists could get caught out by legal details,’ he says. That is particularly true with changes to Part Two of the Landlord and Tenant Act 1954. The RICS is concerned enough to have published a fact sheet setting out details and background to the reforms.
Rating: tends to be a service for occupiers and is a live issue because the country is about to go through its regular five-year revaluation of commercial property. While rating falls within the RICS valuation faculty, Boden sees this as a skill of its own. Some firms concentrate almost entirely on rating. It can be highly profitable if fees are linked to performance in cutting rate liabilities. Unfortunately, the reputation of the sector has been tarnished in the eyes of some occupiers by cowboys who crowded in during the last revaluation, making impossible promises. Rateable values for 2005-2010 will be published in the autumn, generating a flood of appeals, despite the fact that the Valuation Office Agency has promised to cut the workload by more accurate valuations.
Valuation: considered by many the bedrock of the industry, this is Boden’s largest department with about 60 staff. Every agent can do an estimate based on market knowledge, but specialist training can be vital. Valuers often concentrate on areas such as leisure centres or hotels. Sometimes whole firms may concentrate on one sector. These meet continuous demand from fund managers who need quarterly or annual valuations, and banks looking for security for loans. Live issues include the 17-point Carsberg reform plan including moves for ‘churning’ valuers to emphasise independence after scandals like Enron.
Building surveying: another specialist area, covering a huge range beyond the obvious purchase surveys. Regeneration pressures will call more on these technicians, as will demands from the Disability Act and pressure for greener buildings. Amendments to the Building Regulations come into force next month and these traditional ‘backroom boys’ have been working overtime with developers to determine how they can meet new standards.
Project Management: one of the most technical areas, as it involves both building and management skills. This is where quantity and building surveyors or architects rule.
Strategic consulting: JLL’s shorthand label for an eclectic mix that really shatters the myth of sharp suits and gumboots. This section looks at whether and what to build rather than how to do it and includes skills such as management consultancy, planning, statistics and accountancy. Huge issues for occupiers and investors are breaking, such as meeting demands from the new Planning Act, outsourcing property and grappling with changes in accounting regulations.
One area missing from Boden’s empire is Facilities Management. This is not because the mainly tenant-based service is unimportant but JLL is a global firm and organises this area on a geographical basis across the whole of Europe.
What do you call 10,000 lawyers at the bottom of a cliff? There’s little need to prompt most property people about this hoary old joke. A good day’s work, of course. If the public hate estate agents, professionals show equal venality to lawyers. ‘They get in the way,’ is the only printable response – and even that is off the record, because ‘you can’t afford to get on the wrong side of that lot’.
Surveyors with similar nit-picking skills often get urged towards the same cliff. Lease renewal and rent review specialists are viewed as a backroom army cut off from reality. Nothing could be further from the truth. Consider a ‘routine’ letting or lease renewal. Firstly these are rarely, if ever, routine. Some may curse lawyers for inventing 40-page leases but they are a fact of life and require careful combing for inevitable potholes.
In fact, clients could save time and money bringing in a lawyer far earlier. An experienced commercial solicitor could glance through the heads of terms for 20 minutes and spot potential problems which saves expensive legal negotiations later on, says Roger Thornton of specialist property lawyer Maples Teesdale.
A few of the potential potholes in lease renewal were filled last month when the government tidied up the key 1954 Landlord & Tenant Act. But when you fill a hole, it inevitably means opening others. For instance, tenants need no longer fear missing long deadlines to protect their right to renew, but a landlord anticipating redeveloping an old asset now must realise that plans could now need changing almost at the last minute.
Landlords have also lost the perk of continuing to charge current rent while negotiations go on. Tenants will instead pay a market-based interim rent. ‘This could be a bonus in a falling market,’ says Thornton.
One glance at the RICS factsheet on changes to the 1954 Act show how complex the procedures still are. The briefing is not aimed at tenants, of course, but at that special brand of surveyor which quietly rules this murky world, combining legal and property skills with a unique brand of ruthlessness. They also oversee the equally complex area of rent reviews, and both sets of skills are being dragged into the limelight by changes far more revolutionary than legal tinkering.
The government seems bent on shortening leases and eliminating upward-only rent reviews and specialists are already pointing out potential problems. For instance, tenants baying for change could be locked into existing contracts. Who would want to take an assignment of a lease with upward-only reviews when new leases allow rents to fall?
Surveyors have picked up some surprising allies in their battle for common sense. ‘Not all tenants want these changes,’ says Bob Croydon of King Sturge, who sits on the CBI Property Panel. Big retailers want to hang onto good locations and need long leases to amortize heavy fitting out costs, he says. Industrialists need time to pay for plant and machinery.
So the CBI has not jumped to support change in lease lengths, which Croydon sees as a clumsy effort to unify with European standards. ‘Politicians should look at Continental cities, where short leases mean high-paying chains have driven out local users from high streets because of shorter leases,’ he says. Banning upward-only reviews is more attractive but could also backfire on tenants because it may remove the factor which underpins investment. ‘If the funds pull out, there will be less development so rents will rise,’ says Croydon.
Review specialists are caught between a rock and a hard place. They see the likely pitfalls but secretly welcome the fact that it could mean more work. Surveyors have been laid off in droves as rents stagnate. Landlords see little need to employ these rottweilers when there is little prospect of winning better returns. Nor do tenants need them as guard dogs. This could create problems when the market recovers. Retail specialists felt their pain in the Nineties, when rents collapsed. Surveyors – already hard to attract from more glamorous areas like agency – drifted away and are now in short supply in a booming market, says Rupert Grass, of Churston Heard’s in-town rent review team.
Rising salaries and fees will affect other sectors as rents recover – and increase poaching between firms. If ministers barge through changes, lack of specialists could become even more critical. It takes a combination of skills to handle leases and reviews, says Grass. First, surveyors need a lawyer’s ability to understand how changes such as the L&T Act reforms and the Disability Discrimination Act affect landlord and tenant, as they advise both sides. But they must also grasp market trends such as changes in occupier requirements, which can affect the value of property types.
Market intelligence is now far more accessible through online databases but Grass says having an in-house agency team is a great advantage. ‘We need to know not only what has happened to rents but also what may affect them in future. Our colleagues may be able to tell us of a pending development nearby which could have an impact.’
Finally, review specialists must be able to negotiate and if it goes to an arbitrator or independent expert, to present a case. In disputes, they must sum up a powerful argument for an arbitrator or independent expert.
Legend has it that little green men regularly visit Earth but always mistake the intense activity of building projects as ideal landing sites. Inevitably ‘take me to your leader’ results in such violent argument that they flee in frustration. Inter-stellar relations would be improved overnight if every project manager was issued with a swagger stick - for hundreds of years a visible symbol of authority in the chaos of battle. It might even help fellow officers.
Confusion is so rife about who runs development projects even within this army of professionals that every research study and brochure feels the need to explain what project management is – or is not. The stick-holder could be an quantity surveyor, engineer or building surveyor – but this is not construction or site management. A sharp suit may run the show – but it is not property or asset management. Basically, project management is what it says on the tin - over-arching control of all the other disciplines involved.
Neil Grey, head of project management at CBRE, prefers a more artistic analogy. He says the stick is not a military badge but a conductor’s baton, ensuring a vast orchestra plays in time. Traditional squabbles over who best fills that role should be irrelevant, as a conductor cannot also play first violin or tuba. CBRE may choose an engineer or quantity surveyor from among its staff to head a project but only because their skills are best suited for that particular scheme. The firm does not then double up as provider of engineering or cost calculation..
Grey does feel that surveyors have an advantage over other professional firms, however. Project management once ‘merely’ involved translating a developer or occupier’s wishes into bricks and mortar efficiently. Now it has widened beyond how to build into advice on why and whether to build. A client will often have a broad property ‘problem’ rather than a pre-considered scheme. Building consultants will give a view on the feasibility of various options – rebuild, refurb, relocate, etc. But they need to be set in a broader context.
‘It demands skills such as market knowledge which you receive in training and by being part of a firm involved in areas like brokerage,’ says Grey. A specialist architect or engineer would not bring that kind of background to the table.
But no matter who wields the stick when the hardhats go on, one word sums up what project management should be about. Trust. It’s all about being sure that delegating authority will not backfire. That has become even more important as a swarm of new complications descend on schemes ranging from new office giants to refitting a back-lot shopping parade. Grey picks out energy saving demands under new European regulations as the current major headache. But others run them close, such as obscure rules over procurement and disposal of hazardous demolition waste which would turn anyone into a UKIP member overnight if they had no professional buffer.
Not all complications come from Brussels, however. Westminster has contributed stricter access rules under the Disability Discrimination Act. The drive for mixed use has also turned development into an even more skilled act as the orchestra leader has to harmonise competing new instruments. ‘The important thing is that clients should not have to even think about such issues,’ says Mike Warner, head of CBRE building consultancy. ‘They should be able to trust that we will handle them.’
So are project managers true knights riding to the rescue of clients in distress? Research published last month by the RICS suggests the shining armour has some alarmingly dull patches. Most do not understand the legal minefield created by relatively recent developments in contract law, according to a poll of more than 200 members of the project management faculty by international lawyer Dechert and the College of Estate Management in Reading.
For instance, less than a quarter tie up collateral warranties and 31% compound the problem by also excluding provisions of the 1999 Rights of Third Parties Act. This could leave clients in the lurch. ‘If they sell on the project, the buyer will have no recourse to the original team [design and construction] if there are defects,’ says the report.
Meanwhile, project managers seem intent on digging further potholes. Half the respondents said they always amend clauses on standard forms, which produced predictable horror from lawyers. They cannot see the need for such a risky business when they have spent decades honing clauses to cover every possibility. Personal indemnity insurance is another area marked for further study. While considered a ‘major concern’ for project managers, half take a laid-back attitude which tends to the horizontal by never verifying whether their policy covers particular projects.
Parallel research by the University of Reading reveals that managers either don’t understand risk management or fail to communicate well, even though clients and owners are becoming more inclined to seek legal damages if things go wrong. Larger firms can afford lawyers to help lay off risks but smaller ones are often unaware of the dangers. Warner insists the solution lies with clients. Choosing a project manager is not much different to choosing a plumber or roofer for your home. ‘Get references from satisfied customers,’ he says. ‘Then get more references.’
How many valuers does it take to change a lightbulb? None. They prefer to rely on a flashlight while everyone else stumbles around in the dark. Before an army of professionals explodes into retaliation at such a slur, look at the average valuation report. What in God’s name do all those squiggles and formulae mean? And why bother? Surely something is worth merely what someone else will pay?
Oscar Wilde had the answer. The industry is crammed with people who know the price of everything and the value of nothing. He was defining cynics but the idea is close enough. Value is not necessarily what it says on the label. It can’t be when most work involves assets that don’t have a price tag. Fund managers demand constant assessment of assets for a variety of reasons such as reports to trustees on their investment performance. Landlords need spot reports when restructuring complex backing finance.
They can’t slap all that property on the market to see what potential buyers would pay. So the flashlights are turned on and the squiggles proliferate. Any valuation is an estimate based on whatever assumptions the client has instructed and the current state of the market,’ says Rupert Dodson, valuation partner at Cushman & Wakefield Healey & Baker. ‘It is therefore an opinion at a snapshot in time.’
In other words, you can’t just pick a building, check recent local deals and come up with a value. Vast numbers of factors have to be considered, including the physical condition, lengths of any existing leases, types of tenants, ground landlord restraints and planning conditions.
In such a bewildering range of factors, opinions can be notoriously variable – and a lawyer’s delight when landlord, tenant or lender disagree. The RICS has done its best to limit options by compiling hefty volumes of rules culled from experience and case law, referred in shorthand by the colour of the covers – the Red Book and the White Book. Just to widen the spectrum, European valuation rules have added a Green Book.
But rules cannot cover every possibility and valuers are forever sending out cries for help from colleagues. How, for instance, do you calculate the value of a leisure centre buried in an office complex? What about a supermarket underneath several floors of apartments? And how do you hive off commercial space from a scheme riddled with social housing and subject to severe planning restrictions on access, service charges and change of use?
The upsurge in mixed use is likely to bring more alchemists of the industry blinking and stumbling out of their backrooms as schemes reach first rent review stage or begin to mature. Flexible leases will add another level of complication which could see landlords tearing their hair out at the extra pages of calculations and caveats thumping onto their desk.
Surely valuers must be relishing the prospect of all that extra income? Not according to Dodson, who bemoans the fact that clients have developed a habit for demanding more for less. Given the importance of valuations, especially for balance sheet purposes, it is perhaps surprising that fees are generally very low,’ he says, suggesting that clients don’t appreciate the amount of work involved.
Valuers have not helped their cause, however. While this group tends to work together across rival firms to gather information, they have been ruthless about winning contracts. Some firms have blatantly cut charges – often to below cost - in a bid to win a client and generate crossover work from more remunerative investment sales and rent reviews.
That should be a thing of the past, however. The Enron saga sent shudders through an industry already facing a barrage of criticism from investors over whether valuations were really independent. Valuers often seemed to produce the figures clients like property companies wanted – an argument hard to refute if touting for cross-business.
Sweeping changes proposed after an investigation by Sir Bryan Carsberg have been mainly taken up, including valuers declaring fees from other work for clients. Doubts remain, however. Another proposal was to limit long-term contracts between valuers and clients. This is very much in the post-Enron mould, which has seen pressure for ‘churning’ of auditors and separation from other business consultancy.
Yet Grosvenor Estate chief executive startled guests at the Mansion House banquet earlier this year by calling for tougher controls. Property firms are time-limiting contracts but tend to reappoint valuers – which destroys the purpose.
But strict limits could backfire. Dodson says this is yet another pressure which clients expect valuers to absorb. ‘Great caution must be exercised in acting for the same client in a transactional capacity to ensure the valuer's independence and integrity is not impugned. Unfortunately this has not translated into higher fees at a time when valuers are coming under scrutiny and clients want an increasing frequency of valuations, a greater degree of accuracy and more report content.’
If valuation becomes uneconomic, fewer firms will pitch for the work and valuers will drift into other areas – much as happened when rent review specialists were laid off when the market went flat. That will leave businesses and fund managers with a more limited choice, making churn that much more difficult. Skills could also drain away in an area where skill is paramount.
The great 19th century statesman Lord Salisbury said the best lesson he learned from a long and distinguished life was never to trust an expert. Few need reminding today after Enron, pensions scandals, the dot.com farrago and multiple stock market crashes. So who can you trust? Property professionals began to realise a decade ago the depth of scepticism among clients was leading them into the arms of solicitors, accountants and management consultants. Investors were happy enough but occupiers and tenants wanted more than a bunch of agents panting for fat commissions and managers quick to demand rents but slow to sort out problems.
That coincided with moves to persuade businesses that property should be at the heart of decision making rather than treated as an afterthought. ‘Strategic consulting’ was born. In other words, advisers would integrate property with business planning. Corporate real estate departments sprang up, offering professional services ranging from finance to planning. But has anything really changed? Not according to Paul Winter, who has spent years pushing for a new kind of service merging property and management advice.
‘It was a clever piece of marketing to change from agent to softer terms like adviser or consultant,’ he says. But a more fundamental change was needed, which is why he became the first chair of the RICS faculty for management consultancy. Even that term can strike dread, evoking images of clean-cut, fuzzy-cheeked clipboard clones charging a fortune for hefty reports which state the obvious. And all far beyond the reach of the average occupier and investor.
Winter, who prefers to call himself a ‘business strategist’, admits that fees can be twice those of other property services but points out that they more than pay for themselves because clients get business-led advice which involves property rather than vice versa. Take a typical small firm that was looking for guidance on relocating in preparation for finding a buyer. It ended up being told to postpone the move until management had been reorganised, so no property fees were generated.
Some surveying firms argue they can be just as impartial in corporate advice but Winter is sceptical. ‘This remains part of a package where the firm will hope to cross-sell agency and/or management work,’ he says.
In the other direction, large management consultancies and accounting groups run property services departments as a way to draw in customers for tax, audit and other services. Winter believed there was room for something in between when he set up Corpra with a bunch of like-minded professionals as a ‘strategy house’ to provide impartial real estate advice in a business context. A handful of similar occupier-led consultants include Fraser CRE, Jonathan Edwards and Fulcrum.
When an investor asked for advice on backing proposals for a chain of 100 veterinary surgeries, Corpra did a business plan, testing markets around the country and only then asked an agent to find property in half a dozen locations considered suitable. A property adviser would have gone out and got the 100 properties straight away, says Winter, risking huge losses for the investor. A pure management consultant would have done the business plan then asked an agent to get 100 properties.
‘I don’t knock agents, he says. ‘In fact, I have great respect for what they do. But it is not in their nature to turn down the chance to buy or sell property – even when it is the wrong thing for a business. Management consultants sell management knowledge. Agents sell market knowledge. When did you ever hear of an agent using complexity theory.’
Despite the esoteric reference, this isn’t rocket science. You could be forgiven for thinking Winter has approached that level with a degree in corporate real estate, an MBA, a PhD from Cranfield Advanced Management Research Centre and a master's under way in ‘corporate strategic alignment’. Yet he sees experience as the crucial factor. ‘I’ve moved away from thinking an MBA is essential,’ he says. ‘You can get young graduates who know too little about the real world.’ That is why the RICS launched the qualification Chartered Management Consulting Surveyor, which requires seven years experience as a consultant as well as a master’s.
Takeup is still in single figures but there is no shortage of surveyors working – or at least interested – in this broader approach. More than 10,000 joined the management consultancy faculty, many of them in firms Like Ernst & Young, corporate consulting divisions of big names like DTZ and JLL, or carving a niche in small occupier-led firms.
Some are younger surveyors who have seen the way the wind is blowing. They know they won’t earn the big bucks available in agency but realise how narrow future prospects could be in ‘conventional’ property areas. Even veterans are eying master’s courses to differentiate from the milling swarms as firms combine into giants. Ironically, one reason behind the wave of mergers was the fear that management consultants would swallow up traditional property advisers. At least one big name toyed with the idea of phasing out bricks and mortar as a core area and evolving into a business strategist.
Now individual professionals are making that transition. All they need is the experience and perhaps Lord Salisbury’s successors will find that elusive trust. Or perhaps the real money will be in selling grey wigs.