In July, the Financial Reporting Council (FRC) directed four big accountants to set apart their audit arms by 2024.
KPMG, PwC, Deloitte and EY are no longer to be trusted to manage the moral conflict between the arm that takes cheques from clients and the arm that checks the clients’ books.
Last week, RICS announced a review to check the moral fibre of valuers also receiving large cheques for advisory services. The 11-month review is being run by the steely-minded Peter Pereira Gray, global boss of the investment division of the Wellcome Trust.
Why now? RICS senses a rising danger: “In the last year, RICS has received extensive market feedback that valuations of investment portfolios for financial performance purposes risk being considered not fit for purpose. Criticism has centred on the valuers’ ability to keep pace with market realities.”
Those who rely on valuations suggest this first review in 18 years has been sparked by a deterioration of trust in the processes, not by a need to fine-tune Red Book rules. Rumours of poor practice and half-hidden conflicts of interest have corroded trust, they say.
The imposition of ‘you can’t sue us if we are wrong’, implicit in ‘material uncertainty’ clauses, has not helped. The gating of funds has damaged the reputation of valuers in the eyes of the public.
Then there is the damaging reality gap between Red Book valuations and the discount to net asset valuations by which the stock market assesses REITs. Something is very wrong with a process by which the public market judges blue-chip offices to be worth half their Red Book valuation.
Some see the motive for a review to be a desire to just be seen ‘as doing something’. This is the ‘better to be regulated by the RICS than the FRC’ view. It’s unlikely Pereira Gray will see it this way. As a client – and RICS fellow – he is closer to the coal-face than was Sir Bryan Carsberg, who conducted his ‘moral hazard’ review in 2002. Sir Bryan did remove a fair number of moral hazards, generally improving the system, including forcing propcos to change valuers every few years.
The aim of the Pereira Gray review should be to refresh confidence in valuers. To give them a shield enabling even the weakest to fend off clients in the same way merchant banks can fend off those wishing to whitewash their prospectus when offering shares for sale, by saying: “Are you kidding? I’m not going to jail for you!” Only then will RICS be able to rest easy from the risk of a takeover of regulation by the FRC.
No service charges
The world is aware landlords are suffering from tenants not paying rent; the latest figures from data collector Remit Consulting show that seven days on from the September quarter day, only 55% of retail and 77% of office rents had been paid. Bad luck for landlords. But what has been rather overlooked is that just 51% of retail and 69% of office service charges have been collected. Very bad luck for managing agents.
Crash, bang… but when?
The European office market is “like a slow-motion car crash scene; we are yet to reach the bit where the full force of impact happens.” A judgement provided last week by Green Street.
“A ‘V’-shaped recovery was always unlikely,” judges the adviser to funds. “Cyclical downturn in most European office markets is just starting. The parallels with the slow-motion crash that began in the retail market 15 years ago are now unmistakable.”
Not sold on rented plans
A head-in-the-hands moment occurred last week when John Lewis chairman Sharon White suggested part-salvation lay in building rental flats and filling them with John Lewis furniture. One of the more printable comments in The Times offered sage advice: “Property development is a shark-infested water. John Lewis would be wise to consider joint ventures with a reputable operator.”
Dare I suggest Sharon has a chat with Helen Gordon at Grainger before proceeding?
Peter Bill is a journalist and author of Planet Property