Knight (Frank’s) in Shining Armour?

Some good case studies in valuation ethics coming out of a longstanding scandal regarding the activities of RBS, their so-called turnaround unit (Global Restructuring Group) and a subsidiary called West Register during the financial crisis in 2008.

The sharp fall in values in the property market at the time meant that many borrowers were in default of LTV ratios with lenders being able to step in and repossess assets, force loan re-structuring etc.

I remember one friend who had a created a small property fund describing the kind of pressure that he was put under by his lender at the time – even though interest etc. was comfortably being paid and cash flow was healthy.

Newsnight have been running various pieces on the issue over the last few years.  In last night’s story, the issue of valuation came up – in particular hotel valuation.  One of the issues revolved around the valuation bases.  I’m guessing here that one valuation was on a going concern basis and the other on a bricks and mortar basis.  For one small hotel operator/developer

In February 2010, their hotel had been valued at £7.7m once it was up and running. But in June 2010 a new valuer, Knight Frank, was brought in and valued it on a different basis: £2.5-£3m to sell immediately without the extra work still needed. On that much lower valuation, Chris and his partner were in breach of their loan terms…

However, it appeared that the valuer was also involved in discussions with a potential purchaser – RBS’s own West Register!  West Register seemed to have been in communication with Knight Frank.  Prima facie, it looks like a mess of conflicts of interests – at best.

Ten days after his business had been transferred to the Global Restructuring Group in June 2010, an official from West Register joined a meeting with the independent valuer, Knight Frank, and the bank to discuss his business. Chris knew West Register had been in on discussions from earlier evidence. But the report went further, quoting minutes he had never seen showing the West Register official had talked down its value. Newsnight asked Paul Wolfenden, former global head of valuation at surveyors DTZ who regularly serves as an expert witness in similar cases, what he thought a valuer should do when a potential purchaser seeks to influence a valuation.

“Ideally he shouldn’t have joined the call in the first place because if he knew the purchaser was going to be on the call, he should not have joined the call. Once he knew the purchaser was on the call, he should have either refused to answer questions or rung off,” Mr Wolfenden said.

The Knight Frank response was delicious.  They claimed to have produced a valuation figure which was “wholly accurate”.  Wow!  That’s a bold claim to make for a partially complete hotel which, imho, would be extremely challenging to value.  A good analogy of what had gone on was provided

Imagine your mortgage lender tells you the value of your house has dropped and it is now worth less than your loan.  The bank wants its money back and within weeks you lose control of your house. Then imagine how you would feel if you found out, much later, that the lender had a property division that was interested in buying your house – and that, without your knowledge at the time, it had been talking down its value.  Now imagine one more thing: that property division ended up buying your house.

Also, imagine that the so-called independent valuer was talking to buyer about the value of your house.  Paul Wolfenden commented that

“I think it’s just fundamentally inappropriate.  Because why would the bank condone a purchaser being on the line talking values down when the bank ought to be motivated to get the highest possible price a) to redeem as much of their loan as possible and b) to reduce the loss to the borrower?”

Buzzfeed also highlight a case of a repossession of an independent school with Knight Frank making another appearance.

In January, the unit produced an informal valuation (obtained from Knight Frank) claiming the school was worth between £500,000 and £600,000 – around half the value it had been given a month earlier. Boyington was angry: “They’d rejected a legitimate valuation for something written on the back of a fag-packet.”

What happened next is a common thread in the stories of hundreds of businesses that were swept into GRG. The unit’s property division, West Register, swooped in and offered to buy the school at the reduced price recommended by its own valuation. The RBS Files reveal that West Register was “used by GRG to acquire property assets from distressed situations” and sought “to exit properties via a future commercial sale in order to extract maximum economic value”. They also show that the bank’s auditors had raised concerns about GRG’s tendency to “over-ride or ignore third party information (such as third party valuations)”.

I do find that the media can get a lot of these things twisted in real estate stories – but there’s good case study material somewhere here for a valuation ethics tutorial.  I’m struggling to see how Knight Frank could be truly independent here.  RBS (Westfield???) would have been a huge client at the time that they could not afford to lose.  Albeit there’s a risk of reputational damage.


Estate Agency – Don’t Watch This Space?

At a time when the residential transaction process seems to be rapidly being disrupted and reshaped by Proptech 3.0, in policy terms the government have gone all retro and is trying to resurrect some policy classics.

According to Owen Boycott in the Guardian,

Estate agents will be required to obtain a professional qualification and disclose payments for referring customers to solicitors, surveyors or mortgage brokers under government plans aimed at streamline property sales… The proposals from the Ministry of Housing, Communities and Local Government involve encouraging the use of voluntary reservation agreements to help prevent sales falling through and reduce gazumping.

From the narrow perspective of a real estate educator, the really big one is the professionalisation issue.  I can see the National Association of Estate Agents rubbing their hands with satisfaction at the thought of all those new subscriptions (Can an association rub their hands together?).  Some universities will see opportunities for new programmes (and fees).  It looks like an area which could benefit from a MOOC and follow the IFA/CFA assessment model.

Who knows if it will ever happen? This has been discussed since the 1970s. In 2011/12, thousands of people trained to become inspectors for the new Home Information Packs which were casually discarded by Eric Pickles in 2013. Note that the MHCLG state in their paper  that they will “launch a consultation on” requiring a professional qualification for estate agents.

Voluntary?  I wonder who’ll pay for them.  The government is going to get the so-called Nudge Unit to look into how consumers could be encouraged to enter into such reservation agreements.

Basically much of the government’s response seemed to involve trying to get consumers to gain more knowledge about a technical, very important and infrequent transaction process.

The other policy aspect was to try to speed up the due diligence process.  However, due diligence is essentially a risk management exercise and as long as caveat emptor prevails, it’s hard to see why it is in the interest of buyers to reduce its robustness (if that is what attempts to speed it up do).  Transactions in the commercial sector still take up to a three months – and that’s without chains!




MEES (A Long Post)

Coinciding with the introduction of the Minimum Energy Efficiency Standards in England and Wales, last week I helped to organise an event at TU Delft focussed on their use as a policy instrument aiming to reduce carbon emissions from the building stock.   In 2023, as I’ve mentioned in a previous post, the Dutch are introducing their own version of the English/Welsh MEES policy for the office sector only.  All offices (with some exemptions) will have to have a minimum EPC C rating and, by 2030, they will have to have a minimum EPC A rating.  It’s important to remember that EPC C in the Netherlands in not the same as an EPC C rating in the UK.  It’s not as hypothetically energy efficient. Nevertheless, it’s estimated that approximately half of the Dutch office stock are currently non-compliant.

I’d been doing quite a lot of reading on minimum energy performance standards before the event in Delft and I still learned a lot from it.  (I always have a guilty feeling that I really should have known things already.)   A lot of ground was covered – so I’m just going to highlight some of my key takeaways.

The wrong target?  Plenty of evidence was presented that basically pointed out that there was little relationship between energy consumption and EPC rating.  Obviously this is a major concern when introducing a policy instrument that aims to reduce energy consumption by linking it to the EPC rating!   We speculated on the reasons for this consistent finding both in the residential and commercial sectors.  The consensus was that it was probably due mainly to poor operational management of increasingly complex building services.  Possible issues like differences in user density, the wealth of occupiers etc. were felt to be less important.  It also may well help explain the “operating expense puzzle” in Energy Star buildings in the US.

Quality improvements rather than reduced consumption? There was also a belief that improvements in energy efficiency for the lowest rated buildings would largely be absorbed by improvements in variables such as thermal comfort rather than by reduced energy consumption.  So – improvements to the building’s services (better lighting, HVAC) and fabric (better insulation) would improve both the asset and also the user’s experience in the asset.  Both good things indeed.    However, the new minimum standards would not necessarily result in reduced energy consumption and carbon emissions.  As a result, the consensus was that, recognising that there were challenges of getting the data, an effective policy instrument to reduce energy consumption (rather than improve the building stock) would target actual energy consumption rather than hypothetical consumption.  The gap between actual and hypothetical performance also makes the calculation of payback periods much more challenging.

Scotland is different.  To my embarrassment (it’s a recurring theme), I also hadn’t realised just how different the Scottish policy approach was to the same issue.  I need to look into it more but the Scottish government has taken a radically different approach.  In force since September 2016 and applying only when a building is sold or a new lease is granted (crucially not lease renewals) of buildings and building units >1000 m2, there is a requirement for Assessment of Carbon and Energy Performance (ACEP) and Action Plan.  So – unlike Netherlands and England and Wales, the EPC is not the basis for the minimum energy efficiency standard in Scotland.  The minimum standard is based on compliance with the 2004 Building (Scotland) Regulations.  If not compliant, an Action Plan must be available on marketing and the building must meet requirements (i.e. implement Action Plan) within 3.5 years.  A deferral is possible if the owner publicly publishes an annual operational energy rating (Display Energy Certificate).

Lease renewals could be a problem.  Chris Botten (of the Better Building Partnership) liked the exclusion of lease renewals in Scotland.  Chris argued that lease renewals raised particularly difficult issues in England and Wales.  Whereas a new letting provided landlords with a ‘natural’ window to upgrade their space to comply with new regulatory requirements or to replace obsolete features, there were many more complications with lease renewals where the tenant effectively remained in control of the asset.  Sub-lettings and lease assignments raised similar issues.  In the Netherlands, it was notable that that the response from market participants had apparently been “Tell us when you want this done by and we’ll do it.  Don’t mess around with linking it to lettings or sales”.

Long-term policy trajectory is important to owners.  The importance of governments providing long term, reliable signals of policy trajectory was also emphasised.  Institutional owners wanted to know how minimum standards were likely to change so that they could plan refurbishment programmes.  In some cases, it might be optimal to upgrade today to future minimum requirements rather than current minimum standards.

Policy formation could have been better.  As stated above, the Dutch introduced the MEPS for the office sector whilst in England and Wales, it has been for the all properties including residential.  If the stories are true, then the policy design process was not very impressive.  As Bismarck put it – laws, like sausages, cease to inspire respect in proportion as we know how they are made It could be translated more elegantly).  In the UK case, it was cited that the standards were designed for the residential sector with commercial property being bolted on at the last minute without much detailed policy evaluation.  In the Netherlands, it was argued that the policy was somewhat of a panic measure.  The Dutch government got concerned in 2015 that it was not going to meet its carbon reduction targets and picked on the office sector.

Retail fit-out highlights some limitations.  The retail sector was felt to be too complex for the introduction of MEPS in the Netherlands.  This seems to be largely due to the amount of changes to buildings that retail tenants tend to introduce.  This seems to be an issue in England and Wales too.  Fit-out is a key issue.  A shell and core office building may not obtain a compliant EPC rating until the services have been put in by the tenant.  Alternatively a building that is compliant may be rendered non-compliant by the alterations that the tenant makes.  Where the EPC is carried out before fit-out (it often is because this is the date of letting), the tenant can subsequently change the lighting etc. during fit-out.  These issues have led to the introduction of new lease terms with landlords trying to gain more control of the actions of the tenant in terms of changing the building in ways that change the EPC.  It seems sensible that the EPC should be performed after the tenant has fitted out the building.  However, this isn’t what happens.

Raising awareness has been the most significant impact so far? There was a consensus that probably one of the most important impacts of the policy prior to implementation has been to raise awareness of energy efficiency amongst investors and occupiers.  Simply, by nudging owners to obtain information and improve their knowledge, improvements to buildings and to the operation of buildings have taken place that would not otherwise have occurred.  An interesting counter-argument here was that the minimum standards were unambitious and caused unambitious improvements by owners.  The gist was that, by meeting minimum standards, everyone could get their ‘green glow’ without having actually achieved very little.  Without the anchor of minimum standards, owners may have done more – Discuss.

Enforcement and compliance are challenging.  In both markets, it was recognised that enforcement would be problematic.  The key issue was government capacity.  It was pointed out that, in the England and Wales there is simply no provision for informing Trading Standards Officers when non-compliant transaction has occurred.  They have no way of checking of finding out about transactions.  With relatively small penalties, unclear exemptions and little chance of being caught, it was expected that compliance among smaller landlords (and tenants) could be an issue.

Policy impacts could be localised.  With its higher vacancy rates, it was felt that there would be a more significant problem of “stranded assets” in the Netherlands.  In areas with concentrations of already marginal office assets (1970s/1980s) suburban office schemes close to busy roads where conversion to alternative uses was not financially viable, such locations could be blighted by the legislation.

There’s a long way to go.  However, the broad conclusion was that MEES were only a start.  The contrast in the cost of achieving C or A (Netherlands) ratings was minor compared to the cost of transforming the stock to zero energy buildings by 2050.  Reaching the latter required works to existing buildings that go beyond major refurbishment.  The current MEES policy seems like the beginning of the beginning rather than the end of the beginning.


Comparing marks (HE not RE)

It’s always nice to have a label or diagnosis for a condition that you think that you’re experiencing in isolation.  I’ve been pointing out to some my colleagues this academic year that I’ve never had so many students wanting their coursework re-marked.

Apparently it’s called “grade grubbing” and has been increasing.  Barbara Ellen had a short piece in yesterday’s Observer on the phenomenon.

Academics report that “grade grubbing” (the practice of university students trying to negotiate better grades) is on the rise. Some tutors put this down to parents overpraising their children, turning them into fully fledged narcissists, who feel so precious, gifted and talented that they can’t deal with a world or a marking system that doesn’t agree with their own appraisal of themselves.

Then there’s the effect of increased tuition fees. The new breed of student-client no longer tolerates being challenged, tested and graded by the system. They want to be rewarded, to get their “money’s worth”. Which, for some, isn’t a 2:2 and a rude awakening that they’re not as clever as they thought they were. Who could have seen it coming, that uber-monetising higher education would devalue the purity of learning?

I’ve heard a lot of the typical student arguments…

“This is my first mark below x” (sometimes they’re being economical with the truth here)

“I’ve looked at my friends’ marks and my work is better than theirs but they got a higher mark”

“It’s not fair.  I’ve put in a lot of work…”

From painful memory, I’d be the first to accept that it can leave a lasting sense of injustice when you feel that you’ve been marked incorrectly.

I’ve been in academia long enough to know that marking non-computational, analytical work can be subjective.  We all knew who were the generous and harsh markers among our lecturers.  I’ve seen lots of marks by colleagues that I thought were far too generous or harsh – in my opinion.  So – the system is far from perfect.  There’s a lot more checks and balances in the system these days. Still hard to believe, I did a 20,000 word dissertation for my MPhil in Reading in 1990 and they wouldn’t even tell us the mark!  Apparently, this was in our best interest!

Learning difficult stuff: obstacle to a  good degree? (HE not RE)

Although I must admit to be highly interested in it, I try not to think too hard about the purpose of universities and the whole debate about education as a public good, an engine for economic performance etc.  Buts it’s difficult to get away from the growth of marketization and consumerism in higher education.  Kenan Malik provided a really good summary of the issues in the Observer yesterday.  He captured really well how increasing consumerism in education changes the student-academic dynamic.

What a student-as-a-consumer will not want are all the things that truly define a good education – difficult questions, deep reflection or challenging lecturers. These will be seen not as means to greater understanding but as obstacles to attaining a good degree.

It hit a nerve with me.  I’ve been on the end of a few complaints from students recently –basically along the lines of “This material/assignment is hard.  We might get poor grades.  We are not satisfied.  What are you going to do about it and when are you going to do it?”.

In essence it boils down to responsibility.  What is the balance between students’ responsibility to learn, show initiative and independence and our responsibility to provide the structure and direction to their learning (or lack of it).  Everyone says that they want critical thinkers and independent learners, self starters etc. but my sense is that the climate is increasingly hostile to these aspirations in higher education.

At the same time, there’s been a lot of improvement.  Academics are more accountable.  Feedback is far better.  Learning materials are much better.  There’s a lot more transparency.  Compared to my students days, we had to find things out for ourselves much more – but we should have had more direction.  On balance, I think that things have improved.

Buyer funded non-development.

There’s a good story by David Pegg and Oliver Wainwright in the Guardian on the collapse of ‘buyer funded’ development in the North West.  It seems that mainly foreign investors (there were actually demonstrations in Hong Kong about it!) have pre-paid for apartments where the development project has gone bust before construction was complete.  I actually read the administrator’s report for the Pinnacle project in Manchester.  It was very scathing about some of the fees charged especially for marketing and sales.  If you give your money upfront to a developer without strong restrictions, there’s plenty of scope for poor and/or malpractice.  The police are investigating and the lawyers are involved.  I suspect that there’s a lot to come out.  The contrast with the controls that a lender would put on the release of funds are stark.  Well-run banks/lenders will want to inspect every single detail of expenditure before releasing funds for them.

I told some of my students who were doing a development project that payment in advance of completion would not happen in practice.  Apparently it does – albeit it is understandably quite rare.  I’m told that there were similar cases in Manchester involving local investors following the GFC.  I’ve paraphrased slightly – but here’s the take on it of a contact with experience of the Manchester development market.

This is déjà vu to 2008/2010! Several developers in regional cities were promoting resi developments specifically for investor syndicates. They used the “reservation fees” (non-refundable deposits) to service development finance. In some instances, the buyers were obliged to pay the purchase price in several instalments during construction with the final payment upon Practical Completion.  In the worst case scenario, developer goes bust before Practical Completion.  Individual investors are secondary to construction creditors in hierarchy of who gets paid and therefore don’t get their money back.