Risk-busting for property investment
By James Bent MRICS, partner at Tuffin Ferraby Taylor
INVESTING in commercial property is a risky business. Whether it’s a tenant acquiring a leasehold interest, an investor purchasing a freehold asset or a bank lending on a property related transaction, everyone wants to ensure they are aware of their commitments and associated risks before signing up to the deal.
Technical due diligence (TDD) is the investigation and assessment of risks associated with buildings or development projects. It involves the review of the building design (if new) and condition (if existing) along with a review of the related documentation. This approach ensures that a purchaser has clarity on the issues enabling informed decisions to be made as to whether or not a deal goes ahead and at what price.
Successful TDD assesses risks, categorises them relative to severity and, where appropriate, prices risk and/or sets out risk management plans. To ensure that businesses are aware of all the risks associated with property transactions, independent and unbiased advice is critical.
An easy route is to appoint a ‘one-stop-shop’ firm that can advise on the investment, valuation and conduct TDD. But this can expose investors to unacceptable levels of risk and at Tuffin Ferraby Taylor we have live experience of conflicts of interest occurring.
It is not unusual for building survey investigations to highlight defects in a building which can be costly to resolve which in turn can impact on the deal; maybe affecting the price, yield, rent or even the decision to proceed further. Given this position a question any business should consider is “how can property consultancies which offer all aspects of advice clearly demonstrate that the advice offered throughout the process is independent and unbiased?”
Conflicts of interest in the property world are not a new issue. To date, this issue has perhaps not been a high priority but as the scale of issues identified by the banking crises continue to slowly unwind it has started to move into sharp relief.
Organisations and businesses need to justify their decisions and remain accountable and following protocols on a transparent basis is becoming more important. RICS also considers this issue to be important and they have launched and industry wide consultation currently underway.
This will lead to a tightening up of the regulatory framework surrounding the commercial property market in 2017. In the meantime, businesses should consider the need for independent advice to ensure clarity on property acquisition risks.
