The holidays are over and now we have the three-month dash for deals before the onslaught of December parties. Alongside the imperative to make hay while the sun shines, what else appears in our back to work in-tray?
A summer’s backlog of Property Weeks highlights two key industry issues: the challenge of investment agency “double dipping” and, separately, efforts to improve the operation of the commercial real estate lending markets.
While unrelated, both these subjects affect the integrity and operation of our investment markets - currently not that favourably, with even some (isolated) calls for regulatory intervention. Solutions are required.
In the commercial real estate (CRE) lending market, the challenge is to avoid future lending-driven busts, not least because of the unaffordable adverse impact on the UK economy and balance sheet. The Real Estate Financing Vision Group produced an independent report last October making seven specific recommendations, which were reaffirmed in its final report this May. The first of these recommendations, to introduce a common real estate lending database, has been picked up by The Bank of England in its recent discussion paper.
The aim of the database is to better track and understand how the lending market is operating, but has wider potential functions that could include the creation of a more consistent approach to the application of regulatory capital at the micro and at macro levels. Addressing both of these shortcomings makes a huge amount of sense, provided it is implemented in a way that builds on core data and metrics, which any credible CRE lender should already be gathering.
The investment market has the IPD database, which performs an extremely valuable function. A CRE lending database has the potential to be the foundation of an even more valuable function - to provide the macro and micro insights required to reduce leverage-driven booms. But will it, as some say, cost too much? Before answering that question, remember that distressed CRE lending was a material factor behind the Bank of England’s need to inject £400bn into the UK financial system, around £40bn of which was to rescue RBS and HBOS (Lloyds), the two major players in the CRE financing boom. Too much cost
While on the subject of financial stability, the other recommendation that scored very highly on the Vision Group’s recommendations was the proposal that CRE loan amounts be measured as a percentage of long-term sustainable values rather than market values. This is a concept that both borrowers and regulated lenders are likely to become agitated about, not least because it would significantly curtail their ability to do business in the top half of the cycle. But isn’t that exactly the kind of measure the regulated lending market needs? Such a structure also has the potential to inject welcome liquidity into the market in the bottom half of the cycle and has the additional major benefit of being an automatic moderator, eliminating lenders’ and regulators’ proven inability to do what’s needed when needed.
There are a number of ways to approach the application of long-term sustainable value to CRE lending, some of them hideously complex and costly, others less so, each with various limitations. Is this something that regulators will pursue and if so, how would it be implemented? The Bank of England is looking into it. Which brings us on to investment agency “double dipping”. Many of the practices that have evolved in some parts of investment agency in recent years have the potential to undermine the integrity of investment markets. This makes the Investment Property Forum initiative in this area welcome.
I will not try to preempt the detail of what the IPF group might come up with. However, it is worth making three high-level observations:
- Any solution must allow investors and agents sufficient flexibility - anything too detailed or too prescriptive is likely to be unworkable and/or ignored;
- Transparency should be a vital component of improving behaviours — if vendors knew “their” agent was proposing to act on both sides they might be less enthusiastic to instruct, particularly since it might also mean that open-market bidders might be less enthusiastic to compete;
- All parts of the industry will need to come together in support of a common standard — at the moment, the different conflict-management codes of practice in place are clearly not working.
If the main agents can agree to the proposals, then such proposals should have the backing of the RICS and the British Property Federation, in addition to the IPF. Without consensus, guidelines will continue to be ignored. Get these areas right and our investment market will retain its place as the most professional and transparent real estate market in the world. Get either wrong and we will all be the poorer.
Rupert J Clarke is former chairman of the Investment Property Forum and past president of the British Property Federation