Development Finance

There’s a good piece in the FT by David Stevenson on the growth of peer-to-peer lending in the real estate development sector.  The tone is quite mixed – part sceptic, part cynic, part approving etc. but all interesting.  At the moment, the sector seems to be working fairly effectively for small developers.

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Broken? Buying real estate

I’m conscious that we have so little on buying and selling real estate in our programmes at Reading.  It’s probably because no-one on the staff – to my knowledge – has ever been an agent/broker.    It was an article by James Pickford in the FT that pricked my conscience.  His article is about the costs, risks and processes of buying a house with a bit of the fashionable Blockchain vibe thrown in.

From the point at which an offer is made, the pace can slow to a crawl as information is gathered from disparate sources to assure buyers that there are no hidden surprises. The average time between offer and completion in England and Wales ranges from 8 to 12 weeks — a delay that can put transactions at risk as the nerves of buyers and sellers are tested to the limit. The chances of collapse are all too real: more than a quarter of transactions fail, according to official figures.

Many of the points made are just as relevant to buying and selling commercial properties.  By global standards 12 weeks is quite quick.  With some colleagues, I was involved in a fairly chunky piece of work for the IPF looking at liquidity, transaction processes, brokerage models etc. across the globe.  Read at your leisure.

There was a hodge-podge of fees, transaction times, methods of sale, brokerage arrangements etc. and there weren’t really any clear patterns.  A lot of markets had only one broker (just acting for the seller), many had negotiated prices (as opposed to informal tender or ‘best bids’), fee levels ranged from under 0.5% of the price to 4%-5% of the price.  The only near universals were that that the broker’s fee was always a percentage of the price and there was always a broker involved – often two.

Due diligence is hard work – here’s a great report from the CREFC on the range of things that need to be done when buying a property.   I suspect that new technology will only produce incremental improvements in these processes.  Since due diligence is basically part of the risk management process, there’s a risk in not doing it properly.

Co-working space

I stumbled across a very good programme on the co-working space on Radio 4 (The Bottom Line) last night.  There was quite a lot of discussion of the Wework model and whether or not the company was in bubble territory.  Lots of interesting thoughts in it about the future of the sector.  Lots of questions…To what extent is it real estate?  Services?  Data?  Will the sector become oversupplied?  Who is entering the market?  Where will the sector start to grow?  What will be the shelf-life of a brand like Wework?  Worth a listen if you’re interested in the area…

I also saw a a Lex piece in the FT on Workspace who are a serviced office/co-working space provider with quite a different business model.  They hold lots of office assets as, er, assets.

Voguish peers may be driving interest in flexible office provision but Workspace’s valuation rests on its unusual model too. In contrast to WeWork and larger rival IWG, Workspace acts as both operator and asset owner, with a portfolio of London offices worth £2.3bn. WeWork and IWG have a different model. Although both have stakes in a handful of buildings, the majority of its offices are leased.  

£2.3 billion of assets makes them big but it’s operational space that they could also lease out if they opted it.

Home Truths and Futures

I tend to be a futurology sceptic but… For anyone interested in the future of the home, the NHBC Foundation have just published a report by Studio Partington speculating on “The New Home in 2050”.  It’s essentially an assessment of the implications of current trends such as sustainability, aging population, ICT advances etc. on home design.  In many ways, it all looks quite familiar.   It uses the word “will” far too much for my liking and it’s all fairly benign (a bit utopian) with no hint of the possibility of Blade Runner type, dystopian outcomes.   There’s a presumption of progress and progressiveness.  Fingers crossed.

Construction contracting?

I’ve been trying to get more construction knowledge in our real estate development courses for ages.  Most development courses that I know tend to pretty much stop at planning permission.  We do lots on appraisal, planning, market research, feasibility analysis etc. but tend to neglect how the buildings actually get built.  This year we managed to deliver a whole module on procurement and project management in our MSc Real Estate courtesy of our well-regarded School of Construction Management and Engineering.  In the past it has been a single lecture.

It was an article in the FT by Gill Plimmer that stirred me to write something.  The construction supply chain has become complex and intricate and risky in itself.  We had some developers here last term who were very worried about the stability of some of the so-called Tier 1 contractors who on average managed to make losses in 2016-7.  My main takeaway from the FT article was the argument that the large contractors are more like consultancies rather than contractors who manage and procure works rather doing much themselves.

CVA CBA?

My kids used to use the term CBA a lot when I tried to get them enthused about something and they didn’t mean cost-benefit analysis.  REVO (the organisation formerly known as the British Council of Shopping Centres) have apparently written to the MHCLG (the organisation formerly known as the DCLG) Select Committee about CVAs.

We’ve seen a bit of flurry of these arrangements in the last year or two.    The Guardian and the FT have reported on the (unpublished) correspondence with the Select Committee.

Perhaps not surprisingly, it seems that some tenants are becoming aggrieved at seeing their competitors secure lower rents.  It’s started to affect leases.

Some retailers have also become frustrated with the CVA system after watching rivals with weaker finances secure lower rents than them. Fashion chain Next is to insert a “CVA clause” into its lease agreements under which its own rents must also be reduced if any of its landlords’ other tenants agree a CVA.

However, I think that one of the commenters (Boris!  Surely not) on the FT piece put the whole issue into perspective quite well.

This is pretty silly. CVAs require a super-majority approval by creditors (including landlords), which means that where they succeed, it’s because the landlords realise they have no better alternative: there is no solvent tenant available who would be willing to pay the same price. If anything, CVAs benefit landlords because it allows them to simultaneously urge – and in the case of the remaining holdouts force – other landlords to also accept a reduction so that they are not unfairly disadvantaged with respect to other landlords of that particular tenant, and so that they can be assured of the tenant’s solvency (to some extent). The argument that it puts other retailers at a disadvantage is silly. A CVA – despite the euphemism, is a bankruptcy process, and the whole purpose of a bankruptcy (at least now that the world is learning the benefits of the US Chapter 11 process) is to salvage the most economically productive outcome for the stakeholders concerned (with creditors being at the top of that list of stakeholders). The alternative is to liquidate an otherwise perfectly viable concern because it is “unfair”. Also, since when is price discrimination “unfair” outside of situations of monopoly? I think the first class I ever took on economics explained quite vividly how economic benefit is maximised with price discrimination. The idea that CVAs originally had a good intention, but are now being abused, is also totally made up. The retail sector in the UK really is systematically distressed today, and every retailer that’s entered into a CVA so far, needed it! Lastly, the point about other unsecured creditors being left intact is actually potentially fair. I’m not sure exactly what the justification for that is, although I also wonder why CVAs manage to get approved by landlords if it were so obviously a conspiracy against them.