There’s a nice little piece in the Guardian by eminent economist Jeffrey Frankel on the intricacies of housing finance (it always seems to come out as fiancé) system and the wider economy. Worth a look.
James Dearsley highlighted an interesting article by Bruce Thompson on the lack of innovation in the residential development sector. The persistence of traditional technologies and business models has been a long term refrain. The article highlights the consequent and longstanding weak productivity performance of the construction sector. Output per worker has barely changed for decades. It seems that technological innovation has had minimal effects on the construction sector compared to the manufacturing and services sectors (see here for a detailed overview). I’m not convinced by some of the rationales put forward by Bruce Thompson. “… margins are razor thin” – really? Not in the UK. “Risk, the cornerstone of innovation, is often shunned in housing development.” – I’m not convinced. The whole speculative residential development process is saturated with risk.
There are major reasons why house builders and contractors would be expected to embrace technological innovation – competitive advantage, shortages of skilled labour, quality improvements etc. Given that it’s an international issue, low productivity growth definitely seems to be a sectoral rather than a national issue.
However it’s measured, this is affecting my productivity…
Reflecting its increasing emergence as an asset class, the Global Listed Infrastructure Organisation have just published Issue 1 of the Global Listed Infrastructure Organisation Journal. If you look at the list of members, in addition to the large multi-asset investors (AMP, Blackrock, Morgan Stanley, Deutsche Asset Management) there are some major ‘traditionally’ real estate focussed advisors and principals – CBRE and Brookfield. As I’ve said before, there lots of similarities between the real asset classes and infrastructure is something that I think there will be growing pressure to include in real estate curricula.
I once used a Shakespeare quotation from Much Ado About Nothing as the basis for an exam question on ethics, moral hazard and conflicts of interest in the real estate investment brokerage sector.
“Let every eye negotiate for itself. And trust no agent.” Discuss.
I was quite pleased with it. But, out of about 40 (students, not questions), not a single one of them did it!
I think that it was the question that spooked them rather than the topic. The investment agency world is opaque and fascinating – especially if you’re acting for buyers. In a lot of other real estate markets, they don’t use buying agents. However, in the UK, it’s standard for investors to buy assets that have been introduced to them by agents who then act on their behalf. So the seller is represented by an agent and the buyer is represented by another agent. It’s interesting that this brokerage model is by no means standard in other countries. We did a piece of research for the IPF last year on comparative liquidity, transaction processes, etc. We found that the UK model was if anything unusual. Similar to the residential market in England, the most common model was a single broker just representing the seller.
In order for such buyers’ agents to earn a fee, they have to win the race to ‘introduce’ a property that is for sale to the most likely buyer. So – to be an effective fee earning buying agent, you need to know as soon as possible when something is for sale and then introduce the asset to the most likely buyer before anyone else can. As you can imagine, networks and relationships are very important. Being first is obviously critical – so there’s lots of scope for ‘helping’ your mates and friendly business associates if you know that something is going to be put on the market. If you are a buyer desperate for access to good quality product, it also helps to know as much as possible about the seller and you want to have the agent with good connections to the seller or their agent. One buyer told me that the ideal buying agent was the selling agent’s best man. They would then be able to have the ‘inside track’ on interested parties, seller preferences etc.
There have been longstanding ethical issues in brokerage – introductions to multiple potential buyers, sellers’ agents accepting late (informed) bids in return for future work from the buying agent or the buyer…lots of potential scams when there is so much at stake, intense competition for hard-to-find product and, in the end, only one winning buyer.
Anyway, the RICS have just released a new Professional Statement (it’s their term) on conflicts of interest in investment agency that tries to address some of the ethical issues in dual agency (acting for both buyer and seller is severely frowned upon), multiple introductions to multiple buyers (ok as long as the agent is transparent with the client but individuals within a firm should not act for competing buyers) and further incremental advice ( ok as long as the agent is transparent with the client and suitable internal information barriers are created.)
It’s to be applauded that the RICS are trying to improve regulation of these conflict of interest issues. They’re behind the curve compared to the IPF here who issued their own guidance in 2014. The IPF’s Protocol on Open Market Investment Agency identified that:
The potential for conflict of interest has become a fact of modern investment agency. Such situations should always be managed proactively and transparently to ensure trust and confidentiality is maintained at all times.
Common governance themes are outlined in the protocol focusing on clarity and fairness in terms of engagement, maintenance of conflicts of interest databases and reference to complaints-handling procedures and redress schemes. Most of the protocol is concerned with multiple introductions and dual agency The protocol emphasises the role of a maintaining a barriers policy that seeks to ensure that deal teams from within the same firm acting for different clients on the same transaction have strict separation of information flows. If you’re really keen, you can even watch videos on the issue at the IPF website.
I was surprised to see Zoe Williams writing about housing in the Guardian today. It turns out that she was at one stage thinking about writing a book on housing supply issues, particularly quality. She takes a critical look at the various manifesto policies/aspirations on housing delivery and their sheer vagueness on delivery mechanisms.
…no sense of how to enforce better quality, how to make developers care, what to do about land costs, or what better planning looks like (for instance, would it be more centralised or more devolved?). What is an ambitious, pro-development local authority? One whose ambitions are to sell its land to developers for private homes? Or one that is developing its own land for the housing of its own residents? This is more than strategically ambiguous: it is completely opaque. Likewise, those 160,000 homes built by government – in private partnerships? Or are they going to insource construction? And who would those homes be for?
Whilst prevailing political motivations for housing supply increases have shifted from Keynesian stimulus, to productivity enhancer, to simple electoral pressure, it’s remained a ‘wicked’ problem. Some of my former colleagues from UCL have been looking at the planning deregulation involved in permitting the change of use from office to residential. Their initial anecdotes are consistent with press reports of some shockingly low quality housing.
Adam Samson in the FT reports that retail REITs in the US have continued to experience very poor recent performance.
The current decline deepens the fall for retail Reits over the past 12 months to 23 per cent, compared with a 3 per cent drop for the wider Reits industry. The broader market has risen 16.2 per cent over the past year.
US REITs in general have been performing badly with retail REITs probably causing most of the decline. The US retail market is quite different to the UK – the main issue is that they have a lot more shopping space per person over there – but it’s still a pretty dramatic decline. It doesn’t chime with the National Association of Realtors in the US who been forecasting largely stable vacancy rates in the retail sector. No sign of contagion to the UK yet, the share price of Intu remains roughly in the same place as it was three months ago.
In a worrying note, the FT article also reported that Andrew Baum, the widely-followed Citi analyst, downgraded the pharmaceuticals group Pfizer from “neutral” to “sell”. Unless the Proptech guy has also got into viagra in a big way, there must be two of them. Wait – there’s also the famous singing Austrian Andy Baum. This is scary stuff. He’s everywhere.
There’s been a couple of interesting articles over the last few days on the political economy of housing development, land markets, planning etc. creating lots of winners (typically older home owners) and losers (typically younger wannabe home owners). John Plender largely summarises the current situation and then concludes that the business model of the national housebuilders is part of the problem.
This has facilitated a business model in housebuilding that relies heavily on constantly rising land values. Builders have had no great incentive to increase supply, which is one of the reasons why the number of housing starts always lags behind the grant of planning consents. Many have operated, in effect, as land speculators with a building operation on the side.
Discussing the last sentence would make a good examination question – but there isn’t that much actual evidence. I’d really like to see some good research on this issue. How much of the financial performance of the housebuilding sector is created through their land portfolio and promotion activities relative to their construction operations?
Yesterday, Chris Giles in the FT reported that the government was considering introducing powers of local authorities to acquire land at existing use values.
Acquiring land at its existing value massively lowers the cost of constructing housing, allows necessary infrastructure to be built and makes ambitious schemes viable. Local authorities have generally been able to take such risks only on land they already own. Clearly, the Tory plans are limited. Mrs May is considering changing the compensation on compulsory purchases only for “derelict buildings in town centres, unused pocket sites and industrial sites”. Agricultural land, let’s say in Maidenhead, her constituency, is not included. But a change in the compensation principle is potentially of huge importance. It would allow high quality private and social housing schemes to become viable in many areas with high land prices. That would enable development to be financed by private borrowing rather than public spending. A more radical future government could extend the principle to agricultural land outside city centres.
I’ve written about the problem (and here) of high land prices before. In areas of high housing need/prices, most of the cost of a home is in the land rather than the structure. Can/should local authorities pay millions per hectare for privately owned land to build council housing? Can/should local authorities pay thousands of pounds per hectare for privately owned land to build council housing, capture the land value uplifts for the community and later sell off the homes at a discount to individuals (essentially transfer the land value uplifts to them)? These are difficult questions. It’s hard to see a return to mass council house building.