CommFeb Marchweb com

The Journal

RICS Commercial Property

Corporate Professional Local

www.rics.org/journals

February-March 09

Taking a gamble?Valuing in an uncertain market

The valuation edition

February-March 09 Commercial Property Journal 3

Contents

Front cover:Taking a gamble?See page 14.

5 The value of worth Robert Peto asks: does the concept of ‘worth’ have a role toplay in a stressed real estate market?

6 Focus

7 Time for change Gillian Rushmore and Arthur Whatling outline the significantchanges included in the updated Red Book 6th edition

8 A valuable lessonPaul Tonkin looks at the key principles that govern negligentvaluation claims and the lessons learnt from recent cases

10 Making the property world go round... Julian Lyon comments on a change in commercial propertylandlords’ perception towards occupiers

13 It is in your hands‘The future is bright’ may make for odd reading for surveyorsworried about redundancy. Barry Gilbertson explains

14 Taking a gamble?Dermot Charleson looks at the role of a valuer when advisingon valuation uncertainty and property risk

17 Worth its rate?Revaluation of all non-domestic property takes effect from 1 April 2010. David Park describes preparations for change

18 The silent electronic revolutionCharles Partridge discusses forthcoming changes to theelectronic valuation system

21 Two sides of the same coinShiraz Oshidar reports on the new editions of the RICS Expert Witness and Advocacy Practice Standards

25 Worth your whileJeremy Davies discusses how commercial ground rents offerkey benefits

26 History repeats itself Andrew Holden looks at the increase in demand for arbitrators within the retail sector

© iS

tock

phot

o.co

m/A

ndre

w M

anle

y

Contacts

Editor: Ebuni OkoloT +44 (0)20 7695 [email protected]

Advisory group: Paul Bagust, Nicholas Cheffings, Martin Francis, Katie Bradford, Vivien King, Rosemary Elder

Production manager: Michelle Harradence

Sub-editor: Phillip Blanshard

Advertising: Mei-Ling MaoT +44 (0)20 7490 5632 [email protected]

Designed and printed by Annodata Print Services

Published by theRoyal Institution of Chartered Surveyors12 Great George StreetLondon SW1P 3ADT +44 (0)870 333 1600www.rics.org

ISSN 1754-9132 (Print)ISSN 1754-9140 (Online)

While every reasonable effort has beenmade to ensure the accuracy of allcontent in the journal, RICS will have noresponsibility for any errors or omissions in the content. The views expressed in thejournal are not necessarily those of RICS.

RICS cannot accept any liability for anyloss or damage suffered by any person as a result of the content and the opinionsexpressed in the journal, or by any personacting or refraining to act as a result of the material included in the journal.

All rights in the journal, including fullcopyright or publishing right, content anddesign, are owned by RICS, except whereotherwise described.

Any dispute arising out of the journal issubject to the law and jurisdiction ofEngland and Wales.

Licence Registration Number PEFC/16-33-228


scar Wilde once said: “A cynic is a man whoknows the price of everything but the valueof nothing”.

It could be argued that valuers are forced intobeing cynics. Their role, in the purest sense, ismerely to interpret the market to provide a value(price) and not to make judgements as to whetherthe property is worth the price. The reason beingthat worth can only be judged through the eye ofthe beholder and one man’s worth may not be thesame as another’s.

However, there is normally a close relationshipbetween price and worth. Price results from a whole series of worth calculations carried out by the vendor and all the interested buyers. A realtransaction normally only takes place to a purchaserwhose view on worth is greater than all otherprospective buyers, and at a figure above theproperty’s worth to the vendor. The skill of thevendor and its agent is to understand themotivations and views of likely purchasers and tofocus the sale towards those parties who are likelyto place the highest worth on the property.

At present, we are experiencing a propertyinvestment market suffering serious dislocationthrough extreme illiquidity. This is driven by fear (offalling prices and rising tenant distress), leading todeferred activity by purchasers and the absence ofbank financing. However, in such markets, therelationship between price and worth breaks down.

Vendors complain that they are selling below theworth to them of the property and buyers are onlyprepared to purchase at prices that are also wellbelow their calculations of long-term worth.

This makes the valuer’s task very challenging, notleast because many users of valuations do notunderstand what a valuation is. When a clientinstructs a valuer to provide an opinion of marketvalue, he/she is, in effect, placing the property onthe market with a view to undertaking a sale at thevaluation date. However, the difference between avaluation sale and a real sale is that, in the lattercase, the vendor has the choice of withdrawing theproperty if the price does not reach their opinion ofthe investment worth. In a valuation sale, there canbe no withdrawal unless the valuation instruction isterminated prior to submission of the valuationreport. If this is not possible, then the owner cannotuse the argument that the opinion of market value is

not correct because he is not a willing seller at thevaluation figure.

In PS 3.2 of the Red Book, the conceptualframework, paragraph 3.2.5 is clear on this: “Thewilling seller is motivated to sell the property at marketterms for the best price attainable in the (open)market after proper marketing, whatever that pricemay be. The factual circumstances of the actualproperty owner are not a part of this considerationbecause the ‘willing seller’ is a hypothetical owner .”

Over the last eighteen months, commercialproperty valuers have been valiantly trying to markto market in a fast-changing world with limitedtransactional evidence. The forward market(property derivatives) is suggesting that valuers are either behind the curve or that there isconsiderably more pain to come. In my opinion, both are applicable.

It is at times of such stress that the undertakingof Investment Worth calculations becomes moreimportant. With banks under pressure to makeprovisions on their loan books against falling marketvalues with significant knock–on effects on theirlending capacity, there is an argument thatappropriately managed calculations of worth shouldbe used as these take a more long-term view onproperty values.

Robert PetoChairman, DTZVice-President RICS

O

See www.rics.org for theCalculation of InvestmentWorth information paper

OpinionThe value of worth

RICS and IVSC ValuationStandards definitionsMarket value: The estimated amount for which a property should exchange on the date of valuation between willing buyers and sellers in an arm’s-lengthtransaction after proper marketing, wherein the parties had each actedknowledgeably, prudently and without compulsion.

Worth, or investment value: The value of property to a particular investor, or classof investors for identified investment or operational objectives.

In summary, market value is an estimate of price, whereas worth is acalculation of value to an individual.

“A cynic is a man who knows the priceof everything but the value of nothing” Oscar Wilde

Robert Peto asks: does the concept of ‘worth’ have a role to play in a stressed real estate market?

6 Commercial Property Journal February-March 09

Focus

New and improved

How difficult is it to value?

The Valuation Professional Group has introduced a scheme to further improve RICSvaluation standards monitoring and regulation compliance. David Rusholme explains

The Valuation Regulation and Accreditation Schemeaims to demonstrate the ability for self-regulationand ensure compliance with Red Book standards. Inorder to undertake Red Book valuations, surveyorsmust first be registered on the scheme.

Aims and objectivesThe move is described as a ‘logical progression ofself-regulation’. It aims to help to differentiatevaluers’ skills, as well as further enhance thevaluation profession’s creditability during difficultmarket conditions.

What does it involve?The scheme provides a renewable accreditationscheme and a regulation monitoring process whereindividual valuers will be responsible for their firm’saccreditation and regulation compliance.

Why has the scheme been introduced?The scheme will help to enable the valuation sectorto demonstrate its ability for self-regulation and toprevent statutory regulation. The RICS InternationalValuation Professional Group Board highlighted thatRed Book valuations must be vigorously self-regulated because:• many countries already require tough regulation

and introduction of even tighter regulation allowsRICS valuers to increase the number of globalmarkets they operate within (the European Unionhas been examining this issue)

• it will reinforce the Red Book’s reputation as the global valuation standard

• it may create widespread criticism of the sector if no action is taken – this, we feel, is a valid concern.

Key benefits• It will provide a distinction between valuation

surveyors and chartered surveyors withoutvaluation skills

• It can further enhance compliance – researchsuggests accredited valuers may see a 20-30%drop on indemnity costs

• It will allow the UK valuation sector to avoidpressure in meeting European regulationstandards.

Implementation The scheme is implemented through the updatedRed Book 6th edition.

Regulation monitoringThe terms of the scheme were developed by theValuation Professional Group’s working group. It was also highlighted that there is no re-testingrequirement for qualified members. RICS Regulationdeveloped the scheme’s framework and isresponsible for its registration, accreditation andcompliance.

David RusholmeDirector RICS Valuation Professional Group [email protected]

For more information on valuation regulation, visit the Regulation section on www.rics.orgAlso, see the Valuation Standards section onwww.isurv.com

The Red Book is available from RICS books atwww.ricsbooks.com

RICS is holding a series ofcommercial property briefingsin London and the South Eastregion. The fortnightly briefingsbegin with a series of eveningsessions in the capital duringFebruary and March.

These sessions will be held byexpert speakers, delivering thelatest views on pertinent topics inthe commercial property industry. Topics will include:• EPC• Landlord & Tenant• Red Book Update• Business Rates• Leases – the top 10 questions

surveyors ask• Planning practicalities

and procedures.

The half-day sessions for theSouth East take place in MiltonKeynes on 10 March andWinchester on 28 April.

The sessions are led by Kevin Aspin, valuation surveyor,property training specialist andRICS Assessor and cover thefollowing topics:• Valuation – Making sense of

commercial property valuationtechniques

• Compulsory Purchase – Calculating thecompensation package

• The valuation of developmentland (including risk analysis).

For the London Briefings,please contact KateHowarth [email protected] visit www.rics.org/london

For the South East briefings,please contact AlisonAdams [email protected] orvisit www.rics.org/southeast

Commercialpropertybriefings:book yourplace now!

In a volatile market where comparable transactionsfigures are a fraction of the volumes seen at marketpeak, valuers are understandably nervous whenapplying values to property. Also, the limitedavailability of credit also precludes many buyers,making the cash-rich equity buyers stronger players.

However, even in these market conditions thereare active buyers and sellers. It is part of valuers’skills to interpret all the factors that affect propertyvalue and use their knowledge, skills and convictionto achieve a realistic opinion of value.

Research by RICS indicates that UK commercialvaluations are the most accurate of the four largestproperty investment markets in Europe. TheRICS/IPD Valuation and Sale Price Report 2008

For more information, visit www.rics.org and enter‘valuation’ into the search facility

found 60.4% of UK valuations in 2007 were within10% of sale prices, and 84.5% within 20%. This compares favourably with the Netherlandswhere 50% of properties were valued within 10%of sale prices, followed by Germany (47.6%), and France (40.2%).

According to RICS, the UK’s level of accuracywas achieved despite growing market uncertaintydue to the lack of liquidity in the commercialproperty market as a result of the credit crunch.


Red Book

Time for changeGillian Rushmore and Arthur Whatling outline the significant changes that are included in the updated Red Book and provide information as to why they have been made

hanges to the Red Book have beenintroduced in an updated version of the 6thedition, published this month (February). Here

is an in-depth description of what it means to you.

Rules of conductFollowing the introduction of the Rules of Conductin 2007, which provided separate rules for firms and members, the RICS Regulatory team hasdeveloped a regulatory review visits and monitoringprogramme. Visit the regulation page at www rics.orgfor more information. Also, the Valuation StandardsBoard identified both the amendments needed toreflect these changes in the Rules of Conduct andways to extend the principles of some of the UKPractice Statements to a global marketplace. Thechanges are outlined as follows:

Firms and regulationThe Red Book’s introduction has been amended and it now applies to all valuations prepared by firms registered for regulation, and not just individualmembers. Also, the minimum terms of engagement,PS 2.1, have been altered to include reference tofirms registered for regulation. Presently, only UKfirms are registered for RICS regulation, whichmeans that only UK valuation instructions need torefer to complaint-handling procedures. However,this will become a global requirement when theregistration procedure is internationalised.

Knowledge and skillsAlthough the minimum terms of engagementfocuses on most matters covered by PS 1, such ascompliance and ethical requirements, it does nothighlight the knowledge and skills as referred to inPS 1.5. A new minimum term (PS 2.1 (q)) has beenintroduced where a short statement is required todemonstrate the sufficient knowledge, skills andunderstanding necessary to undertake the valuationcompetently. Also, a similar change has been madeto the reporting terms in PS 6.1.

Secured lendingMeeting the aim to raise some UK-specificstandards to a global level, the secured lendingprotocol UKPS 3.1 and Appendix 3.1 has beenreplaced by a new global Appendix 4.4 (valuationsfor secured lending) which was the subject of wideconsultation in 2008. Although based on theprevious appendix, it now contains detailed adviceon recognising and handling potential conflicts of interest.

UK Residential Practice StatementsThis now contains two new Practice Statements: • UKPS 3.6, focuses on the principles that need

to be adopted when requested to issue a retypereport for residential lending purposes. This hasarisen from discussions between the ResidentialProfessional Group and the Council of MortgageLenders where it appeared that such reports werenot issued on a consistent basis

• UKPS 4.4 relates to the Scottish Home Report,effective from December 2008. This PracticeStatement is similar to UKPS 4.1, HSV, as itrequires the member to adopt the RICS formatand documentation but, apart from an itemslisting, does not contain any detail about the service itself.

Revisions to UK Practice StatementsThe Accounting Standards Board has issued revisedrules on the preparation of financial statements forsmall entities (called an FRSSE). The main changefor valuers is that property assets are valued tomarket value (MV) with an option to adopt theexisting use of value requirements of FRS 15. This change reverses the previous statement in UKAppendix 1.4. Also, a change to the valuation rulesfor Collective Investment Schemes (UKPS 2.3)corrects the basis of valuation to MV, previously it was open-market value, and special provision has been made for valuations to be adjustedbetween the regular monthly revaluation reviews.

RICS plans to host a series of valuationroadshows in mid-2009, which will includepresentations on the Red Book update.

Gillian Rushmore National and European Skills Director, Valuation, DTZChair of the Valuation Standards [email protected]

Arthur Whatling Red Book Consultant Editor [email protected]

C

The Red Book is available from RICS Books via www.ricsbooks.com


Legal – case law

A valuable lessonPaul Tonkin looks at the key principles which govern negligent valuation claims and the lessons learnt from caseswitnessed in the market downturn

downturn in the property market invariablybrings an increase in claims againstproperty professionals – predominantly

solicitors and surveyors. Lenders, happy to lendduring a market boom but now finding themselveswith defaulting borrowers and insufficient security,are unlikely to simply write off their losses. Instead,they will seek an alternative route of recovery andthis, more likely than not, leads back to the valuerwho provided the original security valuation.

This was certainly apparent during the early-1990s. The increasing willingness of banks to lendat high loan-to-value ratios and finance speculativedevelopment projects must make this a distinctpossibility once again, especially as the economyfalters and the repercussions of such lendingdecisions come home to roost.

Defining the dutyA valuer will only be liable to a person to whom heowes a legal duty of care. In the absence of such aduty, there can be no claim, regardless of any losssuffered as a result of a negligent valuation. Wherea contract exists between the valuer and a personrelying on a valuation, then a duty will be readilyapparent. However, difficult questions may arisewhere there is no direct contractual relationship. A residential mortgage valuation, for example, isoften commissioned by lenders but there will be no contractual relationship between the valuer and

purchaser who, unless commissioning their ownvaluation, is likely to rely on a lender’s valuation.

The extent of the duty owed by valuer topurchaser in these circumstances was clarified bythe House of Lords’ decision in Smith v Eric S Bushand Harris v Wyre Forrest DC1. The court confirmedthat a valuer could owe a purchaser a duty of care,despite not having a contractual relationship. Thecourt’s decision was heavily influenced by the factthat the valuer was likely to know that a purchaserwas likely to rely on the valuation. Although the casesuggested that a duty might not arise in the case of an exceptionally valuable purchase – where it is imprudent for a purchaser to rely on the lender’svaluation – this exception has yet to be fully tested, so the question as to what amounts to anespecially valuable purchase remains unanswered.

Margin of errorThe concept that a valuer is not negligent simplybecause their valuation is not identical to anothervaluer’s is nothing new. The courts have for manyyears accepted that, if a valuer’s appraisal fallswithin an acceptable margin of error, they areunlikely to be seen as negligent. Although the cases of the early-1990s might nothave created the ‘margin of error’ concept, they dooffer guidance in applying it to more sophisticatedvaluations, such as residual valuations ofdevelopment sites. The cases indicate the court’s

A

© iStockphoto.com/Pamela Moore


Legal – case law

willingness to adopt a pragmatic approach in thesecomplex cases and allow for a wider margin thanmight be appropriate in the case of non-complexresidential valuations, for example2.

Yet, such flexibility comes at a price. Previously, even if a valuation was outside of the appropriate margin it was not deemedautomatically negligent, and the court would stillconsider the valuer’s methodology for evidence ofnegligence. The approach has hardened duringrecent years and now an inference of negligence islikely to be drawn3 where the valuation falls outsideof the margin. Similarly however, the cases suggestthat a valuation within the margin is unlikely to bejudged to be negligent even if the valuer’smethodology might show otherwise.

Limiting the lossAgain, the approach to assessing loss in negligentvaluation claims is well established. The claimant isentitled to be put in the same position as he wouldhave been in if the valuer had not been negligent.However, this apparent simplicity is deceptive andquantifying the recoverable loss can raise somedifficult questions.

Unsurprisingly, the vast majority of negligentvaluation claims in the early-1990s were pursued by mortgage lenders and it is in these cases wherethe approach to measuring loss is most developed.The courts have drawn a distinction between so-called no transaction and lesser transaction cases. Ano transaction case is one where, had an accuratevaluation been provided, the lender would not haveadvanced any money. A lesser transaction case iswhere, had the true valuation been known, thetransaction would still have gone ahead, albeit with alower amount lent.

The courts held that in a no transaction case, alender should be entitled to recover all their losses(including losses resulting from market fall orproperty sales costs). In a lesser transaction case, a

lender cannot recover losses which it would havesuffered in any event (i.e. losses from fall in marketvalue, which it would have suffered even if a lesseramount was lent).

Market downturnThere was clearly an attraction to lenders inestablishing a no transaction case in a fallingmarket. If successful, most of the market loss fell on the valuer who effectively acted as a guarantorof the transaction. The unfairness of this,exacerbated by a rapidly falling market during theearly-1990s, was addressed by the House of Lordsin South Australia Asset Management Corporation v York Montague Limited 4 (SAAMCO). The courtaffirmed the distinction between a lesser and no transaction case, but held that even in a notransaction case, the valuer is only responsible forthe consequences of his valuation being inaccurateand is not guaranteeing the lender’s security.

The court considered that the damagesrecoverable against a valuer in a no transaction caseshould be limited to the difference between thenegligent and accurate property valuations, and thatlosses which exceed this are not recoverable. This isknown as the SAAMCO cap. A lender lends £10mon the basis of a valuation of £12m. The propertywas actually worth £8m at the time of valuation and is now worth only £5m. The lender’s losses arecapped at £4m (£12m less £8m) notwithstandingthat actual loss, taking into account the fall inmarket values, may be £5m.

Developments, such as a robust approach to themargin of error principle and the SAAMCO cap, arelikely to mean that valuers are not perceived to bequite the easy target they were during the aftermaththe last property crash, however, the law in this areacontinues to evolve5. Whether the present marketturmoil will further fuel this evolution remains to be seen although, if my caseload is anything to goby, it must be a real possibility.

© iS

tock

phot

o.co

m/M

arci

n B

alce

rzak

Paul Tonkin Associate in the Real EstateDisputes Team Lovells LLP

1 Smith v Eric S Bush and Harris v

Wyre Forrest DC [1990] 1 AC 831

2 See Mount Banking Corporation

Limited v Cooper & Co [1992] 2

EGLR 142 and Private Bank & Trust

Co. Limited v S (UK) Limited [1993]

where the courts allowed margins of

17.5% and 15% respectively on

complex residual valuations.

3 Abbey National Mortgages Plc v

McCormick & Merrifield (unreported)

15 February 1996

4 South Australia Asset Management

Corporation v York Montague

Limited [1997] AC 191

5 In the recent case of the Platform

Funding v Bank of Scotland Plc

(2008) Times, 6 October Court of

Appeal suggested that a valuer is

under an absolute duty to ensure

that he values the correct property

and therefore will be liable for a

failure to do so even if he has acted

with reasonable care

Case in Point – Negligencein Valuations and Surveys2nd edition is available from www.ricsbooks.com

Real Estate AssetManagement is availablefrom www.ricsbooks.com

Further information


Landlords and occupiers

Making the property world go round… Julian Lyon comments on a change in landlords’ thinking towards occupiers

or generations, the investment market hasthrived on the presumption that owningproperty almost always assures a return.

Historically, long leases were seen as a means ofpassing the benefits of ownership to a third party fora period (often 31 years) at a fee. This evolved fromthe archaic concept of copyhold, and documents inthe National Archives clearly demonstrate the assetvalue vested within leases.

As a modern investment class has evolved, thebalance of benefits has shifted fundamentally, withinvestors typically expecting to pass all the liabilitiesof ownership to occupiers, yet still retaining most ofthe benefits. It is also believed that many investorshave little or no involvement with the property andtenant for much of the lease period.

Even before this credit crunch, lease structureswere changing. Lease lengths have reduced and theCode for Leasing Business Premises offers animproved balance in the leasing process – assumingboth owner and occupier are aware of the Code.

It seems many landlords and occupiers haveembraced the joint Property Industry Alliance andCoreNet Global UK initiative (the OccupierSatisfaction Index) which has identified a substantiallevel of dissatisfaction among occupiers. Since the

(for owners) (BPF) held discussions on migratingexisting leases from rents payable quarterly tomonthly. The cash flow implications of quarterly rentare now such that many retailers are likely to findthemselves in receivership by around the next twoquarterly deadlines.

Clearly, there is a valid argument surroundingvalue erosion. At present, investors bank quarterlyrents and earn interest on the second and thirdmonths’ rent. Also, some might complain that theloss of this interest (which, one could argue, shouldperhaps belong to the tenant) must becompensated. Table 2 summarises the amountoccupiers earn for landlords in a typical year.

If we assume the market marks up a building’srental value where rent is payable monthly inadvance compared to a traditional quarterly rentcycle, then landlords can expect to benefit at rentreview. Consequent impact on investment valueshould mean that the anticipated increase in rentincome drives a higher investment value – and that this could exceed any yield adjustment for a perceived reduction in security. There is scope,therefore, for landlords to improve occupiers’business environments while at the same timeenhancing investment value. Interest loss onadvance rental payments can hardly be considereda credible argument against change.

Also, consider what happens as the market falls – in such a scenario, rental values may well havefallen to below rent payable. The landlord can stillcharge the same rents as before and the occupiertakes the first risk in a falling market. Landlords arereluctant to allow a tenant to mitigate costs bysubletting space for whatever the market will pay(although several landlords have signed up to theBPF’s sublease initiative). This problem has alsobeen substantially exacerbated since April 2008,when the reform to Empty Property Rates Reliefbecame effective.

As rents payable remain above the prevailingmarket rent, top-slice investments will start toappear1. This move means that if an occupier fails,the landlord is highly unlikely to recover the arrears,whereas it should be possible to relet the propertyat the then prevailing market rent.

For occupiers, and in the light of adverse marketconditions, it is clear that there is a goodwill elementto valuation. Most notably, the value is created as aresult of investors maintaining good relations withoccupiers. Indeed, separating goodwill fromunderlying value is a worthwhile exercise in bothgood and bad times. Landlords need to respect the

F

© iS

tock

phot

o.co

m/E

rik

Rot

ter

index’s inception, it appears many landlords arebeginning to perceive themselves more as asupplier meeting customers’ needs than as thetraditional absentee landlord.

There is a very real benefit that property investorsderive from their tenants, for no investment marketexists without tenants – as highlighted in Table 1.

It indicates that while a building is unlet – even if a tenant is expected to sign a lease – value mustreflect the cost of remarketing the property.Consequently, the asset does not increase in valueuntil the deal is completed.

At a time when financial and other businessmarkets are in crisis, owners/landlords need torecognise the difficulties occupiers are experiencingand, where possible, help them to survive. After all, the loss of a tenant is tantamount to reverting from an investment’s worth (see Table 1) to a vacantpossession value.

The British Retail Consortium (acting for retailoccupiers) and the British Property Federation


Landlords and occupiers

go round…

value uplift a tenant brings to an empty property,and should take all possible steps to ensure thegoose continues to lay its golden eggs.

Looking forward, there is a role for both occupiersand owners/landlords to play regarding the need toreduce commercial buildings’ carbon footprints.

Early indications show occupiers being left behindin the debate surrounding green leases, taxationand other green measures. Many solutions that maysuit a large new office building are inappropriate forolder stock and other asset classes. It is essentialthat this discussion is an open dialogue, and that wemove away from the landlord accepting additional

burdens of responsibility on the condition that it canbe passed on to the tenant.

Occupiers and owners need to recognise thecombination of investors’ capital and occupiersuccess to enable a return on capital, helping themarket to function efficiently. It seems occupiersreally do make the property world go round.

Julian D S LyonManager GM Worldwide Real Estate

1 Julian Lyon: A Pure Mathematics Approach to Top-Slice

Valuation, Estates Gazette June 1992

Property rent £100,000

Purchaser’s costs 6.00%

Assumed rates 46.20%

Assumed void period (months) 12 scenario 1

Assumed void period (months) 24 scenario 2

Description/Yield 6% 7% 8% 9% 10%

Assumed capital value let £1,572,327 £1,347,709 £1,179,245 £1,048,218 £943,396

Scenario 1:

Assumed value vacant £1,442,902 £1,219,116 £1,051,469 £921,243 £817,208

Increased value on letting £129,425 £128,593 £127,777 £126,975 £126,188

Scenario 2:

Assumed value vacant £1,312,740 £1,090,516 £924,388 £795,639 £693,041

Increased value on letting £259,587 £257,193 £254,858 £252,579 £250,355

Immediate value benefit to an owner of signing a lease

Interest on advance rentIf an occupier pays £12,000 per year for its space, and rent is paid quarterly in advance, it will makefour payments of £3,000 each year. Of each payment, £1,000 may be allocated to the first month’srent; £1,000 will earn one month’s interest; and £1,000 will earn two months’ interest.

At a deposit interest rate of 4%, this equates to £39.32 or 33 basis points on the cost of the lease.

If one takes a typical weighted average cost of funds for occupiers (other than in a recession) at, say 7%, the cost to the occupier increases to around 57 basis points.

In the recessionary markets where WACoF is more like 10%, the cost is more like 80 basis points.

This is the marginal value the landlord obtains at the occupier’s loss for the convention of chargingrent quarterly in advance.

Table 1

Table 2


Career development

It is in your handsIn such difficult times, ‘the future is bright’ may make for odd reading for surveyors worried about redundancy, but itdoes make sense. Professor Barry Gilbertson explains why

hen the market is going up it can beargued that anyone can profit fromproperty. Its value may well have risen

between the date of agreeing a sale and theexchange of contracts, and its value may haveincreased further still by the legal completion date. If value increase is sufficient to reimburse the costs,then a buyer could sell it immediately at a return ora working profit.

However, when the market is in a downwardspiral, as it is now, the prudent client is more likely to appreciate a trusted advisor’s involvement. This could be someone who really understands the market and can communicate well – whethervaluer, surveyor or agent, and is someone in whomthe client has placed their trust, using the adviceoffered to make key commercial property decisions.

With the average surveyor becoming increasinglyworried about their position, perhaps now is the time to stop being an average surveyor? Use thisopportunity to learn more about the technicalitiesassociated with property and the practicalities of the market.

Training and studyClosely examine the courses and other trainingoptions available to provide an increased depth ofknowledge. Also consider attending softer skillscourses, such as listening, people management orpublic speaking.

Study the broadsheet newspapers’ financialsections rather than just giving them a cursoryglance. Examine the business headlines, and useyour imagination to conjure up an idea about how you, or your firm, can create a fee-earningopportunity for the company headlined or for other companies in the same sector.

Many readers will already have a plethora of dailyor weekly updates jumping into their e-mail inbox.Carefully decide which updates provide valuableinformation, and ‘junk’ the ones that don’t. Then, notonly will there be less of them to read, but you willhave more time to read the more valuable sourcesof information.

Information sourcesIf you are less busy in the office, then tidy up yourinbox. Archive the documents that you need to keepand junk the rest. Look back through your day bookand find those voicemail messages that you carefullywrote down yet never found the time to return thecalls. See if you can make yourself just that little bitmore efficient and productive than your peers.

Financial knowledgeTomorrow’s surveyor will have to be more financiallysavvy than in the past. Test your ability to read abalance sheet and whether you are able to interpretthe strength of a tenant by viewing their last set ofyear-end accounts. Also, try to identity whether yourclient, old or new, has the financial resources to payyour fees. These exercises will stretch your ability aswell as further enhancing your knowledge, ensuringyour clients receive an effective service.

Whether or not an advisor will receive their fees is always a risk, and one which increases when themarket is in a downturn or, as now, a recession.In such times, cash flow becomes tight foreven the best-run companies and clients.Property is a complex business, with nosimple solutions and provides anopportunity to make (or lose) money.It is easy to buy, yet hard to sell ata strong profit. Remember,inflation takes care of mostmistakes, but the reverse isalso true. We are in adifficult economic period, and this encouragesclients who are losing profit to explore every avenueof recovery available.

Legal issuesIn today’s litigious world, there is every prospect that,if your client has lost money, it is likely they will seeklegal advice to recover the loss. In troubled times,litigation cases increase, perhaps because advisorsare under more pressure to accept any workoffered, even if they do not possess the requisiteexperience or expertise. This ill-judged acceptancecan often lead to the provision of poor-qualityadvice. At best, it has the potential to bring a lack ofvalue for money to the client or, at worst, risks beingnegligent, further exposing advisors to the risk ofdamaging litigation.

If you can identify the three key operational risksin a client’s business (or your own), or are aware ofthe top three financial risks in an organisation, it will help to increase your understanding of reputationalrisks. It has taken all of your career thus far to buildyour reputation, but that can be easily damaged ifyou fail to understand risk, and fail act on yourconclusions. Combining all these attributes willmake you better than the average surveyor andshould ensure that your future really is bright.

Professor Barry Gilbertson is a past-RICS Presidentand a partner at PricewaterhouseCoopers

W

For more information, pleasevisit the Valuation section of www.rics.org

Promoting the professioncareers guidance is availablefrom www.ricsbooks.com

FinancialRe

puta

tiona

l Operational

?Risk

Market uncertainty

Taking a gamble?Dermot Charleson looks at the role of a valuer when advising on valuationuncertainty and property risk

familiar question to valuers in presentmarket conditions is likely to be: how canyou value property in market conditions

where there is no debt available, there are no buyersand the only transactional evidence is from forcedsales? Investment inactivity caused by propertymarket uncertainty and wider financial marketvolatility means there is little transactional evidenceon which to base values. Prices achieved in recentyears have been driven by freely available debt andtremendous investor demand. The debt marketfreeze and weakening confidence have seen the property markets decline rapidly with greatlydiminished trading activity. The lack of comparabledeal activity means greater reliance on the valuer’smarket judgement. In this environment, clients arenaturally holding valuations up to greater scrutiny,meaning valuers need to be more explicit with theirclients about the reasoning and thought processestheir advice is based on.

Despite these difficulties, valuers are still facedwith the requirement to provide an opinion ofMarket Value (MV) to a wide variety of clients withdiffering concerns. Investment managers of longterm funds like to see stability and will resist falls invalues – many in the market are even questioningthe validity of the MV definition in these currentuncertain conditions. Other clients such as

refinancing banks focusing on underwriting orreceivers and administrators needing to turn assetsinto cash, will be more accepting of valuer’sjudgement on the market correction. Some users of valuations may say that this relianceon valuer judgement invalidates the results(particularly if they don’t like the results). However,valuation can not rely completely on comparableevidence. Making a judgement about investorsentiment is important when valuing in all markets,whether rising, stable or falling. In a rising marketthis is arguably easier as there is lots of biddingactivity to demonstrate investor sentiment. In the present market this is not the case, and it is even more important for valuers to study investorand vendor behaviour closely in building theirvaluation case.

So what market activity is taking place? Mostinvestors are not looking to buy at the momentunless attractive opportunities can be found. Manyare holding back on the expectation of furthermarket falls. With property and financial market riskat high levels and very limited debt, purchasers arebelieved to be simply seeking higher returns forhigher risk and are prepared to wait for it. The costof their equity has therefore risen and buyers seevendors who are not willing to trade at their level asunrealistic about current pricing.

A

© iS

tock

phot

o.co

m/A

ndre

w M

anle

y


Market uncertainty

What about the sellers? Some observers arguethat any vendors prepared to sell in today’s

market must be forced sellers, so pricesachieved are not true reflections of MV and

therefore should be disregarded asevidence. On closer analysis, while manyinvestors currently selling are certainlymotivated by external pressures, such asfrom their lenders or equity investors,many are not truly forced sales.

The Red Book offers guidance on thisin PS 2.3(4) “Forced sale arises where

there is pressure on a particular vendor to sellat a specific time, for example, because of the

need to raise money or extinguish a liability by a givendate… the time constraint is not merely a preferenceof the vendor”.

The most important factor in concluding whethera sale is forced is therefore whether a vendor givesa reasonable period of time or a fixed date to effecta sale. Valuers must therefore consider fully thecontext of such transactions, especially the vendor’smotivation and time allowed for marketing.

Market pricingAs well as analysing the limited completedtransactions, valuers should observe the salesprocesses of comparable properties offered to themarket but which may not have sold. In conditionslike this, the valuer can gauge a great deal aboutmarket pricing by observing the level and depth ofbidding activity and whether prices reducethroughout the sales process as vendor andpurchaser expectations come closer.

Because of this, it is especially important forvaluers to have a full dialogue with investmentagents and clients who are trading properties. This‘soft’ evidence will assist the valuer in establishingwhere current market pricing lies in the absence ofcompleted transactions.

Fundamental property risks are often overlookedin a rising market, but when conditions changethese negative attributes will begin to impact pricingas the market’s sensitivity to risk increases.Investors’ definition of a prime location tends towiden in bull markets but will narrow in a bearmarket, short leases and vacancy are no longerviewed as asset management opportunities butbecome risks which will attract discounts in pricing.Valuers need to identify such issues and to discusstheir impact openly with clients.

The RICS Valuation Standards Guidance Note 5(GN5) provides guidance to valuers in relation to

valuation uncertainty. The information bulletin,‘Valuation Uncertainty and Market Instability’,provides further notes on the application of GN5 inthe light of the continued market uncertainty.

This paper stresses the importance of the valueridentifying and explaining the reason for, and extentof, valuation uncertainty. The paper also encouragesvaluers to have a dialogue with clients to establishany special assumptions and to comment on thedegree of subjectivity in the valuation figure.

A reminder is given to consider the provision offorward-looking advice and for certain assets, suchas development properties, a sensitivity/risk analysis.Importantly, the paper emphasises that it is notacceptable to h ave standard caveat to deal withvaluation uncertainty, but that valuers’ emphasisshould be to provide considered and authoritativeprofessional advice.

Investment inactivity caused by propertymarket uncertainty and wider financialmarket volatility means there is littletransactional evidence on which to base values

Valuers are facing a very difficult task in reachingtheir conclusions and in conveying these to theirclients at the present time. It is therefore moreimportant than ever to: • be clear about the basis of valuation and

any assumptions• establish the full background to relevant

market transactions so that they can beinterpreted correctly

• review and analyse the soft market evidence to inform valuer judgement fully

• identify the key attributes and risks of theproperty and explain how these impact value

• explain the context of valuation uncertainty havingregard to GN5 and advice in ‘ValuationUncertainty and Market Instability’.

Dermot CharlesonDirector Pan European Valuation

For the 2008 Valuation and sale price report, visitwww.rics.org and see theValuation home page

The ‘Valuation Uncertaintyand Market Instability’bulletin is available onwww.rics.org Enter‘Valuation Uncertainty’ in thesearch facility


2010 Revaluation rating

Worth its rate?Revaluation of all non-domestic property across England and Wales takes effect from 1 April 2010 and nearly 2m newrateable values will go live. David Park describes the Valuation Office Agency’s (VOA) preparations for the changes

o ensure transparency in the rating system, anew rateable value assessment will be issuedonline to all business and non-domestic

property occupiers in October 2009 and ratepayerscan compare and check rates and contact the VOAwith any queries. It is hoped this move will offerreassurance in the accuracy of calculations beforethe final bill is issued.

The VOA set the statutory base date as 1 April2008, highlighting its commitment to provideaccurate valuations in the first instance byimplementing the following: • gathering up essential information • ensuring that the information held is up-to-date

and accurate• maintaining a good understanding and awareness

of the market.

The focus will continue to be on key markets as identified by local regions, specialist types ofproperty, and London with all its environs with high rateable values. During periods of marketuncertainty, this type of investment is of heightenedimportance, and greater confidence is expected inthe valuations produced.

Keen to foster involvement in the revaluationprocesses, the VOA encourages ratepayers tocontact them with any concerns they may have in order to establish a forum for open discussion.Plans are in place to make it easier to supplyinformation, including an online option, and prior-agreeing rating assessments and underlyingvaluation schemes. This move is expected to provide ratepayers with more confidence in financialplanning, as well as to reduce the need to makecostly enquiries and appeals.

The VOA regularly asks ratepayers to supplyinformation on statutory request for informationforms, which can be completed either online or inpaper format. A Rating Contact Scheme is alsooffered to owners/occupiers of multiple propertiesin order to significantly reduce the need for multipleform completion. Users of the scheme are offeredthe option to supply information electronically, and individual information requests will no longer be necessary if regular updates are received by the VOA.

Revaluation occurs every five years in order tomaintain fairness in the rating system, doing so byensuring that valuations are based on up-to-dateinformation. Local service funding relies on rateablevalues, which generate £22bn in business rates forlocal authorities annually.

Rateable values are based upon open-market rentalvalue revaluations to ensure that changes in therelative demand for property types or locations arereflected in assessments.

The VOA has highlighted that rateable values willincrease and decrease in line with the rental marketchanges. Revaluation is not focused on raising extrarevenue, and the multiplier (the factor applied torateable value to produce the bill) will be determinedto ensure that the business rate bill remains thesame, only allowing an increase for inflation. Inpractice, this means that if an increase in a rateablevalue meets the average increase, then rates bill arelikely to see little change, inflation aside.

Further informationDetails on the revaluation is available at

www.voa.gov.uk/2010

More information on the Rating Contact scheme is

available from Kevin Priestland on +44 (0)142 230 7044.

Statutory request for information forms are available from

www.voa.gov.uk/rfi

T

The VOA has highlighted that rateablevalues will increase and decrease in line with the rental market changes

© iS

tock

phot

o.co

m/M

acie

j Bog

acz


Rating revaluation

Charles Partridge looks at how the rapid advance in technology has helped to improve the working processes forsubmitting rating appeals... as well as saving a few trees along the way

urveyors will be well aware that the laws andpractice of non-domestic rating has evolvedalmost continuously since it was first

introduced by the Poor Law Relief Act of 1601, with changes coming about through a combinationof legislation and court decisions. The valuationprocess has become very sophisticated as valuersfollow and adapt to market practices and regulationscontrol the minutiae associated with alterations,appeals and payment. Surprisingly, until very recentlythe communication medium used to support this tax,which now raises close to £20bn per annum, hadonly progressed from quill pen and parchment totypewriters and word processors via pen and paper.The system was inefficient, slow, subject to humanerror, expensive and, as it used vast quantities ofpaper, unacceptable in today’s green world. Putsimply, it was no longer fit for purpose.

RICS saw the need, following the introduction of the 2000 Rating Revaluation to develop e-communications in the arena of rating appeals.Supported by the Institute of Revenues, Rating andValuation (IRRV) as well as the Rating SurveyorsAssociation (RSA), it approached the Valuation

Office Agency (VOA) to establish whether theAgency saw mutual benefit in exploring thepossibilities arising from the rapid advances in ITand the power of the Internet. It transpired that theVOA had already started work on the developmentof a suite of programs designed to enhance thedata available to ratepayers for the 2005 RatingRevaluation, including the publication of SummaryValuations and the ability to lodge appeals againstthe 2005 list assessments via the VOA website. A grant of £20,000 was made available through the UK government’s Invest to Save initiative for an in-depth study of the potential benefits.

The December 2003 report identified that, withthe introduction of electronic communication, specificsavings in the region of £10m per annum might beexpected to be achieved. This would come aboutthrough economies in staff time, postage, paper andstorage, as well as improved efficiency throughgreater accuracy in both the VOA and rating agent’sinformation. The opportunities to achieve thesecame about in part because approximately 94% ofall non-domestic rating appeals by number, and98% by value, are dealt with by agents.

S

The silentelectronicrevolution

© iS

tock

phot

o.co

m/A

ndre

s P

eiro

Pal

mer


Rating revaluation

Changing the method to an electronic mediumbrings immediate savings as highlighted earlier,however, the biggest improvement has been inoperational efficiency. Any manual process issubject to human input error, and this is particularlytrue where the work is repetitive. A fully electronicsystem only requires staff in the VOA to check a proposal (appeal) on receipt for validity, or tocorrectly identify the hereditament if the submittedproposal is unclear to the VOA computer system.The use of agreed protocols has automaticallyreduced the number of proposals (appeals) receivedby the VOA that are unclear and need a manualinvestigation to enable the VOA to properly processthe document. It has, at the same time, significantlyreduced the time spent in trying to resolveincorrectly entered data, with the elimination of input errors significantly reducing the requirement to check data or rectify mistakes.

Previously, agents had to monitor every proposal,ensure that the VOA had actually received it, and allfurther communications had to be logged, enteringprogramme dates, the date of the Valuation Tribunal,etc. This was expensive in man hours, prone to input error and requires the storage of alldocuments as issued by the VOA. The introductionof e-communication has automated and vastlyenhanced this process. While it is difficult to beprecise, the savings and efficiency gains in anagent’s office should broadly replicate thoseexperienced by the VOA.

which will continue to be sent in hard copy throughthe post. This is necessary because the grounds on which a tribunal reaches a decision following a formal hearing are normally very extensive and do not lend themselves to automated electroniccommunication. Hard copies of the VTS’s decisionswill continue to be posted to agents for theforeseeable future, however, they are published in electronic format and are available to download.

The pace to introduce further electronicdevelopments is understandably controlled byfinancial constraints in both the public and private sectors.

For more information on the 2010 Ratingrevaluation, visit www.rics.org

[Before the changes]agents had to monitorevery proposal, ensuringthat the VOA had actuallyreceived it

While electronic communication between the VOA and agents became operational on 1 April2005, communication between the agent and theValuation Tribunal Service (VTS) continued to be on paper. The VTS is a far smaller organisation than the VOA, and for a while a lack of resourcesprevented the development of further electroniccommunication. This has now been addressed and,from the end of November 2008, all proposalsadministered electronically on the VOA were dealtwith electronically by the VTS. This method coversall communications between the VTS and individualagents, except for the formal decisions of a tribunal,

The pace to introduce further electronicdevelopments is understandably controlledby financial constraints in both the publicand private sectors

The VOA and VTS are working to further enhance the electronic system and this move isunderstandably impacted by financial constraints in both the public and private sectors. Plans are inplace to enhance the system’s operational efficiency,and to make it compliant with the both the PISCESand UPRN protocols.

When the three professional bodies, the VOA andVTS embarked upon the introduction of electroniccommunication, they anticipated major financialsavings. These have been achieved, with estimatedcash savings throughout the profession in excess of £15m per annum. However, these pale intoinsignificance when compared, not only with the consequential improvements in operationalefficiency, but more importantly, with opportunities to add value to the advice and service provided to clients from the increased accuracy of acomputer database automatically populated with the latest information.

Charles Partridge DirectorLambert Smith [email protected]

Further informationVisit www.valuation-tribunals.gov.uk/


DRS

Two sides of the same coinShiraz Oshidar reports on the new editions of the RICS Expert Witness and Advocacy Practice Standards

xpert witnesses need to be impartial and not take up the cudgels of advocacy whenprofessing to be expert witnesses. This

message emerges clearly from a reading of thedecisions of various tribunals over the years.

The RICS Dispute Resolution Professional Grouphas published new editions of its practicestatements (PS) and guidance notes (GN) forsurveyors acting as expert witnesses, and/or asadvocates, in proceedings in the UK before varioustribunals (including courts, arbitrators, independentexperts, lands and valuation tribunals and others).The documents’, which came into force on 1January 2009, main aim is to ensure that theoriginal documents were brought up to date,reflecting the current law and best practice. Theprevious advocacy GN has been revised andextended. Also, a mandatory PS has beenintroduced, which outlines duties and standardsfor surveyors who act as advocates.

RICS expert witness practicestandardsThe primary, overriding duty of an expertwitness to a tribunal/third party resolver– not to those retaining or paying them– has been emphasised and is evenmore prominent than in previous editions.The dangers of ignoring this duty are very real.Some might suggest that the notion ofindependence and impartiality in this overriding dutyis mythical, that in an adversarial system – wheresurveyors often commence as negotiators for aclient – expert evidence will at best be presentedwith a degree of unwitting bias, and at worst,stretched and tainted by dishonesty and extremebias. In a survey carried out for the Estates Gazettein 2004, surveyors were asked whether they hadever encountered perceived or actual dishonesty insubmissions, and only 7% of third parties said thatthe expert witness appearing before them wasnever acting as an advocate for their client. A 2004survey of Arbrix (members of RICS presidentialpanels who act as third-party resolvers) indicated awidespread perception that surveyors representingtheir clients commonly strive to misrepresent theevidence, and give deliberately unbalanced views. Ithighlighted a perception among many third partiesthat this behaviour was an ‘ineradicable part of thegreat game’, but that the third parties, in manyinstances, recognised such behaviour and took intoaccount the fact that a surveyor paid mere lipservice to the PS in their decisions, without

E

© iS

tock

phot

o.co

m/E

mra

h Tu

rudu

necessarily going so far as to directly reportindividuals to RICS for potential disciplinary action.

While some third parties may well have come to expect minimal adherence to the PS, the formalframework of rules and guidance governing expertevidence sets standards and a parameter withinwhich evidence must be given. Without this thesystem is undermined and the profession risksbeing brought into disrepute; third parties who arespecialists and share the same discipline as thosepresenting evidence to them, are susceptible tohaving the wool pulled over their eyes, despite theirself-confidence to the contrary. In 2002, JusticeJacob noted the importance of expert evidence tothe justice system and added: “Experts who bend ❯❯


DRS

the rules pervert it and have to go. In my view,although the overriding duty can fairly be said to bea woolly and ill-thought out concept, formally addinglittle or nothing to the requirement to tell the truthand give an honest opinion, it does serve a purpose.

“That purpose is to help experts to understand,and that from the outset, that they are not playing agame, and that they are not negotiating. They aregiving evidence.”

While the behaviour of surveyors before thirdparties is sometimes not what it could be, it is thecase that some third parties have publicly advocatedthe need for their own peers to take a stronger linein decisions, making clear any perception of partisanand unconscionable behaviour. The expert witnessdocument distinguishes roles that a surveyor canadopt, in particular as an advocate or expert witness(or in a dual role as advocate and expert in thesame case, albeit at different times). An occasionalmisunderstanding is that it is mandatory to act as anexpert witness in proceedings before an independentexpert (in an expert determination process).

Whether the role of expert witness, or surveyor-advocate, is adopted will depend on the powersconferred upon the independent expert under a leaseor other instrument, on the relationship between theparties’ surveyors and upon any agreement betweenthem and an independent expert. There is noreference in PSs or GNs to suggest an independentexpert has powers to mandate that presentationsmade to them must be in the form of expertevidence, as opposed to advocacy submissions.

Contingency feesUndertaking of instructions on such a fee basisoccurs in some surveying disciplines, and is viewedwith some suspicion and unease by many. RICSnearly issued an outright ban on contingency fees,but following representations from the rating sectorand discussions with the Valuation Office Agencyand the VTS, it opted instead for transparency anddisclosure to the tribunal of any contingency feebasis operated. The PS clearly indicates the court’sopposition to contingency fees and highlights therisks to client and practitioner in operating them, andit encourages, wherever possible, adoption ofanother fee basis.

Another key change to the standards encouragesexperts to raise with their clients the benefits ofconferring and discussing points in issue with theother side and their expert at early stages of aninstruction. A further change sees theimplementation of new requirements for adoptingthe dual role of an expert witness and advocate,which revolves around client notification and theneed for a client’s consent. ©

iSto

ckph

oto.

com

/Nik

olay

Mam

luke

❯❯

A surveyor-advocate, like otheradvocates, is at liberty to presenta skilled and credible case basedon the evidence available


DRS

RICS advocacy practice standardThe introduction of an advocacy PS provides anexplicit framework elaborating core rules of conductfor a surveyor-advocate to perform their role.

Surveyor-advocates frequently appear oppositesolicitors and barristers, who are subject to rules ofconduct governing advocacy. Surveyor-advocatesare not subject to similar rules and the lowerthreshold of professional conduct requirementsgives rise to the perception of lower professionalstandards and performance. This may taint thesubmissions made by the surveyor-advocate and reduce the weight given to the evidence ofwitnesses: the ultimate result can harm the client’scase. The introduction of a PS should thereforemitigate the potential for this harm. The principalmessage of the PS is that, whilst a surveyor-advocate owes duties to their client, they also owe aduty to the tribunal to act fairly and to assist inmaintaining the integrity of the tribunal’s process.

The surveyor-advocate must take personalresponsibility for the conduct and representation of the client’s case and act in the best interests ofthe client, advancing a case by all fair and propermeans, promptly, diligently and in a competentmanner. The surveyor-advocate is expected not to deceive or mislead the tribunal or the surveyor-advocate’s opposing party. This includes a duty to bring to the attention of the tribunal all relevant legal decisions and legislative provisions thesurveyor-advocate is aware of, whether supportiveof their client’s case or not. Former president of the Lands Tribunal of England & Wales, Sir MichaelRowe CBE QC stated: “An advocate has a duty not to mislead the tribunal in any way… indiscussing fact he must not twist any evidence,though he can put the most favourable constructionon it.” In respect of contingency fees the advocacypractice statement makes clear that a surveyor-advocate (unlike an expert witness) can act on a contingency fee basis, as long as the nature,operation and effect of that basis is made clear to the client.

The criticism and failings of expert witnesseswhen they bat as ‘advocates’ under the guise ofbeing an expert witness has been highlighted – it could often be a more honest and productiveapproach for the professional being asked to act as an expert to advise the prospective client toretain another expert, or to consider acting in solely an advocacy role. The surveyor-advocate can do what a client expects, namely make the best possible argument e.g. in support of thehighest or lowest rent.

It is an unfortunate misconception of some tothink that adopting an advocacy role is tantamount

Surveyors acting as expertwitnesses (3rd edition,combined PS and GN)

Surveyors acting asadvocates (1st ed. PS, 2nd edition GN)

Available free to RICSmembers electronically at www.rics.org/guidance;hard copies can bepurchased viawww.ricsbooks.com

© iS

tock

phot

o.co

m/J

on S

chul

te

to lying, or an automatic admission of non-credibility or weakness. A surveyor-advocate, like otheradvocates, is at liberty to present a skilled andcredible case based on the evidence available. It is to be hoped these new practice standards offer practitioners effective guidance, whichever role they choose to apply.

Shiraz OshidarProfessional Practice ManagerRICS Business Property Professional Group

RICS is developing a two-day practicaladvocacy training course this year, offeringan opportunity to further enhance skills andboost confidence in making advocacysubmissions. To be included on the mailinglist email your details to: [email protected]

Advocacy training


Ground rents

Worth your whileCommercial ground rents combine both the benefits of a fixed income with an ability to add value.Jeremy Davies explains

ommercial ground rents involve the freeholder leasing land to a developer who agrees to pay an annual ground rent for thelease term. The building can then be leased to an occupational

tenant, with the developer as head leaseholder. As an investment,ground rents combine secure income, reversionary growth and theopportunities for exceptional returns through active asset management.Income valuation depends on the mechanisms for growth – as set outin forthcoming rent reviews – such as frequency, unexpired term andthe tenant’s covenant quality. There are also many opportunitiescreated by restrictive use clauses in the occupational leases.

The rent reviews come in a mix of different formats. They can reflecthypothetical characteristics of a property, such as the site’s rental valueas open land, be geared to the open-market rental value, offer fixeduplifts or reflect government statistics such as the Retail Price Index.Security is provided by the income’s reversionary nature, rent receivedis normally at a discount to open-market rent if the head leaseholderdefaults. As such, investors can speculate on a variety of indices whenbuying ground rents, with inflation-linked reviews making them a proxyfor government bonds or rent reviews geared to the open market,providing exposure to occupational sub-markets across the country.

investors will look at their outlay on the ground rent as a percentage ofthe value of the underlying property to ensure sufficient security isafforded in the event of default.

Occupiers of leaseholds subject to ground rents can benefit from the arrangement also. A leasehold with a 30-40 year term can bepurchased relatively cheaply, and provides the occupying business with a secure base in the medium term. If their business is successfulor they want to develop the property further, they can then purchase the freehold ground rent and marry the two interests together. Mostground rent owners are delighted to sell to the long leaseholders, astheir ability to pay ‘special purchaser’ prices can provide profitable exitroutes. Unlike in residential ground rent ownership, however, there is no enfranchisement mechanism where commercial tenants can force a sale, apart from a few cases where the property was originally inresidential use.

Vendors are often councils or public bodies, who typically ownground rents on tranches of land sold on long leases in the 1930s tothe 1960s. Commercial owners tend to be pension funds, family trustsor private property companies, who value the combination of secureincome and opportunity for out-performance in the medium term. Salesby public bodies normally occur through public auction, while privatevendors normally deal ‘off-market’ through surveyors. The security ofincome has meant recent market conditions have had less of animpact on valuations than for more secondary property where theremight be the need to re-let vacant units in the midst of a recession.

Commercial ground rents combine the characteristics of fixedincome with the ability to add value through entrepreneurial activemanagement. As such, they are sought-after investments for a widevariety of buyers, and liquidity should remain for those looking to sell –even in these troubled times.

Jeremy DaviesPrincipal Elmdon Real Estate LLP

C

For more information on ground rents, visitwww.rics.org entering‘ground rents’ in the search facility

There are also many opportunitiescreated by restrictive use clausesin the occupational leases

The frequency and nature of the rent reviews also affects the value,broadly, the more frequent, the better net present value (NPV) of thefuture receivable income. Vagaries as to the mechanism for reviewingthe rent can also have a detrimental affect on values, as there is apremium placed on the certainty of knowing how the income will changein future. As such, a landlord owning a ground rent with 20 years to gountil a poorly defined rent review, can see a rapid uplift in value if theleaseholder is prepared to accept a premium to ‘re-gear’ the lease toreflect fixed five-early reviews to the changes in the Retail Price Index.

The unexpired lease term has a large bearing on the value of acommercial ground rent. The shorter the term until reversion, the higherthe NPV of receiving vacant possession. An investor would normallywant to apply a ‘wholesale discount’ to reflect the delayed nature of the receipt, somewhere close to 40%. This creates an opportunity for avaluable uplift if the leasehold interest can be ‘married’ with the groundrent by the landlord, as the value of the whole would be greater thanthe sum of its parts.

The quality of the underlying tenant’s covenant is significant,although this can be tempered by the quality of the underlying property.On secondary property, a quality long leaseholder provides security anderadicates the hassles of chasing errant tenants. On more attractiveproperties, a defaulting long leaseholder offers an opportunity to obtainvacant possession, and so can be a blessing in disguise. Shrewd

© iS

tock

phot

o.co

m/E

mm

gunn


Arbitrations case study

History repeats itself Andrew Holden looks at the increase in demand for arbitrators within the retail sector

he number of applications to the RICSDispute Resolution Service (DRS) for theappointment of third-party experts/

arbitrators has risen greatly within the retail sector.Last year, Howes & Holden experienced an

increase in applications, with the majorityproceeding to third party. During 1990 to 1993,the company were continually writing third-partysubmissions.

It appeared that owners of properties were lesslikely to accept the correction that had takenplace since the exuberances of the 1988/89period, and the difficulty for all practitioners andvaluers was that there was no evidence to back up their claims. Arbitrations rely on evidence as proof, even more so then, as it pre-dated the Arbitration Act 1996, which cameinto force for arbitrations commenced on or after31 January 1997.

By 1994/95, the level of third-party referralsthe company experienced plummeted. Indeed,many rent review instructions evaporated, simplybecause it was obvious to all by then that wewere in a recession and the market had changed,with values below their peak as experienced atthe end of the previous decade. It seems that,compared to today’s financial crisis, it is a case of history repeating itself albeit with a slight

TIt seems that,compared totoday’s financialcrisis, it is a case of historyrepeating itself

further readingSurveyors Acting as Arbitrators and as Independent Experts in Commercial Property Rent Reviews Guidance Note – 8th EditionThis guidance note provides valuable assistance to surveyorsappointed to act as arbitrators or independent experts to a dispute.It sets out the duties and procedures, providing detailed guidanceon every stage from the appointment through to fees and costs.The previous edition of this guidance note was prepared as the‘new’ Arbitration Act of 1996 came into force.

This new edition represents the experience gained operatingunder the new regime.

The Guidance Note is available in PDF format (no print versionavailable) and as part of a subscription to isurv disputes and isurvcommercial property.

Further informationFor more information, please visit www.isurv.com

Rent Review: A surveyor'sHandbook Arbitration and ThirdParty DeterminationBy Mark Loveday, Andy Guest &Philip RaineyThis book (available fromwww.ricsbooks.com) providespractical guidance on dealing withthe rent review process. By adoptinga workflow methodology, this booktakes the surveyor through eachstage of the rent review: fromconsideration of the various aspectsof the lease, preparation of thevaluation to the conclusion of thereview by negotiation or third party determination. Although theprocess starts on the day of instruction, it may not finish until anarbitration or expert determination has been concluded and thenew rent noted on the lease.

difference. Firstly, we have the Arbitration Act 1996as referred to earlier, meaning that the arbitrator’sexperience is more relevant than before, also, theburden of proof on the tenant has arguablychanged. Secondly, the retail sector market hasevolved quite considerably during the past decade,too. The sector is broad, encompassing as it doesshop units, shopping centres, variety/departmentstores, supermarkets and retail warehousing. Eachmarket sector has to be looked at in its owncontext, and over-generalising can be dangerous.

Experience from the early-1990s indicates thatthere will be a lag between the time when rentalvalues change direction, to evidence of thismaterialising in negotiated settlements and in theresults of third-party awards or determinations. In the present market for rent reviews, the criticalperiod for valuation dates is from the autumn of2007 through to the spring of 2008. Although, thisis not to say the market correction did not startearlier in certain of the retail sectors. Theexperiences of the early-1990s showed that athree-year period ensued before the marketcorrected. Today’s market should adjust far quicker.

Andrew R Holden Partner – Howes & Holden

CommFeb Marchweb com

Documents

Transcript of CommFeb Marchweb com