This year marks my 30th anniversary as a chartered surveyor and a participant in the property investment market.
Those of you with similar career spans are aware of the many changes that have taken place since 1985. However, these are largely about players and products and not process. Changing property ownership is still largely a private treaty process intermediated by investment agents.
In contrast, the other financial markets have changed all three. Technology has been the most significant catalyst for a changed process and helped facilitate a plethora of new financial products. One could argue that we would have been a lot better off without some of this so-called financial sophistication. Its link with the financial crisis is clear. It has also led to other very undesirable outcomes of short-termism, greed and a breakdown in trust.
It is not surprising that regulators have responded by imposing new rules on the financial services sector. Those of us in real estate fund management have been caught in the crossfire of rules directed at others. The irony is this has been imposed on the part of the market that was already regulated and, by most measures, scandal free. However, we have to live with it if we want to be treated as a credible asset class.
The problem is that regulation is now a major cost to business and a barrier to entry. A recent survey by the New City Initiative (NCI), a think tank comprising independent owner-managed fund managers, found nearly half its members reported 15%-20% of management time was spent on regulation. The NCI argues regulators should be concerned about stifling innovation and reducing investor choice by making it too difficult for smaller firms to operate.
The process of trading commercial real estate by private treaty is one of the few financial markets that is unregulated. Clearly, there are money-laundering regulations, the Bribery Act and codes of practice supported by professional bodies, but we are miles away from the standards that govern other markets.
What worries me is the way in which deals are crunched. Buying is not easy and there are considerable pressures on adviser and investor to land that elusive deal. A large contact book and carefully nurtured relationships have always been key to successful deal making. However, the new world raises the bar in how these should be utilised. For example, it is very difficult for management to oversee the conduct of an individual selling agent who guides a preferred buyer or buyer’s agent to the winning price. What looks harmless becomes a problem when indirect reciprocity is involved. It could also prevent the best price being achieved.
What I would like to see is a code of practice for transactional management that incorporates the best practices from other financial markets. This needs to go much further than the IPF conflicts protocol but should not be too tough to achieve. The Code of Practice for Residential Estate Agents by the Property Ombudsman is worth a read. One of its provisions prevents selling agents revealing details of another offer without first having warned that party it is its practice to do so and then providing the same information to all interested buyers.
I would also like to see more imagination in how deals are closed in a more transparent way. Instead of multiple rounds of bids, why not close a transaction by inviting a shortlist of bidders to participate in a private auction? It does not work for every property situation, but having explored the idea with Peter Cunliffe and Richard Auterac at Acuitas, I am sure it can be made to work.
We should be surprised at the lack of regulation in how commercial property is bought and sold. We should take heed of investigations into other markets - for example, the recent Fair and Effective Markets Review. This showed that one of the things that went wrong was a culture of impunity in parts of the market, coloured by a perception that misconduct would go either undetected or unpunished. Let’s make sure our property industry is a beacon of best practice and not have that allegation thrown at us.
William Hill is chief executive at William Hill Consulting and a non-executive director of Mayfair Capital