City Meets Countryside: Re-inventing the Fringe
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City Meets Countryside: Re-inventing the Fringe  City Meets Countryside: Re-inventing the Fringe Document Transcript

  • RICS Property JOURNAL Author standfirst contents UPFRONTCONTACTS Editorial and production manager: Toni Gill Sub-editor: Gill Rastall Designer: Suzy Willis Creative director: Mark Parry Advertising: Lucie Inns T +44 (0)20 7871 2906 E Design by: Redactive Media Group   Printed by: Page Bros Published by: The Royal Institution of Chartered Surveyors, Parliament Square, London SW1P 3AD T +44 (0)870 333 1600 T +44 (0)24 7686 8555 W ISSN: ISSN 1469-5421 (Print) ISSN 1759-3379 (Online) ARTS Editor: Lesley Davis  T +44 (0)1243 784054 E Editorial advisor: John Anderson RESIDENTIAL Acting Editor: Lesley Davis   T +44 (0)1243 784054 E Advisory group: Peter Bolton King (RICS), Andrew Bulmer (Bulmer Estates), Georgiana Hibberd (RICS), Graham Ellis (Greenhouse Surveyors), Philip Santo (Philip Santo & Co), Tony Bowron (Bromford Housing), Paul Cutbill (Countrywide), Chris Rispin (BlueBox Partners), David Smith (Anthony Gold Solicitors), Michael Day (Integra Property Services) COMMERCIAL Editor: Claudia Conway   T +44 (0)20 7695 1605 E Advisory group: John Anderson (RICS), Paul Bagust (RICS), Nicholas Cheffings (Hogan Lovells), Johnny Dunford (RICS), Martin Francis (BNP Paribas), Simon Hooper (Edward Symmons), Vivien King (Malcolm Hollis) Journals online Increasing numbers of members are choosing to view their journals as downloadable pdfs, instead of paper publications, by changing their member preferences on the RICS website. Regular emails inform members when the pdfs of the latest journals are available. While helping RICS to reduce its carbon footprint, viewing the journals online provides you with the same technical information in a format that is quick and convenient to read on screen. To change your preferences, visit J u ne /J u ly 2 0 1 3   3 UPFRONT Contents COMMERCIAL C 16 Building on a vision Simon Williams considers how developers go beyond physical assets to create a sense of place 18 Surveyors among the vines Michael Baynes looks at the unique issues of valuing vineyards 20 Conditions of service Jane Fielding explains the Transfer of Undertakings (Protection of Employment) Regulations 2006 and why they might become more ambiguous for property managers in the future 22 Raising the bar Jim Ware and Paul Carder look at how facilities managers can play a greater strategic role in their businesses 24 Changes for the better David Gardiner looks at a contentious area in landlord and tenant relationships – the granting of licences for alterations – and reports on how new guidelines can help avoid problems for both sides 26 Extending hospitality Babette Märzheuser-Wood explains the pitfalls and potential of a franchise model to fire overseas expansion 27 Taxing times Mansion tax and de-enveloping properties 5 Economic forecast The challenges facing central banks internationally 6 Update 8 Reinventing the fringe Alister Scott examines some of the conflicts at the heart of planning at the rural-urban fringe 11 Beating the offsite rule Philip Santo considers the housing shortage and describes a ground-breaking new scheme that will boost mortgage lending on innovative forms of house construction 14 Legal Q&A Legal experts answer common queries Property Journal is available on annual subscription. All enquiries from non-RICS members for institutional or company subscriptions should be directed to: Proquest – Online Institutional Access E T +44 (0)1223 215512 for online subscriptions or SWETS Print Institutional Access E T +44 (0)1235 857500 for print subscriptions To take out a personal subscription, members and non-members should contact Licensing Manager Louise Weale E
  • RICS PROPERTY JOURNAL 4 J U N E /J U LY 2 0 1 3 ARTSRESIDENTIAL AR While every reasonable effort has been made to ensure the accuracy of all content in the journal, RICS will have no responsibility for any errors or omissions in the content. The views expressed in the journal are not necessarily those of RICS. RICS cannot accept any liability for any loss or damage suffered by any person as a result of the content and the opinions expressed in the journal, or by any person acting or refraining to act as a result of the material included in the journal. All rights in the journal, including full copyright or publishing rights, content and design, are owned by RICS, except where otherwise described. Any dispute arising out of the journal is subject to the law and jurisdiction of England and Wales. Crown copyright material is reproduced under the Open Government Licence v1.0 for public sector information: contents UPFRONT CONTENTS 47 A resilient market The annual TEFAF market report by art market economist Dr Clare McAndrew values the global art market in 2012 at €43bn 49 Printing your own money Keith Heddle gives an insight into the investment market in rare stamps 51 A rare and unusual business The Antiquarian Booksellers’ Association is thriving. Lesley Davis speaks to President Laurence Worms to find out why membership is growing 53 When deals are endangered Could you spot a restricted substance in your saleroom? It could be harder than you think, warns Milton Silverman 30 Keeping up with repair rules In the second of their technical briefing notes, Phil Parnham and Stuart Smith look in detail at property repairs and the Building Regulations 32 Deducting deposits fairly The Tenancy Deposit Scheme resolves more than 10,000 disputes every year between landlords and tenants who disagree on how deposits should be apportioned when tenancies end, writes Chris Kendall 34 Valuing the freeholder’s interest James Wilson examines the development of case precedent at the Upper Tribunal on the appropriate deferment rate to be applied in leasehold reform cases 36 Safe as houses? A strong regulatory framework and sufficient inspectors to intervene where there are hazards to health are crucial in a private rented sector that is an increasingly important source of housing for vulnerable people, argues Bob Mayho 38 A delicate balance Jeremy Leaf outlines why he believes that complex planning requirements, difficulties in obtaining finance, delays and costs are all contributing to the UK’s chronic housing shortage 40 How bright is the future? David Hilton sheds some light on solar energy in the final part of his series on renewable energies 42 No reason for deadlock Philip Santo describes a case where professional opinions differed, throwing doubt on the original valuer’s report and causing uncertainty for the homeowner 44 Helping ourselves to regulation Self-regulation of the residential leasehold management sector is coming, writes Michelle Banks The Antiquarian Booksellers’ Association is thriving. Lesley Davis speaks to President Laurence Worms to find out why membership is growing When deals are endangered Could you spot a restricted substance in your saleroom? It could be harder than you think, warns Milton Silverman Property Journal is the journal of the Arts & Antiques, Commercial Property, Dispute Resolution, Facilities Management, Machinery & Business Assets, Management Consultancy, Residential Property and Valuation Professional Groups
  • J u ne /J u ly 2 0 1 3   5 RICS Property JOURNAL Simon Rubinsohn is Chief Economist at RICS and regularly provides comments for national newspapers including the Financial Times, The Guardian and The Telegraph opinion Breaking out of the bubble Simon Rubinsohn on the challenges facing central banks internationally OPINION MMany RICS members, I am sure, are continuing to find the real estate world a challenging place despite some signs that banks are finally beginning to take a slightly less restrictive approach to providing finance for the sector. Yet as some chinks of light begin to be visible in parts of the UK property sector, a wider debate is taking place, particularly in the US, over the risks central banks are running in pursuing the current unconventional approach to monetary management. The one-time budget director under Ronald Reagan, David Stockman, has been vigorous in stating his view that the US economy is in a bubble inflated by ‘phoney money’. But he is not alone in making the point, with some others highlighting the sharp turnaround in the US housing market as being indicative of a more narrowly focused asset price bubble. Indeed, the Bank for International Settlements has done likewise in the recent past, drawing attention to the narrowing in yield spreads between higher risk classes of debt and safer government issuance. Unfortunately, this is not some esoteric discussion among theoretical, some might say heretical, economists with little relevance to those of you practising in the UK. On the contrary, it is part of a wider debate about how to adjust to the realities of the new world order post credit crunch, in which emerging economies such as China are finding it almost as difficult as many western economies to strike the right balance on policy, and for that matter, the appropriate regulatory framework. In the case of China, the explosion in unregulated lending associated with the shadow banking sector is a particular issue with which the country’s new leadership is currently struggling to grapple. It is perhaps not entirely surprising that after the experiences of the past decade there is tendency to see ‘bubbles’ all too readily. It is also predictable that real estate will attract particular attention given the role of sub-prime in triggering the subsequent credit crunch. Central banks clearly are caught in a difficult place. The lost decades experienced by Japan following its own credit implosion in the late 1980s casts a haunting shadow over their actions. Too little easing and we threaten to repeat that experience. Too much and the wrong signals will be sent both to asset markets and price setters more generally. To some extent, that dilemma is currently playing out at the Bank of England, albeit in a more measured way. While some members of the Monetary Policy Committee believe more needs to be done to revive the British economy, others take the view that there is a very real risk of an inflation episode if any more liquidity is thrown at the problem and that time is the real healer. That conflict ultimately looks likely to be won by the former group with the incoming governor, Mark Carney, set to push more aggressively for further action and, arguably, having more of a mandate to do so reading between the lines of George Osborne’s Budget comments. Further monetary accommodation will, in all probability, have ramifications for real estate; prime end properties, whether residential or commercial, will continue to attract significant interest and I would bet that this will ripple out to the wider market. That is, after all, how monetary policy is meant to work. And as this unfolds, some of that discussion currently taking place in the US about ‘bubbles’ may be replicated in the UK. It would, of course, be helpful if we could identify when a particular market is in ‘bubble territory’. Fundamentals, so the saying goes, should provide the answer but if only it were so simple. Prime London real estate already seems pretty much at the upper end of what could be described as fair value. However, if new sources of finance from overseas continue to seek out property in the centre of the capital, who is to say what the fundamentals imply? That said, no one should be in any doubt that at some point in the future interest rates will need to be raised; the base rate cannot remain at 0.5% for ever. When this happens, real estate analysis will need to be recalibrated to reflect an environment in which borrowing costs are heading upwards. This need not result in lower real estate prices and certainly does not imply a crash. However, it would be foolish to rule out the possibility that as some of the abundant liquidity begins to be reined in, the real estate sector won’t take some of the strain. C
  • RICS property JOURNAL 6   J u ne /J u ly 2 0 1 3 UPDATE RICS has long campaigned for reform of the letting agent sector, believing that achieving better regulation and eliminating the ‘cowboys’ will ultimately deliver more and repeat business for members and a better deal for consumers. Over the past 18 months, RICS has undertaken a great deal of influencing work – both publicly and behind the scenes – to drive home the need for change to government and policy-makers. This work has included events in Parliament and at the party conferences of all three major parties, briefing MPs, ministers and civil servants and a national media campaign highlighting the benefit to consumers of using a qualified property professional when letting a property. The Enterprise and Regulatory Reform Bill (now enacted) presented a clear Lettings reform UPFRONT update opportunity to campaign for reform and RICS, along with Shelter, Which?, the Property Ombudsman and other organisations, worked with Baroness Hayter to table an amendment to the Bill as it passed through the Lords that would extend the scope of the Estate Agent Act 1979 to include other types of residential agency. The aim was to ensure that peers were fully briefed with RICS Impact Assessment research on the cost and benefit of the proposed amendment along with the arguments for the change. The amendment was accepted by 211 votes to 206. On the bill’s return to the Commons, a government Sustainability guidance The role of valuers is to assess market value or fair value in light of evidence normally obtained through analysis of comparable transactions. While valuers should reflect, not lead, markets, they should be aware of sustainability features and the implications these could have on property value in the short, medium and longer term. Furthermore, increasingly stringent legislative requirements will change the specification of new buildings, especially where existing stock cannot be refurbished at economic cost to meet more demanding standards and will be at risk of value depreciation. As part of this new awareness agenda, RICS is preparing a new Sustainability and commercial property valuation guidance note. This asks all valuers to keep abreast of sustainability features, technologies and approaches when establishing market value, fair value, market rent and investment value, ensuring that they collect appropriate and sufficient sustainability data when inspecting property, which will enable them to analyse and apply them to any property valuation as appropriate. The guidance note is being finalised and will be made available for publication in the early summer. Lorraine Howells is Associate Director of RICS Valuation Professional Group n See professional-guidance counter amendment was introduced and passed, giving powers to introduce a compulsory redress scheme for lettings and managing agents by secondary legislation. The Enterprise and Regulatory Reform Act became law on 25 April. Mary Thorogood is RICS Parliamentary Affairs Manager Image©istock
  • J u ne /J u ly 2 0 1 3   7 UPFRONT update In brief... Consultations RICS welcomes responses from members on the following consultations open this summer Surveyors acting as independent experts in commercial property rent reviews guidance note 3June–1July This ninth edition will be split into Surveyors acting as arbitrators in commercial property rent reviews, already accessible on RICS’ website, and Surveyors acting as independent experts in commercial property rent reviews, now publicly available for comment in its draft form. The latter will assist members appointed to act as independent experts by making them aware of the procedures likely to be followed. Mundic guidance note 6June–4July The third edition of this guidance note is intended to equip chartered surveyors, structural engineers and petrographers with the knowledge to evaluate and assess concrete-built properties in Cornwall and Devon that may contain ‘mundic’ and introduces a modified process to reflect increased understanding of the science behind the problem. The guidance will also aim to give some certainty to mortgage lenders in this region. You are welcome to share your views on the draft guidance about this niche yet crucial issue to Cornwall and Devon. Surveyors acting as expert witnesses guidance note and practice statement 12July–9August This review of the note’s third edition and its accompanying client guide aim to ensure that the guidance is up to date with current case law, current practices such as ‘hot tubbing’ and the Civil Procedure Rules and any relevant practice directions. RICS members involved in dispute resolution are welcome to comment on this draft updated version. Selling personal property at auction guidance note ScheduledtoopenendofJune This is the second edition of a guidance note originally published in 2006. It brings the guidance note up to date and its scope has been widened to be relevant not just in the UK, but globally. It provides guidance covering all stages of the process from before the sale through to the post-auction activities. Publication is expected in November. Surveys of residential property guidance note ScheduledtoopenmidJune This is the second edition of a guidance note originally published in 2004, Building surveys of residential property. It updates the content and will provide protection and guidance for members who do not yet exclusively use all RICS Home Buyer Products. This note will provide general advice on issues such as fee setting, terms and conditions and how to identify the appropriate survey. It is expected to publish at the end of October. For the latest consultations, visit system/listConsultations ‘Forward thinking, future proofing’ is the theme for the RICS National Residential Conference at the Kensington Close Hotel, London to be held on 16 July. Delivered through a mix of technical insight and strategic level debate, this conference will critically assess the barriers to growth in the residential market. In attending, members will gain insight into Housing Commission reforms and understand the impact that the National Planning Policy Framework, the Community Infrastructure Levy and section 106 are having on market value, helping to maintain their competitive edge. This annual flagship RICS event is a must-attend to find out what RICS is doing to safeguard members, helping them to avoid the law courts through case law updates ensuring that they are compliant and offering the best advice to their clients. STOP PRESS: Housing Minister Mark Prisk confirmed as speaker. n See RICS Research has evaluated how and to what extent real estate courses equip graduates with commercial awareness. The research gathered the views of UK academics, practitioners and students. For students to be commercially aware, the research suggested that critical thinking and problem-solving skills were essential and that students also needed to be self-motivated and willing to update their professional knowledge. The research found that commercial awareness has been embedded into the RICS real estate curriculum as a whole rather than as a standalone unit and that students do not think their courses have sufficiently helped them to develop their commercial awareness. The answer to this, the research puts forward, could be problem-based learning and more practical experience such as placements or internships. Amanprit Johal, RICS Global Research and Policy, said: “Commercial awareness is an important element of employability and is identified as one of the competencies required to be globally competitive. The research looks at how to embed commercial awareness into real estate courses more effectively.” Paul Bagust, RICS Valuation and Commercial Professional Groups, added: “This report highlights the fact that rather than simply providing traditional technical skills, surveyors are becoming increasingly commercially aware and are looked at to provide leadership. A flexible and strategic approach to business and problem- solving together with a detailed understanding of financial management will be essential skills for those wishing to progress.” n See knowledge/research Commercial awareness research Residential conference
  • RICS property JOURNAL 8   J u ne /J u ly 2 0 1 3 UPFRONT Planning T Alister Scott examines some of the conflicts at the heart of planning at the rural-urban fringe Reinventing the fringe The recent planning reforms within the coalition government present an opportune moment to examine the impact of current policy in the rural-urban fringe (RUF), the arena where economic growth, community involvement and protection of the environment are played out at the intersection of town and countryside. Recent research on the RUF, funded by the UK Research Councils under the Rural Economy and Land Use Programme1 , raises critiques of policy interventions and impacts, and identifies key opportunities for maximising RUF potential. Rediscovering the RUF The RUF is a ‘messy’ but highly valued and contested space. It is here that the pressures for growth and new homes are at their most intense and pernicious. However, the RUF represents something of a conundrum in planning policy; on the one hand it has become the dominant space within the UK contemporary landscape, going beyond visual land use considerations to extend its reach deep into rural areas through the urban lifestyles of resident populations2 . Yet, on the other, it remains largely a forgotten space ‘at the edge’, typically bypassed in policy and decision-making, which tends to prioritise urban and agricultural needs. While many decisions may affect the nature and identity of the RUF, they are accidental and consequential rather than actively planned for as a place in its own right. Thus we see a polarisation between those who favour new development in the RUF and those who oppose it within a planning system that is already adversarial. Without this dualism, the RUF would be better able to act as a catalytic space within which more creative and proactive ideas might emerge. Planning interventions The UK government’s agenda is predicated on delivering economic growth. Set within this policy imperative, radical action has been implemented to reform and streamline the planning system; the National Infrastructure Plan 2011, Localism Act 2011, National Planning Policy Framework (NPPF) 2012 and the Growth and Infrastructure Act 2013. Collectively, these shape a new policy landscape within which the RUF will evolve. This raises key questions as to the efficacy and relevance of such interventions in the pursuit of wider sustainability outcomes. The research project identified three core ingredients that herald an integrated action plan: increasing connectivity, planning for the long term and managing contested values. This article focuses primarily on the connectivity theme. In pursuit of connectivity The RUF as the interface between town and country presents an exciting challenge in tackling what has been identified as a significant urban-rural divide3 . The roots of this in England can be traced back to the Barlow (1940) and Scott (1942) reports, which separated the built (town) and natural (countryside), and their implementation via the landmark Town and Country Planning Act 1947. Here, the core ideas of controlling urban development within planning procedures, and supporting agriculture and forestry production through a system of incentives, spurred at the time by the imperatives of war, were established. Unfortunately, the subsequent evolution of policy and decision-making has stuck to this rationale, with urban expansion seen as something to be controlled with protection of the countryside for agriculture and forestry tied into notions of a rural idyll. This has stifled the wider diversification of both rural and urban economies. Crucially, Ebenezer Howard, the pioneer of the garden city movement, recognised this dualism within his ‘three magnets’ concept, in which he argued for joined-up thinking about town and country to maximise the benefits of both. This concept of multiple benefits is key to unlocking connections between places and spaces and loosening the dominant urban-centric fix where the RUF environment is viewed primarily as a space waiting for the city to come to it, or where green belt intervenes as a one-size-fits-all tool restricting development. Instead, we can create more dynamic, creative and productive spaces where countryside and town ideas and values might fuse to meet identified needs and opportunities. For example, the research highlighted significant problems facing farmers in RUF locations. One favoured option was to lease unproductive land to local communities to grow food. RUF Z Image©getty
  • UPFRONT planning J u ne /J u ly 2 0 1 3   9 This would necessitate joining up agricultural-based payments for environmental and social goods and services from the EU with urban and localism-based planning approaches for community food growing. The resultant land use conforms neither to current urban or rural land use protocols, so is effectively ‘out of order’ and is unlikely to proceed despite its obvious value to all parties concerned. The contemporary policy landscape can be seen as being disintegrated along this urban-rural divide with major disconnects. So, for example, within the countryside we have seen the creation of Local Nature Partnerships and Nature Improvement Areas, all operating at the landscape scale with support from the Department for Environment Food and Rural Affairs family of agencies. Similarly, within the urban centres we have seen the rise of Local Enterprise Partnerships (LEPs) and Enterprise Zones operating at local and neighbourhood scales supported by the Department for Communities and Local Government and the Department for Business, Innovation and Skills. These separate institutions, each with their own geographies, strategies, tools and disciplinary champions may fuel conflict as policy positions are developed in isolation, leading to multi-scalar and sectoral clashes later on in the planning process. Different strategies and action plans emerge piecemeal rather than being integrated at the early stages as most participative processes now recommend. Given that the RUF is within the zone where this policy disintegration is at its most pervasive, conflict and protests are now endemic in the process. Building consensual or shared visions through up-front investment would be more productive in the long term. Thus, we need to better understand the pieces of this complex jigsaw and how they fit together across scales (global, European, national, regional, local and neighbourhood) and sectors (e.g. housing, transport, environment, community and economy). This demands working at the most appropriate scale and unit, but ensuring that this decision is informed by evidence rather than politics. The principal delivery vehicle to achieve this is an effective partnership that cuts across these scales and sectors. However, in practice this is rarely achieved. Strategic vacuum Unfortunately, there is no spatial plan or vision for England within which strategic priorities can be translated into plans at regional and local scales. Indeed, strategic planning has become weakened by the hasty ‘pickling’ of regional scrutiny with policies championing localism. The result has been many local authorities becoming reluctant to accommodate neighbouring authorities’ housing requirements, particularly where green belt extensions are deemed necessary. Thus new housing proposals are significantly below what is needed, with no strategic oversight to identify optimum sites or cross-boundary solutions for development. The new duty to cooperate within the NPPF attempts to plug this gap, but it generates ad hoc activity predicated on interaction between individual local authorities rather than any substantive strategic consideration involving all relevant stakeholders, and with little recognition of the legal status of cooperation. Authorities struggle to work with this arrangement, and planning inspectors are failing to draft local plans as a recent Coventry City Council decision shows – the inspector failed the plan due to a perceived failure in cooperation4 . Lord Heseltine’s review on growth5 seeks to position the newly-created LEPs in this role, but this ‘back-door’ approach to strategic planning is problematic given that not all areas of England are covered and LEPs do not equate with conventional travel-to-work patterns or natural regions such as water catchments, which arguably offer more logical strategic oversight for effective planning and development matters. Furthermore, the failure of 52% of all local authorities to meet the NPPF target to have an approved local plan in place by April this year is likely to result in opportunistic applications in the RUF, seeking approvals based on meeting sustainable development arguments alone. This counters good planning practice, which uses agreed plans as the basis for making long-term decisions for areas in the public interest. New ways of thinking Since the launch of the NPPF in March 2012 there have been many incremental add-ons, most notably the Taylor review of planning guidance after the launch of the NPPF. Within the Growth and Infrastructure Act new planning provisions include permitted development to housing extensions up to 8m (subject to neighbour consultations), taking some planning decisions away from local authority control, and reducing affordable housing quotas and community infrastructure on viability grounds. There are also separate proposals to allow conversion from business to residential use. Together these signal a government lacking a clear strategy and ill at ease with the NPPF and localism as the prime tools to kick-start growth. Cumulatively this risks creating a short-term investment landscape dominated by uncertainty and conflict. Far from speeding up decisions, the reforms are likely to embroil the planning system in legal appeals and challenges, especially when combined with a lack of planning staff and inspectors. n
  • RICS Property JOURNAL 1 0   J u ne /J u ly 2 0 1 3 Acknowledgement > This article stems from research funded under the UK Research Councils’ Rural Economy and Land Use Programme ‘Managing Environmental Change at the Rural-Urban Fringe’; a collaboration between the Economic and Social Research Council, the Natural Environment Research Council and the Biotechnology and Biological Sciences Research Council, with additional funding from the Department for Environment, Food and Rural Affairs and the Scottish Government. The author would like to thank Mark Reed, Peter Larkham and Claudia Carter for comments on an earlier draft. UPFRONT planning CRelated competencies include T061Further +info The key question, therefore, is how to escape the thinking that constrains the options for the RUF and promote effective working across the town-country divide. It is here that the Ecosystem Approach6 may help us progress more theoretical thinking into practice; informing planning and development proposals and outcomes. Moving away from the sole focus on economic land values and economic assessments of impact, planning tools could usefully measure and financially value the increased benefits or costs in key environmental and community assets (e.g. flood protection, water quality, carbon reduction, air quality, food, landscape value), which currently are not effectively factored into decision-making. Thus we can then start to map who provides these environmental services and who benefits from them within new payments schemes. For example, a number of water companies now pay farmers to manage land in order to reduce water treatment costs downstream. Markets exist for biodiversity in England and Wales and for climate regulation via tree planting (the UK Woodland Carbon Code). In future, there may also be markets for climate regulation via peatland restoration. By combining payments for many different environmental services in this way, it may be possible to deal with environmental problems more holistically, rather than within sectoral boundaries. Here, positive environmental change benefits economies, society and environment. Green infrastructure (which encompasses ‘blue’ – water) also helps to connect town and countryside. The identification of a network within planning frameworks of authorities, incorporating community-led approaches and management, can help to identify multifunctional opportunities associated with wildlife corridors, flood alleviation, public access and recreation and land management. The value of green infrastructure in Birmingham has been estimated to be £12m annually or £420m capitalised over 50 years7 . However, there has been a tendency for authorities to consider green infrastructure as a bolt-on to existing masterplans rather than embedding it in planning processes. A successful strategy requires partnerships across different sectors, authorities and geographical scales and integrating different themes in a way that provides improved understandings of the asset base of the natural and built environment. This can be used proactively by planners in policy development, masterplans and in planning proposals. Conclusion Uncertainty and disintegration are the enemies of good planning and long-term economic growth in the RUF and there are dangers in viewing any one component of the growth jigsaw in isolation. The current policy direction is at risk of leading towards more uncertain, opportunistic and disintegrative planning predicated on urban growth. In response, we should boldly go into the RUF with more strategic, proactive and inclusive planning to secure and maximise economic, environmental and community benefits based on maximising connectivity. R More information > 1 n 2 Scott AJ et al 2013 ( in press ) ‘Disintegrated development at the rural urban fringe: re-connecting spatial planning theory and practice’ Progress in Planning 3 Scott AJ , Gilbert A, and Gelan A (2008) The Urban Rural Divide: Myth or Reality, SERG Policy Brief (2) Aberdeen: Macaulay Institute 4 n www.planningresource. 5 Heseltine Review (2012) No Stone Unturned: In Pursuit of Growth n 6 The ecosystem approach is ‘…a strategy for the integrated management of land, water and living resources that promotes conservation and sustainable use in an equitable way’. UNCBD. (2010) Ecosystem approach [online] n 7 Oliver Holzinger Personal communication. An Ecosystem Assessment of Birmingham’s Green Infrastructure with Birmingham City Council (In press) +info Image©getty Allister Scott is Professor of Spatial Planning and Governance at Birmingham City University n
  • RICS Property JOURNAL J u ne /J u ly 2 0 1 3   1 1 UPFRONT BOPAS F Philip Santo looks at the UK’s housing shortage and describes a ground-breaking new scheme that will boost mortgage lending on innovative forms of house construction Beating the offsite rule February’s Offsite Housing Review, compiled for UK government by the Construction Industry Council (CIC) revealed a broad level of agreement among experts that the housing shortfall in England is likely to get worse and confirmed the view of the Future Homes Commission by Sir John Banham in 2011 that in the region of 300,000 units are needed every year to avoid a serious stock deficit by 2030. The report makes a number of striking observations. One of the most interesting, perhaps obvious on reflection, is that the housebuilding industry is very clear that it exists to make money for its shareholders and not to further government policies for housing or sustainability. While the industry would certainly like to be in a position to build more homes, provided there is demand to sustain sales and maintain current profit margins, they will not build at a higher rate than their local markets can absorb. This explains why volume builders are content to build out their sites with completions running typically at one per week with no interest in increasing their speed of construction. Even given the opportunity to resource an expanded programme, the private sales sector of the housebuilding industry would only ever aspire to deliver around 140,000 new homes a year, well below the 240,000 currently targeted by the government and far short of levels needed to meet anticipated long-term demand. Expansion The report identifies three residential construction sectors where there is scope for expansion. First, self-build is already a growing sector. Compared with European averages of around 50% of national annual completions, it is starting from a low base of only 7%, but even at this level it is delivering as many houses as the largest of the major national housebuilders. Second, the social rented sector has been operating at modest levels in total market terms for the past 50 years and is unlikely to increase significantly without a major shift in government policy. Third, building for private rent, which has historically been very small, has attracted much interest recently. Even using optimistic projections, however, there will still be a significant shortfall in total provision. The CIC report, as its title suggests, focuses on opportunities to increase the role of offsite solutions to improve the delivery of new homes for both sale and rent and examines the actions that stakeholders, including government, can take to meet current and projected housing needs. Extensive use is already made of offsite components in the housebuilding industry, with factory-manufactured trussed rafters, floor joists, windows and doors, and particularly timber-frame walling systems. The report recognises, however, that while established volume builders have no objection in principle to adopting offsite methods for whole-house construction, the consequent improvement in productivity actually conflicts with their slow-burn business model. Conversely, reduced construction time on site has significant benefits for other sectors, especially for landlords wanting to have tenants in completed units and paying rents as soon as practicable. Improving quality A further telling observation in the CIC report is that housebuilders currently have no commercial interest in the performance of their houses beyond the obligations that apply for the first two years of the free-standing 10-year structural warranties on most new homes. Builders say they cannot justify the added expense of building to higher standards than the minimum required by the relevant regulations because neither purchasers nor professional valuers differentiate sufficiently on price or valuation between energy-efficient, cheaper-to-run properties and those that are not. The government’s ambition to n Image©alamy
  • Offsite message heads to India > Western Europe and Scandinavia have established housing markets with successful high-performing offsite products. North America has an offsite housebuilding market operating at scale, but not primarily providing high-performing products. The Japanese offsite housing market is very well developed with the potential for high performance and has established strong housing brands that are pursuing export opportunities, for example in Australia. The challenge posed by the UK housing market is modest in comparison with developing countries. In India, the determination to address the problem also provides great opportunities for UK companies. The importance of the Indian market recently saw the Prime Minister, accompanied by one of the largest UK trade delegations ever assembled, visit the country in support of collaboration and trade. RICS has recognised India as a priority market for the UK construction industry and has established a strong presence there. The current Indian Five Year Plan, for example, calls for a construction spend in the region of $1.5 trillion and everywhere there is hard evidence of investment in essential infrastructure including new transport hubs, a rapidly expanding motorway system, utilities and new commercial districts. The pace of Indian urbanisation will continue to increase with a migration to the cities, in turn requiring the delivery of a 21st-century infrastructure. The immediate challenge is to deliver tens of millions of new homes to support the pace of urbanisation, and India will not settle for yesterday’s construction technologies and processes. The construction industry in India is looking to adopt cutting edge techniques and is already using innovative methods, such as offsite construction, to deliver new infrastructure. This includes new communities of up to 20,000 homes being built using offsite construction manufacturing. While the Prime Minister was in India, a delegation from the Buildoffsite organisation met local companies and organisations looking to adopt innovative offsite construction practices. The delegation included representatives from design, manufacturing, contracting and service interests. Says Richard Ogden, Chairman of Buildoffsite: “A professional presence on the ground is essential if any business is going to make progress in this huge market, but the job can be made just that bit easier through the actions of RICS and others to act as a focal point to bring together those people and organisations who have shared interests.” Highly educated and astute industrial managers and government policy-makers in India are looking to do business with overseas partners who can offer the best solutions and help to inform the decision-making that the country will demand. UK leadership in design, exploitation of Building Information Modelling, developments in offsite construction solutions and project management means there is much to offer. An additional advantage is that many Indian professionals and senior managers have studied in the UK and have an excellent understanding of UK practices, technical standards and the excellence of our consultants and constructors. 1 2   J u ne /J u ly 2 0 1 3 RICS property JOURNAL UPFRONT BOPAS improve the thermal performance of new homes will challenge this position by progressively raising the requirements. Builders are likely to find it more difficult and therefore more expensive to meet the prescribed levels with traditional forms of construction. Offsite solutions then offer a means of providing the necessary quality. Assuring lenders Increasingly then, surveyors and valuers are likely to be confronted with non-traditional forms of construction. Whether acting for lenders, housing associations or institutional clients, the professional challenge will be to advise whether these non-traditional forms are sufficiently durable and adequate in all respects to meet the necessary standards for funding. Private purchaser clients will want reassurance about properties during their own occupation and also that mortgage funding will be available to prospective buyers when they come to sell. Historically, the provision of such advice in respect of properties built with non-traditional methods has proved a sticking point in the sales process. Lenders understandably have been unwilling to commit themselves without valuer reassurance and valuers have been professionally unable to provide it within the limited remit of the standard mortgage valuation process. In parallel, manufacturers of offsite systems – often with extensive track records of provision to non-residential clients – have found it exceptionally difficult to obtain confirmation from lenders that their particular system would be accepted for lending purposes. Recognising these difficulties, RICS has worked with Buildoffsite, Lloyd’s Register and Building LifePlans in consultation with the Council of Mortgage Lenders and the Building Societies Association to develop a scheme to provide assurance to the lending community that innovatively constructed properties will be sufficiently durable to be readily saleable for a minimum of 60 years. The resulting Buildoffsite Property Assurance Scheme (BOPAS) comprises a rigorous durability and maintenance assessment and process accreditation, supported by a web-enabled database giving access to details of assessed building systems, registered sites and individual properties that have been warranted under the scheme. This will not only apply to first sales after construction but will be accessible for the life of a property, allowing all subsequent sales to be similarly checked against the database. Forthefirsttime,valuerswillbe abletoreceiveindependent confirmationthataparticular constructiontechnologyhas beenapprovedinprinciple forlendingpurposes “ n
  • mike Fairey, Fusion Building systems (left) receives Bopas accreditation from Richard ogden, Chair of Buildoffsite (left) receives Bopas accreditation from Philip Santo FRiCs is director of philip santo & Co and acts as a consultant to Buildoffsite Related competencies include T041 For details of the Buildoffsite Property Assurance Scheme, see The CIC report can be downloaded at J u N E /J u Ly 2 0 1 3 1 3 UPFRONT Bopas BOpAS launch event > It was standing room only in the RICS Lecture Hall when the Buildoffsite Property Assurance Scheme (BOPAS) was launched at a conference examining offsite solutions to UK housing needs on 26 March. Described as ‘game-changing’, the BOPAS scheme enables residential valuers for the first time to access a dedicated database of innovative forms of construction ‘approved in principle’ for mortgage lending. During the conference, addressed by Alan Collett, RICS President and Michael Newey, RICS President-elect, the Offsite Housing Review was considered and an innovative housing collaboration between Kent County Council and Kier Partnership Homes was outlined. The significance of the BOPAS launch was reflected by the attendance list, which included Stephen Hodder, President-elect of the Royal Institute of British Architects, and representatives of government, local authorities, manufacturers, builders and housing associations as well as lenders, surveyors and valuers. The BOPAS scheme provides absolute confidence to valuers and lenders that particular forms of construction have been subjected to a rigorous appraisal process that ensures they meet lender requirements for durability and suitability for lending. While not guaranteeing mortgage finance, which is subject to the valuer’s report and valuation of individual plots, the scheme removes the crucial area of uncertainty that has prevented lending on countless occasions – lender acceptability of non-traditional forms of construction. BOPAS database entries are online and therefore effectively accessible from site. They are plot specific and accessible for the lifetime of a dwelling and thus available for all subsequent sales and also for advising owners in residence. For the first time, therefore, valuers will be able to receive independent confirmation that a particular construction technology has been approved in principle for lending purposes, often while still on site. Accreditation does not guarantee a mortgage per se, because the valuer still has to consider aspects such as location and value, but it removes the uncertainty over the construction that has proved such a blockage in the past. Accreditation under BOPAS is not limited to residential developments and is potentially open to any manufacturer, but the initial focus of this ground-breaking initiative has been to eliminate a frustrating obstacle in the mortgage lending process that has previously been very difficult to overcome. Manufacturers of offsite systems now have the opportunity to enter all sectors of residential sales and letting development and, with the support of BOPAS accreditation, can be confident that their particular form of construction meets the relevant criteria for funding provision. In the longer term, this even creates the potential for offsite providers to become a new force in the quest for the provision of mass housing. Offsite forms of construction are, by their very nature, ideally suited to meet the challenges of speed, volume and quality posed by the current housing crisis. It is no surprise that government is taking such a close interest. C image©pHilipsanto
  • RICS Property JOURNAL 1 4   J u ne /J u ly 2 0 1 3 +info Q&A PROPERTY JOURNAL Legal +info V is for service of applications Q I have received a Notice of Disclaimer from the liquidator of a tenant, stating that the lease has been disclaimed. According to the company’s most recent accounts it is not insolvent. Can it do this? > Ed John A A company can resolve to put itself into liquidation either when it is solvent (i.e. can pay its debts – a ‘Members Voluntary Liquidation’) or insolvent (i.e. cannot pay its debts – a ‘Creditors Voluntary Liquidation’). In this case, unless you have been given notice of a creditors’ meeting, it is likely to be the former. If a liquidator regards a lease held by the company as ‘onerous property’, they are able to ‘disclaim’ it. A disclaimer operates to determine the interests of the tenant in the disclaimed lease, but the rights and liabilities of third parties such as guarantors and original tenants under pre-1996 leases will generally remain in place as if the lease continued in existence. If the landlord cannot recover the rent from a guarantor or former tenant, they are able to recover their losses caused by the disclaimer (including the loss of rent and other sums for which the tenant is liable under the lease) as a creditor in the tenant’s liquidation. In principle, the landlord should be no worse off as a result of the disclaimer, however the amount payable in each case depends on several factors, including the landlord’s ability to re-let. W is for Without Prejudice Q I am negotiating a rent review with a tenant. The tenant has sent a letter marked ‘Without Prejudice’; what does this mean? >Lucinda Hutton A If a letter is marked as being ‘Without Prejudice’ this would generally prevent any statement or concession made within the letter being used in court or arbitration as evidence against the party that sent the letter. The without prejudice rule is an exception to the rule that where a party admits or concedes something against their own interest it can be used against them in court. The without prejudice rule encourages parties (or potential parties) to litigation to settle their disputes out of court. If parties believe that their admissions cannot be used against them in court should settlement discussions break down, they are willing to speak more freely in order to reach a settlement. However, if a letter is marked ‘Without Prejudice’ and in substance it is not a genuine attempt to settle an existing dispute, it will not be protected by without prejudice privilege. Indeed, a letter need not contain the words ‘Without Prejudice’ in order to benefit from the without prejudice privilege, as long as in substance it is a genuine attempt to reach a settlement. X is for eXperts Q The rent review on one of my properties was subject to expert determination. The expert sided wholly with the other side and I believe may have made some serious errors of judgment or miscalculations in arriving at the rental figure. Is there anything I can do? > Ed John A In this case, the lease will probably provide that the rent will be determined by an independent expert if not agreed. If the parties agree the expert who determines the rent, that determination is binding between the landlord and tenant, even if the valuation was negligent. It can only be ‘set aside’ (determined by the court to have no contractual effect) if the expert has: bb failed to do what was required of them (e.g. valued the wrong property) bb acted fraudulently bb colluded with one of the parties. An expert appointed to determine a rent review has a contract with each party to the lease. They owe both parties a contractual duty of care and will be open to a claim in negligence by the party that has lost out as a consequence of their mistake. So, if the expert has undervalued the rent as a result of a negligent mistake, the landlord can recover damages comprising the shortfall between the rent as determined and the rent it would have been had they done their job correctly. C UPFRONT Legal Q & A V + X Ed John Senior Associate Solicitor, Hogan Lovells International LLP ed.john@hoganlovells. com W Lucinda Hutton Trainee Solicitor, Hogan Lovells International LLP lucinda.hutton@ +info
  • RICS PROPERTY JOURNAL com mer cialJ U N E /J u ly 2 0 1 3   1 5 S E C T I O N C
  • Image:Batterseapowerstation RICS property JOURNAL 1 6   J u ne /J u ly 2 0 1 3 C Simon Williams considers how developers go beyond physical assets to create a sense of place Building on a vision CoMMERCIAL Place-making In recent years, real estate businesses and developers have started using the expression ‘place-making’. Witness the large-scale developments underway at Paddington and King’s Cross or the proposals for development at Earls Court and Battersea Power Station – they all have one thing in common. They are more than just a series of buildings with the developers keen to create a sense of place – dynamic urban settings where people can comfortably live, relax, shop and work. Although the expression is new, the concept is not. London, perhaps uniquely among world cities, has large estates with landowners such as Grosvenor, Howard de Walden and the Crown Estate exercising careful management over vast swathes of the capital. Over the decades, this control has enabled them to create the type of areas that the modern breed of developer is now seeking to emulate. If we look at the history of the Grosvenor Estate, it is clear that it did not shape one of the most desirable places to live and work overnight. Mayfair and Belgravia were ‘created’ in the 17th and 18th centuries and can be viewed as among the earliest examples of planned communities. Grosvenor had a clear vision and a consequent strategy and continues to evolve that vision today. In addition to managing its London estate, Grosvenor decided to take its expertise and apply it to one single large-scale development in Liverpool. It worked with Liverpool City Council on the Paradise Project, which ultimately became the award-winning Liverpool ONE – the complete regeneration of 17ha of the city centre that subsequently spawned more than 40ha of further transformative development. Any real estate or development business that is considering a place-making scheme needs to have both a clear and consistent vision and a substantial area of contiguous land ownership. While the developer or the landowner will put the vision in place, to succeed it has to be communicated to everyone involved whether through its construction, letting or ongoing management once completed. It is for this reason that knowledge of place-making is relevant not only to real estate companies or developers but also to investors, agents and banks, as well as the future occupiers or tenants. Keeping your vision intact is probably the biggest concern and, to do this, a robust legal framework is needed or the long-term success of the estates will be compromised. The framework consists of five factors. Funding structure Place-making developments by their very nature are large and will require significant investment. Careful consideration needs to be given to the vehicle that will ultimately hold the completed asset. This needs to be flexible enough to: bb appeal to a wide variety of different investors I
  • J u ne /J u ly 2 0 1 3   1 7 Commercial Place-making Simon Williams is a Partner in the Property team at law firm Boodle Hatfield swilliams@boodlehatfield. com n bb cater for phased development (and funding) bb allow easy entry into (and out of) the investment bb permit changes in the future. Currently the limited partnership is seen as the vehicle of choice, not least because of its tax-transparent nature, allowing each investor to be taxed according to its own circumstances. The reality of the current economic climate means that funding, both equity and debt, is becoming ever harder and more costly to secure. Consequently, it is more common today for large-scale developments to be financed and constructed in phases and build programmes to extend over a number of years or even decades. The heady days of projects such as Liverpool ONE, which was funded and built in seven years, are unlikely to be repeated in the near future. This requires a considered approach to funding, which needs to be flexible enough to adapt to changing market conditions and the economic environment. A place-making developer is clearly looking to its long-term vision, but if it is clear that this will need to be adapted (or the development altered), funding arrangements need to permit this. Management plan Following completion of the development, a long-term management plan needs to be established, in accordance with the vision, governing: bb who occupies the scheme bb how they operate and occupy space bb how different occupiers interact bb how public realm is used. These controls are generally woven into the occupational leases and licences for both residential and commercial occupiers and also into the contracts agreed with managing agents. It is crucial that the vision is sold by the landowner to the occupiers at an early stage of negotiations to ensure that they buy into it. Occupiers need to accept the consequent controls that the landowner requires, such as limitations on use or to whom a lease could be assigned. These may initially seem unduly harsh to an occupier used to having more flexibility. But even slight deviations can be seen as ‘the thin edge of the wedge’ that could erode the vision if some occupiers observe others being released from similar controls. Occupiers need to be prepared to accept service charge costs that are commensurate with a higher quality development. The landowner must demonstrate not only the value that this additional cost brings but that strict financial discipline is being brought to the levels of expenditure. Place-making schemes should not be seen as being of interest only to the property sector. The retailers, restaurants, coffee shops and office tenants attracted to such schemes have a vested interest in ensuring that the landowners remain true to the vision. This will ensure that the quality is maintained (or even enhanced) over the years following completion. View as a whole Any successful place-making scheme needs to be run for the benefit of its whole. Deals should not be negotiated in isolation on the basis that any single deal could have serious ramifications for the scheme as a whole. A cohesive letting and tenant mix policy will assist, accompanied by universally applicable estate rules and regulations. Long-term value Well-run place-making schemes will see capital values (and rental returns) steadily increase if the vision is followed. The original quality, both in terms of appearance and type of occupier, must be maintained. Nowhere is this more important than in the public realm. Landowners such as Grosvenor have long realised that the space between their buildings is just as important as the buildings themselves. Their occupiers expect the public realm to be managed in a proactive way and the newer place-making schemes have a strong sense of community. They want to involve the local residents and businesses in the use of the public realm and public events, street theatre and displays of artwork are actively encouraged. Short-term profit Landowners should not succumb to the temptation of short-term profit if this comes at a cost to the integrity of the vision. They may have to settle for a lower short-term return, which could mean: bb exercising pre-emption rights (and accepting voids) to prevent less desirable occupiers obtaining space bb resisting the demands of large commercial occupiers more used to taking space on ‘their’ terms bb allocating the time to wait for the right occupier when space becomes available. The creation of a place-making scheme is an immensely complex task. Success will be measured over decades, not months, and the accompanying strategy (which will need to cover periods of economic hardship) must be explained to investors at the outset. Residential property Any place-making scheme is likely to include a significant amount of residential accommodation. With the seemingly never ending rise in residential values in London, developers are keen to cash in and many schemes are seeking to revise upwards the number of residences they are creating. Successfully managing residential accommodation is an art in itself. When making decisions that affect people’s homes, landowners need to keep in mind that an Englishman’s home is indeed his castle. That emotional angle combined with the statutory rights of long leaseholder residential tenants (such as the right to acquire the freehold, to extend a lease, challenge the service charges or take over the management) calls for special care and expert legal advice should be taken before any problems escalate out of control. However, provided the strategy is carefully thought through and properly implemented, there are significant advantages to the presence of residential property. The daily activities of the residents can enhance the overall feel of an area, creating an urban bustle that will be attractive to workers and visitors alike. The new ‘places’ that are being created by modern developers and landowners across London have the potential to transform the city. However, the long-term success of these schemes can be realised only if landowners are clear on their vision and how it will be implemented and maintained over decades to come. Having a legal team that understands that from the outset is a must. C Related competencies include T061, T079, T048
  • RiCs pRopeRty JouRnal 1 8 J u N E /J u Ly 2 0 1 3 C QMichael Baynes looks at the unique issues of valuing vineyards COMMERCiAL VineyaRds Qualifying as an investment surveyor some 27 years ago it was natural that my attention would be drawn to the centres of real estate investment, above all the City of London, where the demand for space sees maximum use of every conceivable rentable corner. But while the sophistication of the city is interesting and fun, I dreamt of a place where it might be possible to work in an investment environment that matched the power of the city with the tranquillity of the countryside. The Bordeaux vineyard market is just such a place. There are vineyards, not for sale I might add, that were we to value them would probably start at half a billion euros. At Maxwell-Storrie-Baynes, we have seen sales at €4m per hectare and offers refused at €7m per hectare. I speak of course of the investment grade Premiere Grand Cru Classé wines and those vineyards designated under the Bordeaux classification of 1855. Trading region The city of Bordeaux became a powerful merchant trading area in the 14th century thanks to its strategic waterways and natural port with access to the Atlantic. By the 19th century, wine had become its core export. But the first known vineyards date back about 2,000 years and it was the Romans who most likely identified and exploited the natural environment and climate so well suited to wine growing. Bordeaux is the world’s largest wine region – there are approximately 126,000ha of vines there, all pruned by hand. Bordeaux has 57 wine appellations (think Heinz!) 8,000 wine-producing châteaux and 13,000 grape growers. With an annual production of approximately 850 million bottles, Bordeaux produces large quantities of everyday wine as well as some of the most expensive wines in the world, which combined creates an industry of some €14.5bn a year. Vineyard market yet the vineyard market is small, discrete and, excuse the pun, illiquid. In London, there might be single streets in Chelsea that see 35 transactions in a year; there were a total of 35 vineyard transactions in Bordeaux in 2011 and the SAFER reports a total of 37 for 2012. This number will increase for 2013 with the continued strong interest from China, but at any given time there are rarely more than 80 chateaux estates on the market for sale. Furthermore, the sales process is slow and fraught with complications and exceptions. How to set a value In February, my company was invited to the Bordeaux business management school, Inseec, to lecture the Masters of Wine students on how to value a vineyard. I went through a case study before having them complete a valuation of a hypothetical estate themselves. They were surprised to learn that the income stream from a vineyard is not valued in the same way as many other businesses or commercial real estate. With the vast majority of businesses an exit strategy is envisaged and the accounts are organised to demonstrate a steady rise in revenue to impress the target for the exit after a certain number of years. But with Bordeaux vineyards it is very rare, particularly in the lower end of the market under €20m, to see a normal business/exit strategy being pursued by owners. The vast majority run the vineyard as a family business and intentionally follow a strategy of tax minimisation while at the same time maximising the French government’s financial support for farm operations. At university I was taught to look at the income stream from the real estate and then apply a year’s purchase capitalisation multiplier to arrive at the valuation. But the vineyards’ income stream is very hard to discern from the accounts as outlined above, and also from the rental stream. The ownership structure is commonly held in two companies, with a commercial company renting from an agricultural holding company. Since the ultimate owner is the same, the rental agreement between the two is not at market rates and is purely a strategic manoeuvre. In this way, when valuing vineyard properties we place no value on the investment value or ‘goodwill’ of the business and income stream. We do not take the net operating income and apply a cap rate multiplier, instead we value the assets only, and if there has been a legitimate reason for poor performance in recent years we apply a discount to asset value Surveyors among the vines
  • IMAgE©miCHaelBaynes J u N E /J u Ly 2 0 1 3 1 9 Michael Baynes is Co-owner and managing director of maxwell-storrie-Baynes michael@ COMMERCiAL VineyaRds accordingly. So the skill of the valuation entails a detailed understanding of each composite part. Each asset is therefore broken down to its unit size; square metres for building and hectares for the land surface. Depending on the condition and amenity of the buildings the appropriate multiplier is applied. For example a well presented chateau residence of 400m2 might be valued at €3000/m2 = €1.2m. In the same way a multiplier is applied to the chai (storage sheds for casks), offices, tasting rooms, barrel storage, bottle storage rooms and equipment garages – each one different. Likewise with the vines, each parcel is analysed on the basis of its plant density, age, condition, aspect, ventilation, soil and drainage. These qualities will place the vine’s value within the range for a given appellation. For example, a Bordeaux Superieur in the Entre-deux-Mers region will have a value range of €12,000 to €30,000 per hectare. The strength of these qualities will determine where the valuer positions their final value on a parcel-by-parcel basis. Other influences will be the notoriety of the wine, its prizes and press strength, strength of sales contracts and marketing brand. There may be some of the vineyard’s parcels closer to the lower end of the range and others in the middle or at the top end depending on their strengths and weaknesses. Finally, the vineyard valuation will review the materials and equipment for farming and making the wine. Their age and condition will be significant factors and the company accounts will list all of the equipment owned by the estate. The global market The Bordeaux vineyard market has in many respects followed the fortunes of its wine market. While the investment grade wines have behaved like luxury goods, the vast majority of Bordeaux wines have had to adjust to the arrival of some very competent offerings from elsewhere in the world – from Chile, South Africa, Napa, Australia and New Zealand. Perhaps the most surprising newcomer to the world of modern wine-making is the uK itself, which in the past 10 years particularly has seen some interesting if not highly technical wines winning accolades and praise. Maxwell-Storrie-Baynes in Bordeaux is affiliated through Christie’s to Strutt & Parker in the uK, which is one of the leading experts in the emerging uK vineyard market. Our new initiative together, named Vineyards by Christie’s, brings the foremost vineyard experts from around the world together to advise on this nuanced area of real estate investment. I asked my associate from Strutt & Parker, Nicholas Watson, to comment on what he is observing in the uK vineyard market. The uK has been largely populated by ‘hobby’ vineyards, which are often attached to an impressive house. The vineyards are not commercial ventures and in most cases the vines are managed by the owner under contract by a wine producer, thereby separating production from location. While Bordeaux has a very mature and ancient vineyard market, the uK is so young that there are very few comparables on which to base valuation evidence. This is further compounded by the embryonic nature of the industry, which has perhaps half a dozen serious businesses in the whole country. Watson explains: “Most vineyards are not profitable ventures, so if their value is acknowledged at all, it is simply as an amenity to the country house that is the principal focus of value.” Through Strutt & Parker, Watson acts on behalf of some of the most significant wine estates in the uK. Of particular note, he says, is the focus on sparkling wine products. As in the Champagne region, there are parts of southern England – Kent, Sussex and Hampshire – that have ‘terroir’ and climatic conditions that are very well disposed to sparkling wine production. The market leader, Nyetimber, is one of Watson’s clients and is taking a significant share of the uK market. But as he points out: “Domestic demand for high-quality English sparkling wine continues to outstrip supply, but as supply increases the challenge for producers is to compete in the international marketplace and establish a reliable export market.” The AOC system Of course I am biased, I admit it, but to my mind there will never be another Bordeaux and no other region in the world can match its depth of knowledge, history and suitability for the growing vines. But above all, and the thing that will always distinguish it from other wine growing regions, is the Appellation d’Origine Contrôlée (AOC) system imposed on anyone that wishes to state that they are making a true Bordeaux wine. While irrigation is standard practice in Chile, the uS and Argentina for example, I bet you did not know that irrigation is illegal in Bordeaux. What makes each Bordeaux vintage unique is the winemaker’s interpretation of the sun, the rain, the frost, the soil, the drainage, the plants’ grape variety and what the market wants. This is what underwrites the Chinese interest in Bordeaux, and this, in my opinion, is what underwrites Bordeaux’s long-term future as a world leader in wine. C Related competencies include TO83
  • RICS property JOURNAL CoMMERCIAL TUPE 2 0   J u ne /J u ly 2 0 1 3 Conditions of service C Why is TUPE relevant? TUPE will generally apply on entry into and exit from an arrangement for the management of one or more properties in a retendering situation. This is because the change of responsibility for the property management services is likely to amount to a service provision change and, in many cases, a transfer of an undertaking. In particular, TUPE is likely to be relevant when: bb a client first appoints a property manager, having previously managed properties in-house bb a client terminates the contract with a property manager with a view to managing the property or properties themselves bb the property manager subcontracts all or part of their obligations under the property management contract, or terminates any subcontract arrangement bb the property manager contracts with facilities management providers for the relevant properties, albeit in this scenario they should not inherit any liabilities under TUPE because they are simply dealing with TUPE issues as agent for the owner. Recent case law has also looked at when TUPE, particularly the service provision change test, may not apply; therefore property managers should have a clear understanding in advance of any property transactions. Recent case law Introduction of the service provision change test in 2006 was intended to clarify when TUPE applied. However, T UPE provides protection to employees when there is a ‘relevant transfer’. A relevant transfer takes place where (a) a business or undertaking or part of one is transferred or (b) where there is a service provision change. In the case of (a), the economic entity must retain its identity after the transfer. In the case of (b), a service provision change occurs when: bb activities cease to be carried out by an organisation on its own behalf and a contractor is engaged to carry out the services (contracting out or outsourcing) bb a contract is reassigned to another contractor (second generation contracting or outsourcing) bb an organisation brings the activities back in-house (contracting in or in-sourcing). TUPE only transfers the employment of employees who are ‘assigned’ to the transferring services (e.g. property management services) immediately before the transfer. While there is no legal definition of assignment, case law suggests that employees should spend the majority of their time on the services, or have the services as the majority of their responsibility, in order to be assigned. Practically, in the case of property management contracts, any employees based on site will usually be assigned to managing it. For head office staff, further analysis will be needed to determine whether or not they are assigned to the transferring property management services for the purposes of TUPE. It does not generally apply to casual or agency staff or to self-employed contractors. Service provision changes If TUPE applies to a change in property management services, employees who are assigned to the transferring services immediately before the transfer automatically become the employees of the new property manager. The new property manager must step into the shoes of the old one and employ the employees on the same terms and conditions they enjoyed before the transfer, save for a limited number of exceptions. Under the current TUPE legislation, terms and conditions may only be varied where the variation is unconnected with the transfer or, where the variation is connected with the transfer it is made for an economic, technical or organisational reason entailing changes in the workforce (ETO reason). The new property manager also inherits all liabilities that arise under or in connection with the transferring employees’ employment contracts, which is potentially very costly. For this reason, any property manager that may become responsible for transferring employees should carry out as much due diligence as possible before any potential TUPE transfer. This will help to gauge what indemnity protection to ask for in the tender process. It is generally unwise to rely on the provisions of TUPE to obtain information because employee liability information (ELI) only has to be provided 14 days before the transfer. That is far too late in the day for any company to make a commercial decision on whether or not to proceed with any transaction. The information that has to be included in ELI is also too limited, e.g. it does not include information about enhanced redundancy rights. Jane Fielding explains the working of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and why they might become more ambiguous for property managers in the future
  • J u ne /J u ly 2 0 1 3   2 1 Jane Fielding is a Partner and Head of the Employment Team at Wragge & Co Commercial TUPE Related competencies include TO48, T070 Thenewproperty managermust employthe employeesonthe sametermsand conditionsthey enjoyedbefore thetransfer “ recent cases have instead muddied the waters, finding that a service provision change will not occur when: bb the services are not fundamentally or essentially the same before and after the transfer bb the services become fragmented after the transfer (an example in the property management context might be where a large property portfolio is broken up) bb there is a fundamental difference in ‘ethos’ between the services pre- and post-transfer (less likely to be relevant in the context of property management) bb employees undertaking the services are not sufficiently organised in delivering the service to the property owner to constitute an ‘organised grouping’. One case that has attracted a good deal of attention is McCarrick v Hunter. The Court of Appeal found that a service provision change does not occur in circumstances where a change in service provider (in the case, a property manager) occurs at the same time as a change in client. When a property is sold and a new manager appointed by the new owner at the same time, TUPE will therefore only apply if there is a transfer of a business or an undertaking. The facts of the case are complex but can be summarised as follows: bb Mr McCarrick worked for a property management company (PM1). In 2009, a winding up petition was lodged against PM1. On the same day, a contract was signed to transfer control of PM1 to a second property management company (PM2). McCarrick’s employment transferred to PM2. bb The mortgagee of the properties now managed by PM2 appointed LPA receivers to take control of the properties, who at the same time appointed a third property management company (PM3). (At this point, the mortgagee and/or the receivers became the client for whom the property management services were performed.) bb Mr Hunter, managing director of PM1, wanted to maintain good relations with the mortgagee and the owner of PM2. As a result, at the point PM3 was appointed, he began paying McCarrick to continue assisting with the management of the properties. This was at no cost to the LPA receivers. bb When, in 2010, McCarrick was dismissed, he brought a claim against Hunter for unfair dismissal alleging that his employment had transferred to him. The Court of Appeal dismissed his case on the basis that there could not be a service provision change where the client also changed. While the facts of the case are perhaps unusual, it is relevant to commercial property transactions where ownership and management of a property changes at the same time. Where this occurs, the court is likely to adopt a restrictive approach and determine that there is no service provision change for the purposes of TUPE. The only other case to consider this point, Taurus Group Ltd v Crofts, followed the Employment Appeal Tribunal’s decision in McCarrick. Property managers must therefore plan for the possibility that they may be liable for any redundancies if they lose a contract and are unable to continue employing certain employees, unless there is a business transfer or they have some contractual protection against redundancy liabilities on exit from the contract. Potential changes The government has been consulting about proposed changes to the existing TUPE legislation. These changes include: bb repealing the provision that introduced service provision changes bb repealing the specific requirements regarding the provision of employee liability information bb relaxing the restrictions on changing terms and conditions of employment post transfer and protection against dismissal so that the current domestic legislation more closely reflects the Acquired Rights Directive (the European Directive that TUPE implements) bb broadening the meaning of the ETO defence to cover changes in the location of the workforce bb ensuring that consultations on collective redundancies with staff who are due to transfer count for the purpose of collective redundancy consultation. The proposed changes aim to reduce the burden on employers faced with a TUPE situation. However, the relative stability of knowing that TUPE will apply in most cases of a change of property manager may be removed, meaning that employers will once again have to grapple with domestic and EU case law to determine whether or not TUPE applies. Check the terms When read together with the case of McCarrick, the proposed changes do make the TUPE picture less clear, at least until the outcome of consultation is determined*. Existing property managers should check their standard terms to see what protection they have in the event that TUPE does not apply on exit from a contract. It may be that, depending on the circumstances, and particularly if McCarrick applies, they will not be able to pass their existing workforces onto any new property manager if they lose a contract. They will instead face redundancy liabilities if they are unable to redeploy staff onto other work. As a result, pre-contract negotiations will become increasingly important and potentially lengthier. Although there is a logic to the McCarrick decision on one level, it does appear to give scope to avoid the service provision change provisions applying simply by the timing of a decision on when to appoint a new property manager. However, clients who prefer to have continuity of site staff, for example, may want the provisions to apply. For now though, it is a case of watch this space. C *At the time of writing, consultation on the proposed changes to TUPE was continuing but due to close on 11 April. The outcome was therefore unknown. More information > The RICS information paper TUPE: Information for property managers is available at
  • RICS property JOURNAL 2 2   J u ne /J u ly 2 0 1 3 C Jim Ware and Paul Carder look at how facilities managers can play a greater strategic role in business Raising the bar CoMMERCIAL facilities management We rarely see organisations map out a cause-and-effect chain to guide FM strategy, which is why heads of FM are so often told to cut (or freeze) their budgets without reference to the causal chain of consequences to the workforce, to work processes and productivity and to the bottom line. Without understanding the consequences of these budget cuts, FM has all too often become a commodity rather than a professional skill in many organisations, to be maintained at lowest cost. Worse still, the FM industry does not yet have the sophistication to be able to analyse and report on the consequences of lowered standards and reduced (or lower-cost) resources. T here have been many assertions over the years that facilities management (FM) should be more strategic. Recent research provides evidence that indeed it can and should play a strategic role in enterprise, but the level of influence in any particular organisation depends entirely on the actions taken by senior FM executives. To be effective, FM leaders must change their behaviours and their very identity. We believe strongly that FM is no longer just about managing facilities per se; rather, it is about enabling the workforce to be productive and engaged and to produce value for the organisation. In our view, and in the view of leading FM executives, today’s workplace is nothing less than a tool for supporting work, for shaping the experiences of the workforce, and for producing competitive advantage. Our perspectives are based largely on a survey completed by almost 400 FM professionals across six continents in summer 2012. The research focused specifically on how FM is currently organised, governed and measured, as well as on how FM professionals interact with their peers in other infrastructure disciplines. Our understanding of the issues was enriched by direct conversations with almost three dozen senior FM and corporate real estate (CRE) executives in the US, the UK, Australia, and Hong Kong, as well as with thought leaders from academia and international professional associations. It is clear to us that to be effective and to serve an organisation’s real estate and business needs, FM leaders must work on a number of multidisciplinary relationships within it. They must focus on gaining the buy-in needed to provide coordinated workforce support from all the infrastructure functions. The overarching goal must be to achieve a deep common understanding of the strategic imperatives of the organisation as a whole. What stands in the way? In our experience, the ‘Head of FM’ – a generic title for the senior functional executives ultimately responsible for facilities, corporate real estate and workplace – is often poorly led from above. Not nearly enough thought goes into considering business strategy and how to translate it into tangible targets and actions for facilities operations. Becoming strategic To have a strategic impact, an activity or capability must differentiate the business from its competitors. It is worth noting that in some industries (retailing comes immediately to mind) the facilities are absolutely central to brand strategy and to generating business revenue. In a 1996 Harvard Business Review article ‘What is Strategy?’1 Harvard Business School Professor Michael Porter identified three basic principles: bb strategy is the creation of a unique and valuable position, involving a different set of activities [from competitors] bb strategy requires you to make trade-offs in competing—to choose what not to do
  • J u ne /J u ly 2 0 1 3   2 3 Commercial facilities management Jim Ware and Paul Carder are Directors of Occupiers Journal bb strategy involves creating ‘fit’ among a company’s activities. Operations, including facilities, can clearly help an organisation to be competitive in the marketplace. But the key idea is differentiation. It is not enough just to have lower-cost facilities than your competition. The questions that must be asked relate to how well your facilities/ workplace strategy contributes to your business strategy. Is FM aligned with the requirements of your business units, in the locations where you need to be? Do your facilities support your talent recruiting and management strategies? Are the workplace designs consistent with the business technology needs and strategy? Does the facilities cost structure support the company’s financial strategy and cash flow requirements? Perhaps even more importantly, facilities managers have to ask themselves this very basic question: “What is the facilities function doing to strengthen the company’s strategic positioning with customers, with employees (and prospective employees), and with the communities where we are located or want to do business?” Summary of findings The 2012 global survey compiled responses from FM professionals in over 40 different countries. It revealed that: bb facilities are increasingly being recognised as a strategic resource bb FM has had mixed success in achieving strategic alignment with other elements of business bb large, global organisations face dramatically different challenges to those of smaller, more local businesses – and they manage their facilities very differently bb financial metrics and cost control continue to dominate FM bb heads of facilities are still buried in day-to-day operational concerns bb FM career paths are undergoing significant change, and the FM profession faces a potentially serious future talent shortage. Recommendations for action Think strategically It may sound simplistic, but thinking strategically means focusing on competitive advantage, as suggested above. And when heads of facilities focus on helping their companies establish competitive advantage, they are paying attention to – and even helping to shape – business strategy. Thus, our first recommendation for action is that heads of facilities develop a deep understanding of the business they are supporting, its customers and its competitors. In addition, strategic thinking includes understanding how to develop financial models, how to build and analyse alternative future scenarios, how to see ‘over the horizon’, and how to link causes and consequences in areas as diverse as HR, IT, finance, operations and even marketing and procurement. Act strategically Strategic action begins with strategic thinking, but thinking is only the first step. When heads of FM behave strategically, they are spending more time on the future than on the present—and they are focusing their staff’s attention on business issues. An effective head of FM develops and applies measures of FM’s impact not only on the bottom line (which of course can be very strategic), but also on performance outcomes such as attracting and retaining talent, staff productivity, the ‘triple bottom line’2 , community recognition, and even broader metrics such as brand recognition, market share and net profit. Rebuild the FM role The heads of FM must also take several basic, short-term actions that serve to free up their time to focus on the core strategic issues. First among these is to develop a strong layer of operational management within the existing corporate FM organisation. Recruit subordinates with strong FM and management experience; be willing to bring in strong managers even if their FM-specific experience is weak or non-existent. The in-house (occupier) team in an outsourced FM model requires business and management competencies more than technical skills. Outsource activities We believe that the best pathway for making FM more strategic is to outsource as much of the operational, routine work Related competencies include T019, T079 to third-party service providers as possible. Spending less time ‘firefighting’ will free up in-house resources and allow heads of FM and their immediate staff to focus much more on long-term planning and strategic challenges (both FM-related and business-focused). Among the organisations we interviewed, those that were clearly operating more strategically (and were recognised as a strategic resource by their senior business executives) had outsourced far more of their operational activities than those in which FM was struggling to get resources and recognition. Ask for support One of the most critical activities for heads of FM is to educate their senior business executives and functional colleagues about how to work with FM. FM is most successful when business leaders know how to define their requirements, how to establish performance goals beyond simple financial measures, how to assess outcomes and how to plan ahead to ensure that their facilities do in fact help to create strategic advantage. Effective heads of FM do not buffer their business counterparts from the details of FM; just the opposite. They take every opportunity to help their clients to understand the strategic role of facilities and ensure that facilities and workplace design issues are part of every strategic conversation. C This is a summary of the full report Raising the bar: Enhancing the strategic role of facilities management, published by RICS on 1 November 2012 More information > 1 Porter, M (1996) ‘What is Strategy?’ Harvard Business Review, November- December, reprint #96608, p.1. Available from 2 The ‘triple bottom line’ was first defined in 1994 by British consultant John Elkington. It refers to measuring organisational performance along three complementary dimensions: ‘people, profit, and planet’. See ‘Triple Bottom Line’, The Economist, 17 November 2009 (, for a more complete discussion of this important concept
  • RiCs pRopeRty JouRnal 2 4 J u N E /J u Ly 2 0 1 3 C COMMERCiAL liCenCes to alteR David Gardiner looks at a contentious area in landlord and tenant relationships – the granting of licences for alterations – and reports on how new guidelines can help avoid problems for both sides Changes for the better T he scenarios can be very different but ultimately the situation is the same: a tenant wants to make an alteration at their property and needs the landlord’s consent to do so. Alterations can be anything from a multinational investment bank wanting to repurpose a trading floor in a Grade A office building to a one-man band wanting to put a mezzanine floor into a warehouse or a retailer changing the signage on the front of a shop. All of these works will invariably be covered by provisions in the occupational lease that require the tenant to get the landlord’s consent before works begin. A question of timing In the 2012 Property Industry Alliance Occupier Satisfaction Survey, the satisfaction score for the application for consents process, which encompasses licences for alterations, was 4.7 out of 10 – one of the lowest ratings across the survey and below the overall satisfaction rating of 5.1. It is perhaps timing that is at the heart of most aggravation caused by the application for and granting of licences for alterations. By definition, a tenant would not be proposing the works if they were not intrinsically business critical – the altered workplace would deliver improved operational efficiency or value. A landlord, however, does not want changes made that could compromise the fabric of their property and possibly have a negative impact on its future operation and value. In business situations, where one party wants to proceed with haste and the other needs to evaluate circumstances with careful consideration, it is always going to be hard to reconcile the needs of both. Generally, larger and more sophisticated occupiers, particularly those with their own estates departments, will be well aware of the procedure to obtain a licence for alterations. However, this group does not represent the majority of business tenants and, unfortunately, the natural inclination of some is to progress with works and cross the bridge of necessary consents when they come to it. Sometimes this error springs from ignorance rather than an intention to evade the process. A not inconsiderable proportion of tenants think that because they have signed up to the rigours of a full repairing and insuring lease and are paying the rent, then the space is theirs to do with as they see fit. Retrospectively unpicking a situation where the necessary licence has not been obtained can be very bad news for both sides. Not only may the work have to be reversed, it is likely that remedying the situation will incur more professional fees than a simple grant of a licence would have done at the outset. New guidance To address the growing level of conflict in this area of landlord-tenant relationships, RICS set up a working party to create a new set of guidelines to assist both sides. The result is the Licence for alterations in commercial property guidance note, published in January. It provides a comprehensive guide to best practice in dealing with applications. As with all RICS guidance notes, surveyors following the advice will benefit not only from the process running more smoothly, but they will also lessen the risk of potential negligence claims. When an allegation of professional negligence is made against a surveyor, a court or tribunal may take account of the contents of any relevant guidance notes published by RICS in their decision. In the opinion of RICS, a member conforming to the practices recommended in a guidance note should have at least a partial defence. It is for each surveyor to decide on the appropriate procedure to follow in any professional task. However, where members do not comply with the practice recommended in a note, they should do so only for a good reason. What does it cover? The alterations guidance note is most relevant to surveyors dealing with tenant applications at office and industrial properties in England and Wales. While it is also applicable to retail premises, a more detailed sector-specific process can be found in the Guide to retail delivery, which is published by the British Council for Shopping Centres. As illustrated in the flow chart (see right), the guidance covers the whole licence process from the tenant making an application through to the final inspection of the completed works at the property. The response from a landlord or their management surveyor will be driven by the nature of the works proposed by the tenant: an application to undertake major alterations at a property is likely to require far greater consideration, including specialist advice. Conversely, a simple application may be dealt with swiftly and with minimal effort. It is good practice for the surveyor involved to re-read the lease to ensure they are comfortable that the proposed works are permitted and that a formal licence is, or is not, required. Additional issues to consider include whether the proposed works fall fully or partly outside a tenant’s demise. An example of this potential grey area would be where plant is to be installed on a retained roof area. It is also important to cover how the proposed works will be assessed and
  • J u ne /J u ly 2 0 1 3   2 5 Commercial LIcences to alter David Gardiner is a Director of Property and Asset Management at Jones Lang LaSalle approved. Depending on the knowledge and expertise of the landlord’s surveyor, it may be necessary to consider consulting third-party experts such as a structural engineer, building surveyor or mechanical and electrical engineer. In these circumstances, the tenant should be advised as early as possible in the application process and required to provide an undertaking for the relevant third-party costs. Landlord benefits While it is quite clear what the tenant will gain from proposed alterations, the landlord’s interests must also be evaluated. On the face of it, alterations may just seem an additional hassle for a landlord, but they can provide an opportunity for an enhancement in rental income and the capital value of the property. It is common for the improvements to be excluded as a material consideration at the time of rent review or lease renewal even though they may have clearly increased the potential future rental value of the property. If this is the case, a landlord should consider whether to exercise the option given by section 3 of the Landlord and Tenant Act 1927 to finance the work in return for an additional rent. It’s good to talk Communication is of crucial importance. The tenant or their representative should make the surveyor aware of the desire to make alterations in good time, ideally at least six to eight weeks before the project’s proposed start date or a longer lead-in time for major alterations. A landlord or their agents should provide progress updates to a tenant during the processing of an application. However, this chain of events presupposes that the tenant is aware of the need to apply for permission before carrying out alterations. Landlords can protect themselves from unlicensed alterations by ensuring that occupiers are periodically made aware of their obligations as part of regular communications. It is far better to over-communicate than otherwise. Keep it simple It would be completely disproportionate to apply the same rigour and detailed process to all types and scales of alterations. Most proposed alterations are relatively minor and permission can be granted using a number of methods. A growing number of landlords are now developing ‘letter licence’ consents that can be used to document minor works. The most appropriate form to use will depend on the client’s preference and the circumstances – the more conditions or obligations required, the less likely it is that a simple form will be sufficient. Whatever form is ultimately used, it is important to check that the licence documents contain the necessary level of information and detail with plans showing existing and approved alteration layouts. This will also help the reinstatement process when the tenant exits the property at the end of the lease term. Don’t ignore the situation The challenge for the landlord and their managing agent is to develop a mechanism for the granting of licences that is responsive, timely and proportionate. If a landlord is not responsive to a tenant’s application for a licence they can be taken to court, where a declaration can be obtained stating that the landlord is being unreasonable and that the works may proceed. Even if the tenant does not take the matter to court, it is likely that they will just proceed with the works, so it is clear that ignoring the situation or dragging their feet are not options for landlords. However, by following the procedures laid out in the new guidance notes and communicating with tenants about their obligations there is no reason why the alterations process should not run smoothly. C More information > The Licence for alterations in commercial property guidance note is available to download at Related competencies include TO48, T070 Licence process Tenant application Factors to consider Third party input Response Documenting Final inspection
  • RICS property JOURNAL 2 6   J u ne /J u ly 2 0 1 3 C Babette Märzheuser-Wood explains the pitfalls and potential of a franchise model to fire overseas expansion Extending hospitality CoMMERCIAL Franchising H otel and restaurant operators often receive enquiries from customers who admire their brand and wish to apply for permission to open a duplicate business in their country – known as a franchise. It can be a great opportunity, but there are associated risks that must be weighed against the potential upsides. These fall into four broad categories: bb reputational risk bb financial risk bb risk to brand integrity bb legal risk. The law Franchise laws are in force in more than 40 countries, ranging from disclosure and registration requirements to laws that expose would-be franchisors to potential liability for damage caused to customers by the franchisee. In the US, for example, the sale of franchises is treated like the sale of securities and severe penalties can be imposed on companies that break these laws. But in the UK or countries in the Middle East, the position is more benign. All that is needed is a good-quality franchise agreement that covers all the legal and commercial angles. Proper registration of your trademarks in your target markets is another key legal requirement. To grant a franchise in a country where you do not have a registered trademark can create a threat for the longevity of your business. The franchisee could walk away with your intellectual property and knowhow free of charge and you may not be able to do anything to stop them. If you are seriously considering a franchise, you will need to invest in a number of preparatory steps to ensure that you do not fall foul of franchise laws. First, you should register your trademarks in your target countries. As this can be expensive, you should priortise key markets. Next, you need to put in place detailed documentation. This comprises: bb an operating manual bb a prospectus and disclosure document bb a franchise agreement. Finally, you need to consider how you will train, support and supervise the franchisee, an aspect that is often underestimated. In addition to hands-on training in one of your facilities, you will need to have a dedicated member of staff to answer questions and make regular visits to the franchisee(s). The value proposition Companies ask us: “Can I franchise my business model?” More often than not, the answer is yes. However, these companies need to ask a second crucial question: “Can I franchise my business profitably?” To work, the franchisor needs to create value for both themself and the franchisee – the ‘value proposition’. The margins need to be such that after payment of franchise fees the franchisee can still make a meaningful profit. Domino’s Pizza is a good example – the UK franchisor is listed on the London Stock Exchange. At the same time many Domino’s franchisees are reportedly millionaires in their own right. In conclusion, to franchise your business successfully the operating profit generated by your business needs to be sufficient to feed two mouths. Fees need to be generated for the franchisor and profits for the franchisee. If you feel that your brand has what it takes to create a successful franchise, these are the steps you should follow to take matters forward: bb register your trademarks bb financial modelling to create the value proposition bb franchise agreement prepared by specialist franchise lawyers bb devise and document a training programme and operational manual. Do not give the game away Once you have put together your model, you will be eager to meet prospective franchisees. At this point, it is tempting to explain the secrets of your success in order to persuade them to join forces with you. Unfortunately, there are individuals who will use such an opportunity to gain access to as many of your trade secrets as you are willing to divulge without committing to the franchise. There is a risk that they will simply copy your ideas. To protect yourself from this form of idea theft, it is important to insist that would-be franchisees sign a confidentiality and commitment agreement before any meaningful information is disclosed. You may also wish to ask for a small deposit or commitment fee. Conclusion Franchising presents a real opportunity for hospitality businesses that wish to achieve fast global growth. With careful preparation, expert advice and a viable financial model, franchising can be a good business opportunity. C Related competencies include TO87, M002 Babette Märzheuser-Wood is a Partner at Field Fisher Waterhouse, Europe’s leading franchise law firm. She specialises in advising hospitality businesses “Can I franchise my business profitably?”
  • RICS Property JOURNAL J u ne /J u ly 2 0 1 3   2 7 C TAXING TIMES Commercial Taxing Times Wynne Thomas is Partner at Penningtons Solicitors LLP wynne.thomas@ Wynne Thomas explains how a two-bedroom flat can be a ‘mansion’ T here has been much talk recently about a mansion tax on properties valued at over £2m. UK government has resisted this proposal, partly because of the task of valuing the estimated 70,000 properties that fall into this category. It has, however, taken steps to tax certain high-value properties owned by wealthy overseas individuals through offshore companies. On a sale the vendor would sell the shares in the offshore company to the purchaser who would then have control of the property, but because there was no transfer of the property title, stamp duty land tax (SDLT) was not payable. What this overlooks is that clients would be wary about buying a company that might have inherent liabilities and most purchasers insisted on taking the property and paying the SDLT. For most non-domiciled individuals the structure was used as a means of avoiding inheritance tax and not SDLT, and also for reasons of confidentiality. De-enveloping HM Revenue and Customs’ (HMRC) attack has introduced the concept of de-enveloping, taking properties out of corporate structures. A new tax, originally known as the annual residential property tax but renamed in the 2013 Budget as the annual tax on enveloped dwellings (ATED) has been introduced on properties valued over £2m, and amendments have been made to SDLT and capital gains tax (CGT). ATED will potentially require many properties to be valued. At the time of writing in March 2013, there was still no final draft legislation. However, the broad thrust of the rules is clear and HMRC is already writing to addresses owned by companies informing them of their potential reporting obligations. Who will be caught? Originally there were a number of mismatches between the persons to which each provision would apply, but HMRC has simplified the definitions so that: bb companies owning property used for residential occupation are within the rules – for SDLT and ATED this includes both UK and offshore companies bb companies that own properties for commercial purposes, such as residential letting are not caught bb companies owning properties for development are not caught bb properties owned directly by trustees are not caught even if the trustee is itself a company bb the taxability of properties owned by nominees will depend on the status of the beneficial owner bb properties held by partnerships will be caught if one of the partners is a company. So what are the changes? SDLT The general rate of SDLT on properties over £2m was increased to 7% from 21 March 2012. If the property is acquired by a company the rate applicable will be 15% – this is the disincentive to setting up new avoidance structures. Even though certain categories of properties have since been removed from the 15% rate, there are no proposals to reimburse purchasers who already paid at the higher rate. ATED This new tax applies since 1 April. A property used for residential purposes owned by a company will now be liable for an annual charge of £15,000 in the £2m-£5m range; £35,000 for the £5m- £10m band; £70,000 for the £10m-£20m band and £140,000 for £20m+. This will increase with the consumer price index. The applicable value of the property will be as at 1 April 2012, updated every five years. The tax will be payable under self-certification of the value. HMRC has power to query the value declared, with penalties where this is found to be an under-declaration. Where a property is within 10% of any particular band, HMRC has a process in place to agree the value. The first returns are due by 1 October and payment by 31 October. For many clients it will be sensible to obtain a valuation from a professional that can be used in support of any query by HMRC – particularly if the value is close to the next band. The returns require ownership information and for a number of clients confidentiality will be an issue. Capital gains tax Offshore companies are not subject to CGT on the disposal of assets situated in the UK (although anti-avoidance removes any advantage for individuals resident and domiciled in the UK). CGT is now charged on the gain realised on the sale of a property by an offshore company (unlike the SDLT and ATED charges this does not apply to UK companies) that is subject to ATED – the gain is that arising since 1 April. This throws up a tension between a low value for ATED purposes, and a high value for the CGT base cost. Given that property prices in prime central London have been rising at over 10% a year, there may be some scope for a reasonable differential between the April 2012 figure for ATED and 2013 figure for CGT. Action There has been much talk of restructuring current arrangements by transferring direct ownership of properties to individuals or trustees, but there can be significant inheritance tax and CGT drawbacks of such reorganisations, and given the short time-scale between the finalisation of the rules by HMRC and their coming into force, many clients have decided to defer any decision, pay the ATED for 2013, and take appropriate steps when the precise terms of the legislation are known. And if you have an offshore company that pays its ATED, you can still sell its shares without paying SDLT. C
  • Your own Account Manager – looking after you from start to finish As soon as you get in touch, you’ll be assigned a personal Account Manager who’ll do a free survey of your block(s) and follow up with a free estimate. They’ll offer expert advice and support throughout the process – so your installation will be as hassle free as possible. Great subsidies available with our Shared Dish Finding a cost-effective Communal TV Solution for your blocks has just got easier No matter how big your portfolio, our Specialist Installation Team can find the best Communal TV Solution – and install either our Shared Dish or Integrated Reception System (IRS) in all your blocks, at the same time. What’s more, great subsidies are available on our Shared Dish solution. To learn more about how we can provide the right Communal TV Solution for your blocks, simply get in touch with us today. We’ll get the process started with a free, no-obligation, estimate and free survey. You can now get Communal TV Solutions for your entire portfolio of flats Benefits of a Shared Dish: One dish can supply Sky TV to an entire block Fantastic subsidies available We’ll talk to your residents for you No need for individual minidishes – and we’ll remove any existing dishes as part of the service Benefits of our IRS: Platform-neutral so residents can choose their TV provider – Sky, Freeview or freesat from BBC/ITV Discreet installation, quality guaranteed by Sky CCTV option for added building security A survey will take five working days between booking and completion dates. Shared Dish Subsidy: Only available on a Shared Dish system. The value of the subsidy given will depend on how many residents in your block register for a Shared Dish. IRS: The IRS maintenance and warranty will expire on the one year anniversary of the transfer of the title in the equipment to you. If the system is leased, 5, 10 or 15 year options are available depending on the terms of the lease. Sky TV: Sky TV subscription required for Sky digital programming. Packages £21.50 – £55.50 per month (pm). Sky box and set-up costs may apply. Two satellite feeds required for full Sky± functionality. General: Sky±HD box must be connected to a fixed telephone line for 12 months. Minimum Sky TV, Sky±, Sky±HD subscriptions are 12 months. Further terms apply. Sky±HD box prices may vary in flats. Information only applies to residential customers in the UK, Channel Islands and Isle of Man. Lines will be open 9am – 5pm, Monday to Friday. Calls cost 5.1p per minute (plus 13.1p connection fee) for BT customers. Calls from other providers may vary. Information correct as at 25 July 2012. For a free survey and free estimate go to to register or call 08442 411 678 Believe in better Don’t miss out – register today
  • R E S I D E N T I A L R den tial resi RICS PROPERTY JOURNAL j u ne /j u ly 2 0 1 3   2 9
  • T he focus of this second article on regulatory issues commonly encountered during Condition Reports, HomeBuyer Reports and Building Surveys turns to repairs and improvements to residential domestic dwellings (see Property Journal April/May for the first article on loft conversions). Here, we review the relationship between building repairs and building control, identifing the type of work to which the Regulations are most likely to apply and how to report these matters to the client. Asking about repairs It is good practice to ask the current owners, occupiers and/or their agents about previous repair work and this is an important part of the assessment process. Typical questions include: b have you carried out any structural repairs (for example, underpinning or strengthening work)? b what property improvements have you carried out (for example, new bathroom, kitchen or roof window, energy improvements and so on)? b have there been any structural alterations or additions (for example, removing a partition)? b did you redecorate or renew any of the finishes? Assessing the adequacy of these repairs and improvements will be difficult but the existence of Building Regulation approval together with a completion certificate may give you and your client a level of reassurance. But to which of these activities do the Building Regulations apply? Listed here are the ones you will commonly encounter. It is important to note, however, that although the Building Regulations apply to England, building control authorities may interpret them differently. Scotland and Northern Ireland have different building control systems, where many of the provisions will be similar but not necessarily the same. Since 31 December 2011, the Welsh Government has had the power to make its own Building Regulations. This means that over time the Wales Building Regulations will also be different to those in England. New porch and/or conservatory Normally these will be exempt from the requirements as long as they are less than 30m2 in floor area, there is separation between the existing dwelling and the new space and any glazing meets the requirements of Part N (now subsumed into Part K). Any new separating construction must meet the relevant energy efficiency requirements. Keep an eye out for heating systems that extend into these spaces from the main dwelling. Since 1 October 2010, such spaces are no longer exempt from the energy-efficiency requirements. nSee Part L1B, 4.8, page 12 Windows and doors Since April 2002, the replacement of doors and windows has required Building Regulations approval. Alternatively, a contractor registered under the government’s ‘competent person scheme’ should have installed them. Here are a few useful pointers: b sometimes the date of manufacture is printed on the inside of the edge seal of the double-glazed units b window repairs do not require approval – for example, replacing a broken pane of glass, a failed sealed unit, or a rotten opening casement to a timber window b an external door with frame is the ‘controlled fitting’ so a door-only replacement is not covered by the regulations. nSee Part L1B, 4.17, page 14 FENSA is not the only competent person scheme. The government’s website lists BM TRADA, Benchmark, BSI, CERTASS, NAPIT, Network VEKA, and Stroma. See 1 IMAgES©pHilpaRnHam/stuaRtsmitH RiCs pRopeRty JouRnal 3 0 J u N E /J u Ly 2 0 1 3 R In the second of their technical briefing notes, Phil Parnham and Stuart Smith look in detail at property repairs and the Building Regulations Keeping up with repair rules RESiDENTiAL teCHniCal BRieFing notes
  • Thermal elements Renovation has been controlled since October 2010 and covers floors, roofs and walls. For example, when defective render is stripped off a wall to expose the masonry, the repair will often have to include some form of thermal insulation. Flat and pitched roofs are more typical where the re-covering specification should include insulation. However, in practice it is rare to find this has been done. If you note this type of repair, you must raise the issue and give measured advice. This has important implications for the Green Deal, where we can expect to find increasing numbers of thermally improved dwellings. n See Part L1B, 5.7, page 17 Fittings New sinks, washbasins, toilets, bidets, baths and shower enclosures are all considered ‘controlled fittings’ under the Regulations and approval may be needed if these are ‘materially altered’ or are new. Strictly speaking, this could even include the drainage from a new dishwasher or washing machine. The main thing to look for is whether the appliance connects satisfactorily into the foul or combined drainage system and has appropriate traps. Replacement of existing appliances or fittings (like-for-like) would not normally require approval. n See Part H of the Building Regulations Heating appliances Provision or replacement of heat-producing appliances, including bringing redundant chimneys back into use, are controlled under Part J. Electrical heating appliances are controlled by Part P if they are a fixed installation. Electrical alterations Part P controls electrical alterations if they are in special locations such as kitchens, bathrooms and outside areas. This includes electrical installations in sheds, garages and greenhouses. Repair and replacement work is not normally notifiable where no new wiring is required. The exception is the replacement of the consumer unit, which is always notifiable work. From April 2013, the scope of notifiable work is reduced, so for example kitchens will be treated no differently than other normal locations. Structural works Building work that affects the structural integrity of a building will be notifiable. Examples include: b taking out an internal partition to form a through lounge b removing a chimney breast and leaving an upper part in position b installing a new window or door opening b re-covering a pitched roof with a heavier or lighter covering n See Part A, section 4, page 38 Reporting to clients you are the eyes and ears of the client’s legal adviser and so you should be specific about the repairs and alterations to which Building Regulations may apply. you should typically include the following information: b the nature, extent and location of the work b clearly recommend the matter should be referred to the client’s legal adviser and the matter resolved before legal commitment to a purchase b outline the implications of the work not having the necessary approval under the Building Regulations. This last point is very important. In most residential transactions, the answers to these enquiries will not come through until late in the sale process when time is tight and nerves are strained. To help clients come to a measured decision earlier in the transaction, it is important to provide an explanation of the regularisation process where building control approval does not exist. This should include the disruption (for example, digging holes, taking up floor coverings) and the cost. R More information > This short article highlights the general issue of repairs and their relationship to the Building Regulations and identifies some common examples. However, it cannot cover the full details of this rapidly changing topic. Consequently, you should add depth and breadth to your knowledge by reviewing the following information sources: The government’s Planning Portal is the most important sources of information and has a list of ‘common projects’ you will encounter during your inspections (www. permission) Your local building control authority. Most council websites will have a building control section and a number of these may outline how that authority interprets the Building Regulations in that area m1Structural opening This wall between the dining room and kitchen has been removed as part of a refurbishment scheme. Although the building control officer had visited and approved the work, it must still have a final completion certificate k2 New render The cement-based coating of this listed building has been removed and lime-based render is about to be applied. do its thermal properties need to be upgraded? Although historic buildings can be exempt from some provisions, this presents a trail of enquiry that must be highlighted k3 New fire Multi-fuel room heaters are fashionable but do they meet the requirements of part J? has a ‘competent person’ installed this? Is the property in a smoke control area? If not, your client could be at risk from an unapproved heater 2 3 Related competencies include TO06, T039, T083 J u N E /J u Ly 2 0 1 3 3 1 RESiDENTiAL teCHniCal BRieFing notes Phil Parnham mRiCs is a Chartered Building surveyor and a director of BlueBox partners; Stuart Smith mRiCs is a Chartered Building Control surveyor and Head of Recruitment in the Faculty of development and society at sheffield Hallam university phil.parnham@
  • After nearly six years of tenancy deposit protection, the share of disputed deposits awarded to agents and landlords has steadily increased as knowledge of the law and the scheme improves. However, there are still many landlords who lose sight of their tenants’ obligations and misunderstand what the tenants’ deposits can be used for. Betterment A common mistake made by landlords and letting agents is to view the deposit in the same way as insurance cover, looking to claim the full replacement value of an item on a ‘new for old’ basis. Landlords cannot use the tenant’s deposit to put themselves in a better position either financially or materially. To do so is called ‘betterment’, and not being aware of betterment often leads landlords to assume that they are entitled to more money from their tenant’s deposit than they really are. Consideration of betterment most commonly arises in disputes over damage to the property or its contents. Disputes over damage appeared in 45% of Tenancy Deposit Scheme (TDS) adjudications last year, making this the second biggest issue after cleaning. Money awarded to a landlord from a deposit is intended to compensate for their loss. When deciding how much to award for damage, an adjudicator has several factors to take into consideration: fair wear and tear, the most appropriate remedy, and whether the amount the landlord is claiming would make them better off than if the damage had not occurred. Nearly all items will depreciate in condition and value over time and that is no different where a tenancy is involved. So damaged or not, the likely outcome for any landlord who claims the full cost of replacing a damaged item is that they will receive less than they hoped for. Assessing fair wear and tear ‘Fair wear and tear’ is defined as the ”reasonable use of the premises by the tenant and the ordinary operation of natural forces”. Unlike many commercial leases, which require tenants RICS property JOURNAL 3 2   J u ne /J u ly 2 0 1 3 R A Deducting deposits fairly Residential Landlord & Tenant The Tenancy Deposit Scheme resolves more than 10,000 disputes every year between landlords and tenants who disagree on how deposits should be apportioned when tenancies end, writes Chris Kendall k  Nearly all items will depreciate in condition and value over time
  • to return properties in exactly the same condition as they were found, tenants of most residential lettings do not have to pay for fair wear and tear. To assess fair wear and tear, adjudicators use the evidence they have been given and apply the following factors: bb the age, quality and condition of the item at the start of the tenancy bb the average useful lifespan to value ratio (depreciation) of the item bb the reasonable expected usage of such an item bb the number and type of occupants in the property bb the length of the tenants’ occupancy. What is considered fair wear and tear is different for every tenancy. A landlord letting a house for several years to a family with children must expect carpets to wear out more quickly and to a greater extent than a single person renting a flat for six months. Landlords must take such variables into account when deciding how much deposit to withhold, because not taking fair wear and tear into account will result in betterment. Can we fix it? The adjudicator must also ask what the most appropriate way is for the landlord to remedy the damage: bb repair? bb replacement? bb nothing? It would not be fair to ask a tenant to pay for the replacement of a sofa because it has been stained. Assuming it is just aesthetic damage and the sofa is still usable, it would be more reasonable for the tenant to compensate the landlord for the cost of cleaning the stain. The landlord might not even need to do anything at all; if the item has just lost some inherent value or some of its useful lifespan but can still be used, the landlord can just as reasonably be compensated without repairing or replacing the item. InarecentsurveyofcleaningdisputesatTDS, nearlyhalfoflandlordsdidnotprovideaquote orinvoicetojustifythecostsofcleaning “ How much would the bed cost to replace? (a) £250 How old is the bed? (b) 2 years What is the average useable lifespan of the bed? (c) 10 years What would the residual lifespan of the bed be? (d) 8 years What is the depreciation of value rate? Calculated as (a) divided by (c) = (e) £25 per year The reasonable cost to tenant? Calculated as (d) x (e) £200 Is the landlord better off? Finally, when calculating an amount, the adjudicator must ask – will the landlord be financially or materially better off because of the compensation? Even in the rare cases when an item is damaged beyond repair, it is unlikely that a tenant will be liable for the full replacement cost because the effect of fair wear and tear must still be accounted for. Take as an example an average quality bed that was new at the start of a tenancy. At the end of a two-year tenancy the bed has been damaged beyond repair and therefore the most suitable remedy is for the landlord to replace it. How much should the tenant pay? Provided the landlord had some evidence of the bed’s original quality and condition, the adjudicator will normally follow a process such as the one below: As can be seen, the tenant would not be made to pay the full replacement cost of the bed, but an estimate of its value after two years. If the tenant was made to pay the full price, the landlord would have a brand new bed in their property instead of a two-year-old bed, making them materially better off. This would constitute betterment. It is uncommon for items to be damaged beyond repair. The more common cases are those in which small cleaning or repair is the most likely remedy, such as a stain on the carpet. Still, the principle of betterment remains; if a tenant left a stain on the carpet they should reasonably expect to pay for a spot clean. However, if the landlord has the whole carpet cleaned, the tenant should still only pay the amount it would cost to remove the stain in tenancies where professional carpet cleaning is not stated as a requirement. Otherwise the landlord now has a fully professionally cleaned carpet that they otherwise would not, and at the tenant’s expense. Is it worth it? Betterment ultimately comes down to whether the landlord becomes better off at the expense of the tenant’s deposit. Adjudicators have to establish what damaged items are worth and the costs of the damage. This is based on the evidence provided by the landlord and the tenant, but reliable evidence is where many landlords fall down. In a recent survey of cleaning disputes at TDS, nearly half of landlords did not provide a quote or invoice to justify the costs of cleaning. It is a key principle that the deposit is the tenant’s money so it is for the landlord to justify the value of deductions. Adjudicators cannot take the figures given to them at face value; without evidence of worth they must estimate the reasonable cost to the tenant. This is why landlords should keep a record of the value and condition of the contents of their properties, through such means as inventories and receipts. This is particularly important if the property contains high-value items; rented properties rarely contain top end fixtures and fittings so landlords who do equip their properties at this level need to prove that a higher than average loss has been sustained through the damage caused. Otherwise, at risk of allowing betterment, an adjudicator can only estimate for lower range furniture typically used in rented properties. Finally, it is important to note that the law does not prohibit betterment where it is intrinsically necessary to correct the damage done by a tenant. However, TDS does not allow betterment at all when adjudicating and therefore a refusal to allow betterment is a TDS policy rather than the law as it stands at present. R J u ne /J u ly 2 0 1 3   3 3 residential Landlord & Tenant Calculating tenants’ reasonable costs Chris Kendall is Social Media and Communications Officer at the TDS
  • RICS property JOURNAL 3 4   J u ne /J u ly 2 0 1 3 R T James Wilson examines the development of case precedent at the Upper Tribunal on the appropriate deferment rate to be applied in leasehold reform cases Valuing the freeholder’s interest Residential Leasehold reform The deferment rate is a constituent part to value either the freeholder’s or landlord’s interest (referred to in this article as the freeholder’s interest) and is required in all circumstances, i.e. for both house and flat enfranchisement and new lease claims. Accordingly, it is paramount that all valuers are aware of and understand the leading cases. This is by no means a definitive list, but covers the background and a sample of subsequent departures from what is known as the ‘generic’ rate. In leasehold reform the three components, where applicable, which when aggregated give the value of the freeholder’s interest are: bb the term bb the reversion bb hope value. In this article we are only concerned with the value of the ‘reversion’, which is calculated by taking the freehold vacant possession value (or share of freehold/999-year lease value as applicable), then discounting it at an appropriate rate of interest, the ‘deferment rate’. What is the deferment rate? For the valuer to enter any analysis or discussion on the deferment rate it is essential to understand both what it is and its component parts. “The deferment rate is an annual discount of a future receipt, the vacant possession value of the house or flat at term”, Earl Cadogan v Sportelli [2007] 1 EGLR 153 (referred to as Sportelli). In Sportelli, (one new lease, one house and three collective enfranchisement claims in Prime Central London (PCL), all with unexpired terms over 20 years) the Upper Tribunal (UT) sets out how the deferment rate can be calculated, being “the addition of an appropriate risk-free rate and an appropriate risk free premium, with a deduction for capital growth”. As a formula, it is represented as follows: DR = RFR – RGR + RP where DR is the deferment rate; RFR is the risk-free rate; RGR is the real growth rate and RP is the risk premium. The risk-free rate is defined as “the return demanded by investors for holding an asset with no risk, often proxied by the return on a government security held to redemption”, the UT determined 2.25%; the real growth rate is the growth in house and flats’ prices (values) above the rate of inflation, the UT determined 2%; and the risk premium is “the additional return required by investors to compensate for the risk of not receiving a guaranteed return”, the UT determined 4.5%. All the above leads to what is known as the ‘generic’ deferment rate for houses: DR = RFR – RGR + RP DR = 2.25% - 2% + 4.5% DR = 4.75%. For flats, 0.25% is added to the risk premium because of the “prospect of management problems arising during the course of the tenancy” hence the formula becomes: DR = 2.25% - 2% + 4.75% DR = 5%. To establish the risk premium the UT considered the market for the type of asset being valued. The risk of investment in long reversions involved those of: bb volatility bb illiquidity bb deterioration bb obsolescence. In addition the UT considered ‘specific factors’ that might affect the appropriateness of using a generic rate, being: bb length of unexpired term bb location bb obsolescence and condition bb flats v houses bb transaction costs. We now examine a sample of cases where the generic deferment rate has been challenged, having in mind the component parts of the formula. Leases below 20 years In Sportelli, the UT had determined that the deferment rate is constant beyond 20 years. For terms of less than 20 years the rate would need to have regard to the property cycle at the valuation date. In Cadogan Square Properties Ltd (and others) v The Earl Cadogan (and others) [2010] UKUT 427 (LC) (referred to as Erkman), five collective enfranchisement claims in PCL, the unexpired terms ranged from 17.8 years down to 15.6, i.e. less than 20 years. Following its approach in Sportelli, the UT considered and concluded that the formula can be adjusted to reflect the fact that at the valuation dates, the residential property market was above its long-term trend of real growth rate of 2%. In three of the cases the valuation dates were in 2005. The UT concluded that whereas the hitherto growth rate in PCL was above the long-term trend, future growth would in any event be expected, albeit below the Sportelli rate of 2%. The UT concluded 1.75% for RGR,
  • J u ne /J u ly 2 0 1 3   3 5 residential Leasehold reform James Wilson MRICS is head of valuation at W.A.Ellis and co-author of Leasehold enfranchisement explained, RICS Books being 0.25% below 2%. The formula is adjusted to: DR = 2.25% - 1.75% + 4.75% = 5.25%. Following on for the two cases with valuation dates in 2007, where in the interim the market increased sharply by 15% in 2006 and a further 8% by September 2007, the UT concluded 1.5% for RGR, being a further 0.25% below 2%. The formula is now adjusted to: DR = 2.25% - 1.5% + 4.75% = 5.5%. Short unexpired terms In Trustees of the Sloane Stanley Estate v Charles Carey-Morgan [2011] UKUT 415 (LC) (referred to as Vale Court), a collective enfranchisement claim in PCL, the unexpired terms were 4.74 and 70.25 years. Having identified the factors that were different as between a five-year reversion and a 15-year reversion, the UT concluded the Sportelli formula is not to be applied to the valuation of very short-term reversions. Short-term reversions are more akin to freehold interests in possession. The UT determined that the deferment rate for reversions of less than five years should be the net rental yield that the evidence shows to be appropriate for the property in question; and in addition there should be an end allowance, which in the absence of setting some other percentage should be 5%. On the facts of the case, the net rental yield of 3.25% with an end allowance of 5% equates to a deferment rate of 4.37%. Generic rates departures Other cases where departure from the generic rates has been allowed include Zuckerman v Trustees of the Calthorpe Estates [2009] UKUT 235 (LC) (referred to as Zuckerman). For the 11 new lease claims in Kelton Court, Dudley, West Midlands (a block of flats of 1970s construction), the UT determined departure from the generic rate as follows: bb greater risk of deterioration in Kelton Court than PCL, not reflected in vacant possession values, increase in risk premium of 0.25% bb significantly lower long-term growth rate in West Midlands than in PCL, increase in risk premium of 0.5% bb greater risks associated with flats pursuant to the introduction of the Service Charges (Consultation Requirements) (England) Regulations 2003, increase in the addition for flats to reflect greater management problems from 0.25% to 0.5%. The formula is now adjusted to: DR = 2.25% - 2% + 5.75% = 6%. Following on from Zuckerman, in City & Country Properties Ltd v Alexander Christopher Charles Yeats [2012] UKUT 227 (LC) (referred to as City & Country), a new lease claim in a block of 54 1930s-built flats in Horsham, West Sussex, the UT, having granted permission to appeal, had limited it to the issues of capital growth and management and their effect on the deferment rate. The LVT had determined an additional 0.25% for obsolescence and that stood. The UT allowed the appeal on the management issues only, as follows: bb added risk of obsolescence (LVT), 0.25% addition to the risk premium bb addition for flats of 0.5% to reflect potential management problems. The formula is now adjusted to: DR = 2.25% - 2% + 5.25% = 5.50%. The UT refers to its decision in Daejan Investments Ltd v Benson [2011] 1 WLR 2330 (referred to as Daejan) and set out its reasons for the 0.5% uplift in respect of reversions on flats as opposed to those of houses, briefly as follows: bb an addition of 0.25% allowed for in Sportelli to reflect the lack of certainty that the purchaser would not become involved with any management problems bb an addition of a further 0.25% to reflect the potential actual burden of management; however, if clear evidence exists showing that the purchaser of the freehold reversion would realise on the facts of the case it was extremely improbable that, as freeholder, it would become burdened with any responsibility of management, this evidence may be sufficient to displace this extra 0.25%. The Supreme Court’s majority (3:2) overruling of the decisions of all lower courts and tribunals has arguably appreciably reduced the potential actual burden of management and thus displaced the extra 0.25%, Daejan Investments Ltd v Benson and others [2013] UKSC 14. All valuers need to be aware of the provisions of the leasehold reform legislation and for those practising in the field it is paramount to have an understanding of the background, the component parts and case precedent to the formula that gives the generic deferment rate. R If you are an RICS member involved in enfranchisement you may like to join the RICS Leasehold Enfranchisement Community. To do so, email Allvaluersneedtobeawareof theprovisionsofcurrent leaseholdreformlegislation “ Related competencies include TO83 Deferment rate
  • RiCs pRopeRty JouRnal 3 6 J u N E /J u Ly 2 0 1 3 R T Safe as houses? RESiDENTiAL opinion: HealtH HaZaRds The Chartered Institute of Environmental Health (CIEH) has members who work in landlords’ organisations, local authorities, housing associations and the third sector. This breadth of membership gives us a unique position from which to put forward advice and guidance to the private rented sector. Outreach through door to door visits, common meeting places and organised housing surgeries, as well as Housing Health and Safety Rating System (HHSRS) inspections – are some of the ways that environmental health practitioners (EHPs) work to maintain standards in the private rented sector. Applying these, EHPs work with landlords to improve properties, in some cases preventing severe injury or death because of their interventions. Enormous change is taking place within the private rented sector and everyone wants to understand what this involves, how to respond and whether we can harness and foster opportunities, as well as make and offer choices. The public sector housing budget has been slashed by a massive 74%. In the three years to 31 March 2011, the government invested £1.8bn in housing renewal and improvement, but in the period from April 2011 to March 2015 it plans to spend zero, a cut largely overlooked by the media. Allied to changes proposed in social care, welfare reform and housing benefit, the impact on the sector promises to be immense. There is no shortage of evidence linking poor housing and poor health and now we can better evaluate the health and social care costs of failing to address poor conditions. These costs can be contrasted with the payback periods for investment in eradicating the hazard. There is little discussion of housing standards in the government’s 2001 housing strategy, nor will you find anything new on supporting local authorities in their strategic housing role where this relates to improving conditions in the private rented sector. In describing a ‘hands-off’ role for the state in housing, it does not tackle other pressing issues such as the lack of decent, affordable accommodation, increasing homelessness, the growing number of dangerous properties and rising rents. Under pressure There has been significant growth in market share in the private rented sector in recent years – in the past decade it has accommodated an additional 1.3 million households. In the same period, high demand has pushed up rents by 66%. This increase in demand comes at the same time as council budget reductions. So while Shelter reports that complaints about the most serious hazards under the HHSRS have risen by 25% in the past two years, the number of local authority staff available to respond to those complaints has fallen, probably by around 10%. Governments have, since 1949, invested in the improvement of tenanted and owner-occupied homes to ensure that properties reach at least minimum standards. Since 2001, there has been a Decent Homes Standard. The former government’s aim was to ensure that all social housing and at least 70% of private housing occupied by vulnerable families was ‘decent’ by December 2010. Homes are deemed to be non-decent if they are in a poor state of repair, with ‘category one’ hazards such as excess cold, a lack of modern facilities or energy inefficiency. Private renters are far more likely to live in cold, damp, non-decent homes, according to the latest Department for Communities and Local Government English housing survey, which reveals that 37% of privately rented homes are non-decent, compared to 25% of owner-occupied and 20% of social rented homes. The private rented sector is increasingly an important source of housing for vulnerable people. The changes in respect of homelessness and housing benefit legislation are increasing vulnerable households’ reliance on low-cost private accommodation. Upholding standards Management standards vary enormously, and highly publicised instances of criminal landlords show that there is a particular problem of upholding acceptable standards in some parts of the sector. Market forces and competition alone cannot ensure adequate management quality. An excess of demand over supply for rental properties at the bottom end of the sector neutralises the discipline that consumer choice would otherwise impose. Furthermore, alongside the limited security of tenure that an assured short-hold tenancy gives, tenants fear the risk of retaliatory eviction should they complain. This is why we at the CIEH believe a strong regulatory framework is important and that there should be sufficient numbers of housing inspectors to intervene where there are hazards to health or serious wrongdoing. Housing regulation should, of course, be even handed – both tenants and landlords can be victims and perpetrators. We would like to see more landlords brought into the sector’s accreditation schemes and for local authorities to work constructively with members of such schemes. There is plenty of scope for co-regulation. Our approach to housing policy is led by members working in housing and we regularly canvass their views on issues they encounter in securing compliance with and enforcing the law. The following are issues they have raised and on which we are working. Strong regulation and sufficient inspectors to intervene on health hazards are crucial in a private rented sector that is an increasingly important source of housing for vulnerable people, argues Bob Mayho
  • J u ne /J u ly 2 0 1 3   3 7 residential opinion Bob Mayho is Principal Policy Officer at the Chartered Institute of Environmental Health Data capture Virtually all local authorities collect data on inspections, although they use a wide range of software systems for recording HHSRS results, some of which are inefficient. Typical limitations include the inability to record the nature of the initial complaint, the need for specific (and time-consuming) reports to be written to retrieve relevant data, and systems designed for other council purposes, such as planning. Cutbacks in council resources combined with software systems failings can make applying the processes inherent in the HHSRS significantly more difficult. Standardised survey forms for use in either single- or multi-occupied properties would be extremely useful, as would clear requirements for standard statistics to be collected so that comparisons are fair and accurate and improvements in the stock can be properly assessed. Many members feel the level of paperwork required to take action is an obstacle to firmer enforcement action, particularly where the process applies to houses in multiple occupation (HMOs) and buildings converted into flats. Strategic or reactive approach? Most councils nowadays inspect only in response to complaints, with few having the resources to adopt council-wide approaches. Many retain an element of proaction in their strategies in relation to specific housing types (usually HMOs), or in geographical locations where housing conditions are especially poor. Others have developed ‘twin-track’ or ‘triage’ approaches to assess the urgency of cases and the likelihood of risk. Political support for action More than 40% of respondents to a recent CIEH survey felt there was little or no interest from elected members for the work they do, with political support only in a ‘crisis’ or in relation to ward issues. Some felt there was little political will to tackle poor housing conditions that are known to exist and that environmental health work in housing features low in spending priorities. Enforcement performance In 2011, former president Dr Steve Battersby compiled a report for then shadow housing minister, Alison Seabeck, on local authorities’ performance on enforcement activity associated with the HHSRS, using the responses of 221 English local authorities to Freedom of Information requests as source material. A key finding was that there are low overall levels of enforcement. We wanted to examine the reasons for this through our own member survey. bb Nearly 80% cited lack of resources as the single most significant explanation for low enforcement levels. Many pointed out that funds for ‘works in default’ had been severely cut back, in itself restricting enforcement options. bb Two-thirds felt that informal action usually sufficed to deal with infringements, although fears were expressed that this approach cannot deliver long-term change unless it is allied to other strategies, e.g. a more active, determined use of formal enforcement action in appropriate settings. bb Some felt that little political support was connected with a presumption in favour of informal action, with this consequently becoming the norm. Such a ‘softly, softly’ approach has become widespread and there are now plenty of practitioners with little or no enforcement experience. bb Rulings by the independent Residential Property Tribunals were also mentioned as a factor, with respondents referring to some of their findings as ‘defying logic’ and ‘hostile’ to enforcement action. bb Another contributory factor quoted was concern for tenants’ security of tenure: tenants in the worst housing conditions are often vulnerable and the least willing to complain (or unaware that they can complain). The threat of retaliatory eviction for complaining is a familiar additional complication. Some respondents criticised the HHSRS itself, considering the entire enforcement process – from inspection to serving notices – as time-consuming and bureaucratic. The CIEH wants to examine this bureaucracy further. Conclusion When the Housing Act 2004 introduced the HHSRS, ministers said the working of the new system (which replaced the old fitness standard) would be reviewed after five years. The current government has made it clear that it has no plans for such a review, but it recently consulted on extending the range of regulations covered by the Primary Authority scheme to include the HHSRS, arguing that landlords would benefit from clear advice on the standards they must achieve in their properties, thus improving protections for tenants. While this is true, we do not believe that extending the primary authority scheme is the way to achieve that. The application of the HHSRS in improving and maintaining standards and correcting Category 1 and 2 hazards is unique to the property under inspection, since the system is built on a rigorous risk-based assessment and approach. HHSRS inspections need to continue to be performed on an individual basis without let or hindrance, because the consequence of making it possible for someone with (say) two properties to approach a primary authority would compromise the very point of the ‘system’ behind the scheme. The primary authority arrangements were established to address perceived inconsistency in dealing with systems such as safety policies where, in the context of retail chains, if one local authority found them adequate there was a reasonable expectation that others should agree. It was never intended to constrain dealing with site-specific issues; this was also the case when proposals were brought forward to include statutory nuisances within the scope of the primary authority. Here, too, context is everything and the primary authority cannot take that into account. The critical discretion of officers in deciding which enforcement action is most suitable for every case, and the ability to act immediately in emergency situations, must be retained, however. It is likely that only medium to large registered social landlords will be interested in primary authority relationships with local authorities; in the private rented sector, where the majority of landlords own one or two properties, it is unlikely that many will see the benefit of the arrangements. R RICS is currently working on health and safety guidance for residential property managers, which it hopes to publish later this year Related competencies include M008
  • U k government’s own figures reveal that household formations are likely to grow by around 220,000 each year until 2032 whereas only 98,000 new homes were started in 2012 – the lowest figure for more than 80 years. As a result, the uK shortfall is estimated at more than 100,000 homes. Problems in obtaining finance and planning delays, together with associated costs and taxes, are frequently cited as reasons for the lack of supply. The vicious circle of strict lending criteria forcing aspiring first-time buyers to pay record rents, which, in turn, makes saving for a deposit even harder, also needs to be broken. If lenders won’t lend and buyers cannot buy, then builders won’t build. Seeking solutions So, what are some of the ways in which government tried to address the problem? The £130bn New Homes Bonus, launched in autumn 2010, was supposed to incentivise local authorities to build more. Then in November 2011, the Housing Strategy sought to ‘Get Britain Building’ by accelerating the release of publicly-owned land for up to 100,000 new homes. This was followed last August by the government-commissioned Montague Review that recommended relaxation of section 106 planning agreements so that longer-term Build to Rent developments might count towards affordable housing quotas and attract more institutional investment. The £800m boost given to the scheme in the Budget for sites of 100 or more units with five-year extendable loans at a 2.06%pa interest rate, should concentrate the minds of the 45 developers afforded preferred bidding status. The government seems determined that planning obligations do not hinder development. For instance, the Growth and Infrastructure Act, which became law in late April, includes an opportunity for developers to renegotiate section 106 affordable housing agreements that may render a scheme economically unviable without necessarily submitting to financial scrutiny. Viability should now specifically embrace the RICS concept of market value, which represents a break with the concept of fixed margins above current or existing use value. It is hoped up to 75,000 affordable ‘shovel-ready’ new homes stalled in the planning system could be released as a result. Developers will also be able to submit planning applications direct to the Planning Inspectorate if the relevant local authority consistently fails to consider the matter on time. There seems to have been broader acceptance too that ‘localism’ needs to be as much about encouraging as preventing development. The net result? A common thread running through these initiatives is a failure to appreciate that numbers will not increase sufficiently unless landowners and developers receive what is perceived to be a competitive return. The RICS Financial viability in planning guidance recognises the importance of generating a fair price for land as part of a market value-based stance if supported by robust evidence. Indeed, last January an inspector overturned a decision by Wokingham Borough Council to refuse planning for 126 houses by quoting the need for ‘competitive returns’ in accordance with RICS guidance. But, paying too much for the land is not a material consideration. Accessibility to finance is, of course, paramount. The Funding for Lending Scheme (FLS) has helped to lower interest rates and increase provision of mortgage products but not higher loan-to-value lending. Banks do not appear to be passing on lower borrowing costs to their customers as mortgage approvals have returned to levels prevailing last August when the scheme started. So FLS has been extended to include extra incentives for banks to increase slightly riskier lending – hopefully to more first-time buyers. Help to Buy was therefore targeted at those with only a 5% deposit on any home worth up to £600,000. The first part – from April – offers five-year interest-free shared equity loans of up to 20% of a new property’s value. The second (for three years from January 2014) gives access to a government-backed mortgage guarantee of up to 15% of any home’s value. However, Help to Buy may have more of an inflationary impact on prices initially, unless additional new homes can be brought onto the market to meet anticipated demand and overcome the time lag involved in housebuilding. Although full details are not yet available, an All-Party Treasury Select Committee suggest the scheme will mean government is underpinning house prices, exposed to substantial losses if values fall and/or incentives are withdrawn as well as probably helping existing homeowners more than first-time buyers. IMAgE©getty RiCs pRopeRty JouRnal 3 8 J u N E /J u Ly 2 0 1 3 R Jeremy Leaf outlines why he believes that complex planning requirements, difficulties in obtaining finance, delays and costs are all contributing to the UK’s chronic housing shortage Adelicatebalance RESiDENTiAL opinion: Housing supply
  • Setting a levy Higher-than-anticipated Community Infrastructure Levy (CIL) and section 106 payments, as well as the need for very detailed supporting documentation, is certainly reducing supply. Government’s timing seems less than perfect, bearing in mind its commitment to stimulate economic growth by increasing housebuilding. Another problem is the wide variation in levels of CIL. The London Borough of Wandsworth, for instance, has divided itself into four zones, with the levy payable ranging from zero to £575/m2 , depending on the infrastructure required. Calls for review It was originally thought that section 106 obligations might be replaced by setting a fixed per-square-foot CIL at a competitive level as part of a less complicated, more flexible and regularly reviewed regime. Planning Minister Nick Boles seems to have recognised industry concerns and advised local authorities that CIL should not be set at a rate “right up to the margin of economic viability”. Councils with an approved neighbourhood plan could now benefit from the ‘Boles bung’, retaining 25% of their CIL to pay for approved infrastructure close to the land in question. The latest consultation proposes an end to ‘double dipping’ whereby local authorities cannot demand section 106 and CIL payments for the same infrastructure or for properties with consent that have remained empty for six of the previous 12 months. They will also be able to delay the April 2014 deadline for introduction of charging schedules by a year and accept CIL payments ‘in kind’ so developers have more confidence that relevant infrastructure will be provided. Unless implemented fairly and transparently, CIL and section 106 charges will just be regarded as extra taxes on development so will only delay decision-making and much needed homes. To encourage housing delivery further, local authorities have been asked to grant ‘permitted development rights’ for an initial three-year period to convert offices into homes without planning permission. Despite an overwhelming majority of them seeking to opt out ‘due to adverse economic circumstances’ the government has decided only key employment areas nationally will be exempt, as well as parts of some London boroughs including all of Kensington and Chelsea. It is unlikely many commercial buildings will be converted without external changes and/ or the need for additional amenity space so planning gain would still be captured via CIL or section 106 provisions as part of a revised planning permission. In my view, the policy should be aimed at reducing the number of redundant buildings and increase the supply of affordable homes to buy or rent. Lambert Smith Hampton recently reported that 27% or 11.7 million square feet of regional office space is obsolete and up to 7.4 million sq ft is suitable for change of use for up to 11.5 million new homes. Demand is likely to prove strongest within the M25, where the gap in values between office and residential markets is at its widest so residential values may stabilise or fall whereas office values could rise in those places. It seems government is determined to increase brownfield supply significantly one way or another. Apart from the cost of complying with complicated planning requirements, capital gains and inheritance tax have also to be taken into account. And politicians wonder why owners of land suitable for development are not rushing to sell. What happens next? There is no single solution to increasing housing supply. A more radical, coordinated approach, including marginalising political influence in planning decision-making and better recognition by central and local government of the connection between time and money, is paramount. If planning red tape is not cut further, painstakingly arranged finance can be compromised and schemes abandoned. I believe that more council accountability, better awareness of viability and bigger-than-local decision-making, as well as reducing the time to decide on ‘major’ applications, would definitely increase supply. Lenders clearly need more confidence in the economy and the sustainability of recovery before taking riskier, longer-term decisions. Setting and keeping to minimum targets would be one way of breaking the logjam. Is it unreasonable to expect the government to put pressure on the banks that were so heavily supported by the tax payer in their time of need? R RICS Commission > Against the backdrop of the UK housing shortage, RICS has established a commission to recommend ways of delivering the right homes, in the right tenure, in the right places. It is calling on RICS members and the property sector to provide examples of initiatives that would help boost the number of homes across the country. Commission chair Michael Newey, RICS President Elect and chief executive, Broadland Housing, will address the following issues: bb How affordable can future housing be and how should subsidised housing be paid for? bb How can we improve existing stock quickly and sustainably to create homes that meet the standards we need? bb What regulation is appropriate and what outcomes should regulation be designed to achieve? bb How do we ensure that there is enough land in the right places to meet the need for new homes? bb How do policy-makers and practitioners ensure that affordable rented housing is attractive to institutional investors. The commission will use its findings to make recommendations for RICS, government and the housing sector. n Go to housingcommission to submit your responses to a series of questions. Related competencies include TO41, T061 J u ne /J u ly 2 0 1 3   3 9 residential housing supply Jeremy Leaf FRICS is a former chair of the RICS Residential Professional Group Board and sits on the RICS Residential Estate Agency and Letting Working Group
  • Images©1greenphoenix2&4D.Hilton;3dimplexRenewables RICS property JOURNAL 4 0   J u ne /J u ly 2 0 1 3 R David Hilton sheds some light on solar energy in the third and final part of his series on renewable energies Residential sustainable power How bright is the future? I moved back to the UK in 1997 having spent my school holidays and 10 years of my working life in South Africa in the solar heating and heat pump manufacturing and installation industry. When I visited recruitment centres they would ask: “What do you do?” My reply brought the response: “Oh! When you have been here for a while you may notice that we do not have any sunshine…” So, on this valuable advice I entered the gas industry, only to find that actually there is a market for renewables and there certainly is a solar resource. The sun’s resource is about 1,350W/m2 at the earth’s atmosphere but due to the angle of incidence the actual resource in the UK is accepted to be 1,000W/m2 . Naturally, this figure is optimum and is not available every day of the year. To work out the amount of resource available in any given location you can use the Photovoltaic Geographical Information System and input your coordinates for either average irradiation information or PV generation information. There are two main types of solar collector, also referred to as solar modules or panels: photovoltaic (PV) and solar thermal (ST). PV panels convert the light energy from the sun into electricity, which can be used in the home or exported to the grid. ST panels transfer the heat from the sun to a thermal store to be used in the building for domestic hot water. We cannot harness all of this resource and therefore need to have a system whereby we can compare efficiencies of products. Under Standard Test Conditions, all solar panels are rated on their efficiency based on 1,000W/m2 . Therefore, if a panel is 16% efficient it means that if there was 1,000W shining on it then it would produce 160W. On PV panels there is a need to also account for the temperature of the cells because they lose efficiency of 0.5% per degree when the temperature rises above 25º C. Plenty has been written about PV so I will mainly concentrate on ST with the occasional reference to PV for comparison. ST panels have two main visual designs: Flat solar collectors are usually about 1m wide by 2m long. They comprise a single sheet of reinforced glass covering a coated metal plate and distribution pipes, with insulation beneath. The coating was originally black paint but that has been replaced by a ‘selective coating’, which is more absorbent and less reflective of the resource. It has a dark bluish colour. Solar evacuated tubes are, as their name implies, a series of long glass tubes that have a vacuum inside. A vacuum is the perfect insulation and it is for this reason that tubes are often marketed as more efficient than flat panels. The tubes can be either a single evacuated volume with long, thin plate collector inside, or a twin-wall glass tube with the selective coating but the pipes not actually inside the evacuated area. There are many claims as to which type of panel is more efficient. The truth is that they are both about the same if you take into account the complete aperture of the panel. Tubes tend to be more efficient if you only calculate the area of the actual collector in the tube and not the area between tubes. The vacuum also contributes to efficiency calculations in areas with low ambient temperatures. On average though, considering that tubes tend to be more expensive than flat panels, I would always opt for the flat k1 Evacuated tubes placed discretely on a flat roof. The design is less vulnerable to wind and is a far better visual solution k2  Typical example of an evacuated tube collector, this one with vertical tubes. Many tube systems can also be installed with horizontal tubes I
  • J u ne /J u ly 2 0 1 3   4 1 David Hilton has a masters degree in sustainable architecture, is an accredited renewables installer, trainer and design specialist and a Gas Safe-registered heating engineer. He is also the Sustainable Building Expert at Grand Designs Live shows and delivers CPD talks, training seminars and presentations residential sustainable power units for straightforward installations. However, in areas of high wind or difficult installations where large scaffolding is not practical, the tubes can be a far better option. They are useful in installations where the roof is not south facing because the tubes can be rotated and certain types (direct through flow) are also very good for discrete installations because they can be installed almost flat and rotated to a better angle of incidence. Payback times are always at the forefront of any decision to install solar panels and it is now not good enough to consider only the cost of the panels versus the usable heat they will provide. This is, however, a good starting point and software such as T-sol is useful in giving some sort of payback calculation. The next criterion to consider is whether you have any kind of condition of planning or efficiency driver that requires the generation of energy on the building or the offset reduction of CO2 emissions on-site. The Code for Sustainable Homes calls for 25% reduction in CO2 at level 3 and a 44% reduction at level 4. For anyone facing k3  Section of a flat plate collector E D J I H GFB A C A Collector cover (glass) B Absorber plate (aluminium) C Powder coated frame (aluminium) D Manifold pipe (copper) E Collector insulation (mineral wool) F Meander pipe (copper) G High selective absorber coating H Back Plate (aluminium) I Secure cover fixation J Continuous mounting channel k4  On this roof, solar flat collectors have severely deteriorated and will not work these conditions of planning, ST and PV are good options to score points and benefit from the solar gains. Deciding to install solar panels is only the first step. You then need to make sure that the system is designed and installed in a manner that optimises the return. If you have a ST system that is backed up by a boiler you will in all likelihood have a twin-coil cylinder with the solar panel plumbed to the bottom coil and a boiler to the upper. The boiler then provides the extra heat required if the ST can not attain the required temperatures. You will need to plan and manage the hot water use and set up timers to mange the boiler. If you use hot water at night you will need to either hold the boiler off – and run the risk of not having enough hot water in the morning – or alternatively plan a pre-feed tank system – where the hot water cylinder receives replacement water from a separate solar cylinder – to allow for intermittent hot water use. Lagging of pipes is essential and if a secondary return plumbing system has been employed this extra heat loss needs to be accounted for in the design. The correct use of non-return valves must also be used to stop the heat rising back up to the collector through thermosyphon. This can result in great heat loss, especially in the colder months. Polychrystalline silicone PV (bluish colour) 14%–16% Monochrystalline silicone PV (black colour) 15%–19% Amorphous silicone PV 7%–11% Flat plate solar thermal 80%+ Evacuated tubes 80%+ Average efficiency of solar collectors Decidingtoinstallsolar panelsisonlythefirst step.Youthenneedto makesurethatthe systemisdesignedand installedinamanner thatoptimisesthereturn “ Related competencies include TO44, M009 The correct flow rates must also be designed according to the heat exchange size, and the temperature sensors need to be appropriately placed to avoid heated water being pumped back to the collector. The life cycle of the panels must be considered and if they are integrated into the roof you will need to make sure that you can either get replacements of a very similar size or keep spare tiles to make the roof good when the panels are removed. Solar panels are fitted on the roof under General Permitted Development as long as they do not protrude more than 200mm above the roofline (150mm for integrated panels), protrude above the ridge line or face a public highway. They must also be removed when their useful life is over. This is not actively policed by the authorities but is actioned on any complaint. R
  • Images©PhilipSanto RICS property JOURNAL 4 2   J u ne /J u ly 2 0 1 3 R T In his continuing series on the practical issues faced by surveyors and valuers, Philip Santo describes a case where professional opinions differed, throwing doubt on the original valuer’s report and causing uncertainty for the homeowner Noreason for deadlock Residential Case notes The previous edition of Case Notes reflected on circumstances where the owner of a house was confused when two valuers disagreed about its mortgageability. This time the case under consideration was distinguished by the differing views of two pairs of professionals about the need for remedial work, causing a similar level of confusion for a puzzled and concerned homeowner. Two years after purchasing a post-war former local authority end terrace house (photo 1) in a resale, the owners applied for a remortgage. The valuer who undertook the valuation inspection recommended a structural engineer’s report on the stability of the roof after noticing distortion and the presence of original in situ concrete gutters, a proprietary system known as Finlock. The owner requested an inspection by a former work colleague who had recently established a private practice as a consulting engineer. The engineer recommended complete replacement of the concrete gutters, at a likely cost of at least £7,000. Similar work had already been carried out by a local housing association on properties still remaining within its stock in the surrounding area, including the adjoining property (2). It is common knowledge among surveyors and valuers that Finlock gutters are prone to leakage between the interlocking sections. This can cause deterioration to the fabric and decorations below and it would be expected that any competent valuer would be alert for such defects during an inspection. Understandably, the owner asked why the matter had not been not identified when the property was ‘surveyed prior to purchase’, referring to the original mortgage valuation. Two questions needed to be answered. First, should the mere presence of Finlock gutters have put the original valuer on alert that extensive replacement work might be required, because the system was so fundamentally flawed that retention was not a suitable option? Second, was the Finlock system at this property in such a condition that replacement was required and, if so, should this have been seen at the time of the original inspection? A reinspection was carried out to investigate the complaint. This noted the edge of a metal lining material to the gutter, intended to prevent leakage at the section joints. It also revealed that the alignment of the Finlock gutter on the front elevation had dropped distinctly above the larger front bedroom window (3). A slight degree of corresponding unevenness to the plane of the roof slope above can just be discerned in photos 1 and 2 but more marked adjustment of the whole roof structure away from the gable end wall and the party wall had also occurred. This had caused the characteristic ‘pagoda’ effect, visible on this and the adjacent property to the left in photo 1, but this was a feature of the roof construction and not attributable to the gutters. Internally, there was no serious cracking in any of the internal rooms and all the windows were in working condition, so there were no signs of recent movement. Nor were there any indications of deterioration such as damp penetration that might indicate the gutters were leaking, or visible signs of problems within the roof space. A drive around the area established that original Finlock gutters on about three-quarters of the houses had been replaced. However, there was a consistency about this work that suggested it had all been carried out by the local housing association, while those properties still with Finlock gutters were in private ownership, the result of earlier ‘right to 1
  • m1 Front elevation showing slight unevenness to gutter above window. Slight deflection to the roof from the party wall and the ‘pagoda’ effect at the gable end, with a similar ‘pagoda’ effect on the adjacent property, are due to slight adjustment of the roof structure since construction unrelated to the gutters k2 The subject property in the centre shows slight unevenness across the plane of the roof slope. Adjacent properties to right and left have had their gutters repaired by the Housing Association. The far end terraced property still has its original Finlock gutter. k3 Displacement to gutter above the main window on the front elevation k4 Front elevation of a nearby property during remedial works to its gable wall n5 Front corner of Finlock gutter, showing a stainless-steel lining required to prevent leakage through the gutter section joints n6 The outer part of the gutter is to the right of the picture. The vertical section in the centre is the lining at the rear of the gutter. Roofing felt to the left has been peeled back to expose concrete, laid in the trough formed by the inner part of the Finlock sections, to create a lintel over the J u ne /J u ly 2 0 1 3   4 3 Philip Santo FRICS is a Director of Philip Santo & Co. He delivers CPD training and presentations and his second edition of Inspections and Reports on Dwellings: Assessing Age is published by Routledge residential Case notes buy’ purchases. This high proportion of replacements could be interpreted as evidence of the need for replacement, but the desire for a housing association to replace a ‘weak’ element in the construction of its housing stock should not automatically be seen as justification for requiring individual owners to undertake such precautionary work as a condition of a mortgage advance. Experience has certainly shown Finlock gutters to be a less than ideal form of construction, but in the absence of ongoing deterioration at the subject property there seemed no reason to carry out complete replacement work, let alone to require it as a condition of a mortgage advance. It was interesting to note that similar distortion above first-floor windows was present on most surrounding properties but it showed up much more clearly on those gutters that had been painted white by their owners, as had the subject property. Remedial work at a nearby property (4) provided the opportunity for a close-up look at the gutter detailing where the gutter lining was visible (5). By peeling back the roofing felt, the rear part of the concrete gutter sections, filled with reinforced concrete and acting as a lintel above first floor windows, could also be seen (6). The original valuer’s site notes recorded: “Lined concrete gutters – will probably require attention in due course – no sign of any damp penetration associated or distress internally.” There was also a note that there Related competencies include TO06, T044, T083 2 6 3 4 5 was “slight roof deflection”. All important points had therefore been identified and taken into account during the original valuation. In the light of the recent engineer’s report and recommendations, however, the customer was unlikely to be satisfied simply by a letter of explanation and denial of liability. With the consent of the owner it was therefore decided to commission a second opinion engineer’s report. This confirmed that the concrete gutter was structurally sound with no evidence of recent major deflection, so it concurred with the complaint reinspection report and supported the original valuer. This might be seen as the professional equivalent of a ‘score draw’: one valuer and one engineer for replacement and the same against. One person, however, had no doubt about the result. Given a copy of the latest second engineer’s report and having never believed that there was a problem, and not wanting either the cost or upheaval of replacement works, the owner was greatly relieved by the outcome. R
  • RiCs pRopeRty JouRnal 4 4 J u N E /J u Ly 2 0 1 3 R Self-regulation of the residential leasehold management sector is coming, writes Michelle Banks Helpingourselves to regulation RESiDENTiAL selF-Regulation T he stated aim of self-regulation is to drive up standards and improve the lives of leaseholders. But it will also have a significant impact on the profession as a whole. Residential leasehold is a vital part of the housing sector. There are around two million leasehold flats in England and Wales and managing agents are collecting in the region of £2.5bn a year in service charges to maintain the communal areas of those buildings. This is not a niche industry. The role of the managing agent has become ever more specialised in recent years. A growing web of legislation and health and safety regulations together with the increasingly complex nature of buildings themselves mean that today’s agent needs to be equipped with a range of skills. Good property managers are those who can adapt to change and seek to enhance their skills through training and development. The demands of the consumer have changed too. Leaseholders rightly expect transparency in all dealings with their managing agent and their expectations of a professional service have risen. At the same time, the recession has meant an increasing focus on value for money. But, for the professional managing agent, being undercut by a ‘cheaper’ competitor who is not a member of any professional body only to see the service suffer as a result, can be frustrating. If buy-to-let continues its recent surge and if Build to Rent schemes take off, quality property management is going to become even more important. Buyers need to be sure not only of the terms of their lease but also how their property is being managed and by whom. Having a poor managing agent can have an impact on the long-term enjoyment of a home and potentially its future value. Despite the heavy consumer reliance on managing agents, they are not subject to any form of professional regulation. Anyone can set up as a managing agent and start collecting service charge money. They need no qualifications, experience or membership of a professional organisation such as the Association of Residential Managing Agents (ARMA) or RICS, which can make choosing a managing agent a bit of a minefield. Both ARMA and RICS have been campaigning for statutory regulation for several years but to no avail; without statutory regulation, how do you identify the professionals? ARMA has just finished a three-month consultation exercise on proposals for self-regulation of its 300-plus members. The aim of the new regime, called ARMA-Q, is to improve the lives of leaseholders by driving up standards of residential property management and to make the good managing agents stand out. At the heart of the proposals is a consumer charter designed to ensure cutting edge customer service from ARMA members. underpinning this are rigorous standards designed to promote honesty, fairness, transparency and timeliness in all areas of residential leasehold management. It will be the first time the industry has had codified standards that are specific to the role of the managing agent and meaningful for the consumer. Standards are all well and good but they need to make a difference. The major impact of the new regime will be the independent regulation of ARMA members. The standards will directly tackle issues around corporate conduct, service charge accounting, insurance and statutory compliance. A separate independent regulatory panel will oversee and enforce the regime. It will have powers to investigate failure to meet the consumer charter and Itwillbethefirsttimetheindustryhas hadcodifiedstandardsthatarespecific totheroleofthemanagingagentand meaningfulfortheconsumer “ k Keith hill is chair of ARMA's new regulatory panel IMAgE©getty
  • J u N E /J u Ly 2 0 1 3 4 5 RESiDENTiAL selF-Regulation Michelle Banks is Chief executive of aRma standards. This level of independent scrutiny is another first for the industry and it should be a powerful reassurance for leaseholders. Former housing minister, Keith Hill, will chair the new regulatory panel. An experienced politician with a high public profile, he will be supported by nine lay panel members from relevant disciplines including law, accountancy and surveying. Importantly, leaseholders themselves will also be directly represented on the panel. No member will be connected with ARMA or its members. The panel will also oversee the accreditation of members so compliance with membership requirements will be independently vetted. Crucially, all disciplinary action taken against ARMA members will be published. This should improve transparency and boost consumer confidence for those appointing a managing agent. So it is good news for the consumer but it is also good news for the professional. Managing agents accredited under ARMA-Q will be able to make a bold statement to both existing and prospective clients that they comply with rigid standards and have been independently accredited. For existing RICS members, accreditation under ARMA-Q will complement an already well-respected status. Firms will be able to demonstrate that they hold specific expertise in block management and their absolute dedication to the work they undertake in that area. Property management has, perhaps, traditionally been overshadowed by its more glamorous cousins in estate agency and lettings. Now, industry-specific standards set by the professionals and overseen by an independent regulatory system with consumer representation should bring this important profession into the spotlight and give practitioners a real edge on the competition. ARMA-Q is due to be implemented later this year. But self-regulation can only go so far. We remain optimistic that statutory regulation will be the long-term solution. So for now, the optimists should join ARMA-Q. R Related competencies include M005 > > Regulation of the residential leasehold sector is largely welcomed by managing agents and, despite some real procedural and training adaptations that all ARMA members will need to undertake, the benefits far outweigh any additional time and cost and must result in better choice for consumers. ARMA-Q is no half measure and represents a huge achievement on the part of those involved in what, I believe, will shape the future of leasehold management. As a member of both ARMA and RICS, Mainstay is required to adhere to the RICS Residential Management Code. This sets the standard for all managing agents that are members of either RICS, ARMA or both and has statutory approval. The ARMA-Q regulatory framework seeks to build on those standards, and give consumers confidence that their agents are transparent, competent and compliant and are prepared to be called to account by an independent panel. Independence is important because anything less would not have held the level of validity required and, just as importantly, the standards will be audited. This is not a box-ticking exercise. In most cases, regulation will simply mean changing processes that are not wholly transparent to make them clear to customers and clients alike. It will require published schedules of rates for all charges falling outside of the standard management fee, complete transparency with regards to related companies and will prohibit hidden or undeclared income streams. ARMA-Q recognises that managers need to be flexible in their delivery and that innovation and creativity should not be stamped out by imperative rules. However, ARMA also knows that everyone in the industry needs to shape up and deliver excellence. Most of all, it needs to be done on a level playing field and consumers would be mad to use a property manager who was not accredited and regulated. We have more accreditations than I would ever have imagined necessary. I strongly suspect however, that as far as our customers are concerned and, as far as future opportunities are concerned, ARMA-Q will quickly become a highly valuable signifier of quality. Complexity in leasehold block management continues to increase; complex development and contradictory case law, wrapped up with myriad statutes and regulation make it increasingly risky for operators and increasingly opaque for leaseholders. Regulation will bring some much-needed standardisation and create real barriers to those that chose to remain outside of good practice. I believe that there is increased awareness and sophistication among consumers and the need to provide genuinely expert and accredited services. In seeking to meet the standards set out in ARMA-Q we have looked closely at how our current process improvements can assist: b commitment accounting is allowing us to report earlier and more accurately on budgeted expenditure in a year b we understand there is a need for a proactive focus and real value for money b we understand the role of quality services in asset enhancement b we believe that long-term planning is required to deliver certainty in complex buildings b we aim to be one of the first fully accredited and independently regulated managing agents during 2013-14. Our team is actively involved in seeking improvements and innovative ways of delivering the best services. My belief is that accreditations and regulation encourage a collaborative team approach and this successfully wins new business. ARMA-Q accreditation will add further to my conviction that, in future, only the very best will succeed in an industry long overdue a regulatory framework. David Clark FIRPM AssocRICS is an owner at Mainstay Group ARMA-Q - A managing agent’s viewpoint
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  • RICS PROPERTY JOURNAL J u ne /J u ly 2 0 1 3   4 7 A R T S A ar ts
  • Progress continues on the updating of old GN4 from the Red Book – The valuation of personal property and also Selling personal property at auction, which is scheduled to be published later this year. As far as Valuer Registration is concerned, RICS Regulation is working with members to ensure that all aspects are fit for purpose and members fully understand the monitoring and compliance process and how this protects and enhances the reputation of RICS members. There will be more member communications and roadshows over the coming months to help members with any queries they may have. Finally, we do hope that as many of you as possible will come to the RICS Arts and Antiques Seminar on 11 June, timed to coincide with the Olympia International Art and Antiques Fair. Some interesting speakers are lined up for the event. As ever, any articles you feel may be of interest to members would be warmly welcomed by the editor. RICS update > 4 8   J u n e /J u ly 2 0 1 3 RICS property JOURNAL A ARTS INTROduction A resilient market Welcome to the second combined Property Journal, aimed at those who work in the commercial, residential and arts and antiques sectors. However, many of our readers work in other professional groups, who have an interest in arts and antiques Overall, the market remains resilient in the face of continuing economic headwinds. The annual TEFAF (the European Fine Art Fair) market report by respected art market economist Dr Clare McAndrew values the global art market in 2012 at €43bn. While this figure is 7% down on the previous year, the fall is attributable to a €3.5bn decline in Chinese sales. The report puts the US back at the top of art trading nations, with China second and the UK third. The respective values given to these markets are €14.2bn (up 5%), €10.6bn (down 24%) and €10.1bn (up 1%). The US accounts for 33% of the global market, China 25% and the UK 23%. The EU makes up 36% of the global market, but with sales down 3% year-on-year to €15.8bn. The total volume of transactions, however, actually fell by just under 4% to €35.5m, 30% down on the boom year of 2007. Post-War and Contemporary art achieved record sales at €4.5bn, which is 43% of the fine art auction market by value. Modern art was second with sales of €3.2bn, giving it a 30% share of the market. As further confirmation of improving markets, the report says dealers are back and buying at the fairs with a 5% increase in sales reported, although private retail and dealer sales fell 4% to €22.2bn. In the special reports on China and Brazil there are some other interesting statistics. Chinese auctions were the main growth area accounting for 70% of sales, while in Brazil dealers and galleries account for nearly 80% of sales due to a number of factors, including tax laws and import regulations that have hindered the further development of the international market. McAndrew also confirms that the Chinese auction market suffers from a lack of expertise, specialist knowledge, regulation and transparency, which will all act as a barrier to consumer confidence and further development of the market if left unaddressed. The Chinese art market is mainly dependent on domestic demand, but polarised, with a few major collectors at the top end and a number of buyers at the bottom purchasing works for less than €5,000. There is also little international participation in the market. “The important middle market is yet to develop,” says the report. Interestingly, TEFAF is looking at staging a high end art fair in China in 2014, so there is confidence in the potential of the market. In the UK, HM Revenue and Customs annual cross-border customs figures reinforce the country’s status as one of the world’s two leading markets for arts and antiques. Global exports were up by nearly 40% in 2012 to just under £4.5bn, while imports rose 20% to just under £4.7bn. The US remains Britain’s most important trading partner, with Switzerland and Hong Kong competing for second place. Hong Kong was held back by softening Far East markets last year. These figures assess the value of arts and antiques moving across UK borders, rather than transactional evidence, but they give a clear indication of market movements. At the time of writing, fine art, antiques and collectables worth £8m had been sent from the UK by a consortium of regional auctioneers for a sale at the Xiamen Free Port in Fujian Province on 21 April. This is the first event we know of to actively promote Western antiques in China and it will be interesting to assess the results. Another interesting development to watch is Christie’s licence to operate independently in mainland China. Christie’s intends to hold an auction in Shanghai in the autumn A John Anderson is Associate director of RICS Professional Groups
  • RiCs pRopeRty JouRnal J u N E /J u Ly 2 0 1 3 4 9 A ARTS stamps R Keith Heddle gives an insight into the enduring nature of the investment market in rare stamps Printing your own money Rare stamps have remained one of the best kept investment secrets for well over a century, despite the likes of ‘bond king’ Bill Gross, the Rothschilds and the British royal family using them to protect and grow their wealth. But that may all be about to change with the release of the Wealth Report 2013 by Knight Frank. The report, which provides the definitive global perspective on prime property and wealth, identifies rare stamps as a genuine investment option, highlighting that “for performance they are hard to beat”. Over the past 100 years, according to an independent academic study (Dimson and Spaenjers, 2009), the whole market for British stamps has risen steadily in value by over 5% a year (or 2.9% after inflation). Singling out investment-grade stamps would have shown a considerably better performance – the GB30 Rarities Index shows a compound annual growth of 10% over 50 years. To make an interesting comparison, in that period gold only increased by 0.7% per annum in real terms. So what constitutes investment-grade and, more importantly, why are such stamps expected to continue to rise in value? Quite simply, it is ‘supply-demand’ economics at its most fundamental. There is a declining supply of rare, heritage material as items are damaged, lost, donated to museums or tied up in long-term collections. Against that, there is rising demand, not just in the uK from the ‘baby boomer’ generation but from prestige collectors and investors in the uS, Europe and Asia, with the BRIC economies (Brazil, Russia, India and China) unsurprisingly driving the charge. And you simply cannot print more Penny Blacks to satisfy demand. Stamps have been collected since 1840, when Great Britain issued the Penny Black, the world’s first stamp. However, while wealthy families and many of the royal dynasties of Europe have regarded stamps as a store of wealth for generations, investing in rare stamps is a relatively new phenomenon among the general public. Where much confusion lies is in the distinction between collectible and investment-grade stamps. Collectible stamps are amassed by an estimated 60 million people worldwide who are interested in philately; they collect for the joy of it and spend more than $20bn a year on their hobby. Investment-grade stamps, on the other hand, are identified as having the potential to grow in value based on what are called the Five Golden Criteria: b Rarity: Only invest where there is a small number of surviving examples. b Condition: Only invest in the best-quality examples. To qualify as investment-grade, the stamp must be in “fine condition for the issue concerned”. What constitutes ‘fine’ differs greatly, taking into account everything from the size of the margins and quality of the perforations or the condition of the gum, to how clearly and centrally a postmark has been stamped (if the issue has been ‘used’ postally). Great Britain 1840 Plate Imprimatur Penny Black ‘VR official’ Great Britain 1840 Penny Black ‘VR official’ Great Britain 1840 Penny Black multiple Great Britain 1840 Marginal block of Penny Blacks WORTH £300k WORTH £480k WORTH £675k WORTH £275k n
  • RiCs pRopeRty JouRnal 5 0 J u N E /J u Ly 2 0 1 3 A ARTS stamps Keith Heddle is group investment director at stanley gibbons group 020 7836 8444 b Authenticity: Ensure authenticity can be proven – a certificate is only as good as the person or body issuing it. Seek items with documented history and provenance. b Liquidity: Only invest in areas where there are a healthy number of collectors, because collectors drive prices. b Price: The classic value-investment principle – seek to buy at below fair value. Only a very small fraction of stamps from around the world meet all of these criteria and are therefore likely to increase in value. They include everything from Britain’s most famous stamp, the Penny Black, to rare stamps from far-flung corners of what used to be the British Empire, and Chinese heritage pieces. They also include stamps that are flawed in some way: in this market mistakes can be highly profitable, from the famous Prussian Blue to rare modern-day errors. Part of the stamp’s design missing (such as the value or Queen’s head), erroneous colour, upside down overprint or inverted centre can greatly increase the value of even the most common stamp. British stamps remain the most popular for investment due to the long recorded price histories. However, for those investors with a higher ‘risk profile’ seeking more dramatic returns, Chinese rarities are increasingly in demand. Although the printing of 68 million Penny Blacks and the fact that an example can be picked up for just a few pounds from an online auction site may suggest it to be unsuitable for investment, strips, multiples, and blocks in fine condition are still rare and desirable. Early individual examples with large margins (white paper around the edge of the stamp) are also sought after because these did not have perforations and had to be cut from the sheet by postmasters. It is easy for a novice (or even an experienced collector) to misidentify a stamp: a subtle difference in colour could mean you have a rare ‘error of colour’ or just a poor-quality faded stamp; the date stamp may be particularly rare, thus elevating an ordinary stamp to something extraordinary and making it valuable; even small flaws such as a crease, a ‘thin’ or a ‘short perforation’ could vastly devalue it. As the world’s oldest stamp dealer, philatelic publisher and auctioneer with more than three million stamps in stock, our experts consider only about 0.01% to have investment potential. Time and again throughout history, financial wealth is destroyed when there is a stock market or house price correction or crash, because most investors are overexposed in these areas. Rare stamps are uncorrelated to other asset classes and largely unaffected by economic events, making them a viable and stable alternative asset class with significant growth potential. Stability can largely be attributed to passionate prestige collectors pushing up prices rather than the fear, greed and speculation that generally drive investment markets. A prestige collector might have to wait five or 10 years before they find the particular stamp they are looking for – and when they get it, they are likely to hold on to it. Collectors do not rush to sell at the first sign of a downturn in the stockmarkets or currency destabilisation. If anything, they hold on to their precious collections even more. According to survey results released by Natixis Global Asset Management, market volatility has led to “more investors turning to new approaches to investing”, but “knowledge of alternative investment strategies remains low”. At Stanley Gibbons, many of our clients – perhaps most – have no fundamental interest in stamps. They are simply seeking to secure their capital with the chance of steady returns. This is not a market for stock-pickers or dynamic day-to-day trading; it is for those looking for steady growth, healthy returns and stability for part of their portfolio. Historically, during times of rising inflation, rare stamps have performed very well and because of this an increasing number of concerned investors are placing money into these tangible heritage assets for diversification and as an anchor of wealth preservation. The GB250 Rare Stamp Index, which is quoted on Bloomberg Professional®, has shown a compound annual growth rate of 13.18% during the past 10 years and even showed an increase of 17.7% between 2007 and 2008 while global markets crashed. Stamps also offer a number of tax advantages over income-generating assets because they are taxed as a capital gain, which has a top rate of 28% against 45% (decreased from 50% in April 2013) for income. Capital gains tax rates overseas are generally lower than income and in some areas, such as the Channel islands, tax is nil. Much of the appeal also lies in the fact that this type of investment product is easy to understand and straightforward to execute. Investors own the asset (the stamps) and as such there is nothing virtual about it. With a growing market, increasingly positive media coverage and values continuing on an upward trend, the investment benefits of rare stamps will not remain a secret for long. A WORTH £675k Hong Kong, 1863: Block of four 96c stamps with incorrect olive bistre colour WORTH £22k£22k Singapore, 1955 $1: deep-purple Queen’s head omitted WORTH £85k China, 1968: withdrawn because Taiwan is left white WORTH £40k£40k China, 1897 2c: surcharge inverted WORTH £125k Great Britain, 1976 13p Roses: value omitted – only three examples exist n
  • RICS Property JOURNAL J u ne /J u ly 2 0 1 3   5 1 A arts ABA The Antiquarian Booksellers’ Association is thriving. Lesley Davis spoke to President Laurence Worms to find out why membership is growing A rare and unusual businessT he Antiquarian Booksellers’ Association (ABA) like RICS, is also a member of the British Art Market Federation. As members will be aware, this represents the stakeholders in the UK arts and antiques sector to a wide range of government bodies both at home and in Brussels. Founded in 1906 – and the oldest organisation of its kind in the world – the ABA describes itself as “the senior trade body for dealers in antiquarian and rare books, manuscripts and allied materials in the British Isles”. Membership also extends to many of the leading booksellers overseas. Heading up the ABA is Laurence Worms, who is coming to the end of a two-year stint as President of the association. He has owned and run Ash Rare Books (previously based in the City of London and now online) since 1971 and has more than four decades of experience in the trade. Laurence works in a market that is worth around £250m each year in the UK alone (an estimate based on figures from Richard Thompson Insurance Brokers, a specialist insurer in this area, together with the declared figures of the UK auction houses). He is just one of an estimated 1,700 to 1,800 antiquarian and second-hand booksellers in the British Isles listed in Sheppard’s British Isles directory published by Richard Joseph (final figures to be announced later this year). Around the top 15% of these dealers are members of the ABA but this number is now growing year on year. ABA members number around 260 individuals, who are elected rather than simply paying a fee to join the organisation. Booksellers are recommended by their peers on the basis of proven experience, expertise and integrity and members are expected to “observe the highest professional and ethical standards and to foster a mutual trust and respect”, which the ABA considers to be the basis of a successful relationship between the trade and the public. Applicants for membership must have been professional antiquarian booksellers for two consecutive years before becoming eligible for Associate Membership and usually for five years for full Membership. All members are bound by the Articles of Association and Rules, as well as what the ABA believes is “the most stringent Code of Good Practice yet adopted anywhere in the world of books”. ABA members are able to use the association’s badge on their shop windows and websites and on company literature. As the world begins to see the dangers of dealing with the unaccredited and the uncontrolled, especially via the internet, Laurence explains that this gives the public “complete reassurance” of the: bb authenticity of all material offered for sale bb expert and proper description of all such material bb disclosure of all significant defects or restorations bb clear, accurate and professional pricing of all material bb fairness and honesty of offers to purchase The association also provides a valuable ‘book security’ service whereby any items lost or stolen may be reported in a brief message to all members, to other associations, the police, the major auction houses and the Art Loss Register. Applications for ABA membership are growing. “We hope to see as much as a 10% increase during 2013,” says Laurence. “We elected nine new members last month alone and there are some outstanding younger booksellers coming through.” This may also be a result of a buoyant market for antiquarian books – the ABA’s London Antiquarian Book Fair held at Olympia last May (www. was its most successful ever. Despite the recession, the sector is growing – partly due to greater access to rare books via the internet and perhaps also to the perception that antiquarian books may be a good alternative investment at a time when more traditional vehicles have become less appealing. Laurence is wary of this argument saying that the ABA does not promote books as a form of investment for the simple reason that a book is only as valuable as the price k1 The ABA London International Book Fair at Olympia (2012). n
  • RICS Property JOURNAL 5 2   J u ne /J u ly 2 0 1 3 A arts ABA Lesley Davis is a freelance writer and editor from the Property Journal Arts section paid for it – there is not a liquid market in the way of stocks and shares, books are not always immediately tradable – booksellers are stock-holding dealers (not brokers) – and their margins reflect this. That said, over the long term, collectors with a keen eye, sound judgment and expert advice can do very well indeed. So what gives antiquarian books their appeal to collectors and their value in this expanding market? Rarity in itself is not enough to make books collectable; instead their appeal is whatever “strikes a chord in someone’s soul – for whatever reason,” Laurence explains. However, there are obviously some books that will always hold both value and appeal. The great authors in all fields have already stood the test of time, he says. “Are a Shakespeare, a Newton, a Dickens or an Austen, Darwin or Adam Smith ever going to be unimportant or negligible?” he asks. One of the “loveliest things” that he has recently handled himself is Dylan Thomas’ rare first book of poems inscribed by the poet to his wife Caitlin, which Laurence describes as “probably the finest debut in literature of the 20th century”. The volume sold for a five figure sum that Laurence will not disclose out of courtesy to the new owner. Like other collectable items, the value of books comes from their rarity, the condition in which they are found and of course, their provenance. Laurence explains that the Dylan Thomas volume “is a rare and valuable book in its own right but propelled into a different league by a perfect provenance. It sold for ten times the price of an unsigned copy in the same condition and could well have been more”. So should antiquarian books be restored and how does condition affect their value? The current trend is to have an archival box made to protect rare books from further deterioration says Laurence who, like the majority of booksellers and rare book librarians is reluctant to interfere with the original condition of a rare volume. However, if the book can no longer be opened and looked at without damaging it – which is after all what books are for – then a case can be made for restoration. When asked what auctioneers who come by a large collection of books should get excited by, Laurence confirms that spotting something really valuable is an inexact science. “There are interesting, rare and valuable books in every field of human endeavour – and there are no shortcuts to real expertise and genuine experience in any of them,” he says. Recent notable sales include the collected works of WB Yeats, published in eight volumes in 1908 in a deluxe vellum binding, which in later tranches was replaced first by quarter linen over paper boards and then by brown buckram. The set achieved £2,500 at the Olympia Book Fair in 2012. Also sold at the fair and proving Laurence’s point about provenance was a first edition of The Hound of the Baskervilles by Arthur Conan Doyle containing two presentation inscriptions, one dated 1902 and the other 1943 from “Eloise” and a letter from the author on headed paper in its addressed, stamped and postmarked envelope, dated January 1904. The book and the letter were sold for £3,400. An even more astounding £60,000 was achieved for a complete set of all the Holmes and Watson stories published in Strand Magazine from 1891 to 1927. The 75 volumes included the first appearances in the original monthly parts, of the Adventures and Memoirs collections, The Hound of the Baskervilles (New York and London), The Return of Sherlock Holmes, The Valley of Fear, His Last Bow, and The Casebook. These are all 56 Holmes short stories written by Doyle, plus the two novels that were published in these magazines (only A Study in Scarlet and The Sign of Four did not appear in Strand). Despite chips, tears, minor repairs and fading to half the blue spines, the magazines remained in very good condition and are extremely rare. That the appeal of antiquarian books is enduring is in no doubt. Worldwide sales of books and manuscripts in the past five years by Sotheby’s alone are quoted at $350m. With London vying with New York as the centre of the global antiquarian books market, the future for the sector is positive, although it will necessarily become more specialised and require more skills – hence the focus of ABA on education and training. Despite dwindling numbers of traditional bookshops, according to Richard Joseph of Sheppard’s: “Many are now trading, often in a small way, via the Internet, at book fairs, from warehouses, and or via auctions.” The shape of the market may be changing but its fortunes look bright. A Further information > If any RICS member or library needs expert help with the valuation of a collection of books, the ABA will put members in touch with an expert dealer specialising in the relevant type of book. For more information, visit m2 a first edition of Edgar Wallace’s first thriller (1905); 3 a scarce wartime first edition of Agatha Christie (1942); 4a first edition of Pickwick Papers (1837) 32 4 n
  • A J u N E /J u Ly 2 0 1 3 5 3 RiCs pRopeRty JouRnal ARTS Cites M When deals are endangered Could you spot a restricted substance in your saleroom? It could be harder than you think, warns Milton Silverman Most art and antique dealers could spot a rhino horn, an elephant tusk or a piece of mahogany pretty quickly. Chartered surveyors working in the arts sector should be aware of the need to abide by the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) treaty and understand which objects are exempt from the regulations, and which are not. In the European union, CITES is implemented by a regulation that sets out the rules for the import, export and commercial use of specimens. This divides endangered species into four categories or ‘annexes’ with Annex A listing the most endangered species and Annex D the least. Species listed in Annexes A and B require permits from the Wildlife Licensing and Registration Service (WLRS) for import, export and commercial use (buying, selling, keeping for sale, offering for sale, transporting n k Chartered surveyors must be able to spot restricted substances such as ivory and know the rules on imports and exports
  • Muchtoourdelight, wewon...the sculptureswere finallyoutofjail andwhattheclients describedafterwards asa‘Kafkaesque nightmare’wasover “ RICS Property JOURNAL 5 4   J u ne /J u ly 2 0 1 3 A arts CITES Milton Silverman is Senior Commercial Dispute Resolution Partner at Streathers Solicitors LLP 020 7034 4200 for sale and even exchanging and displaying specimens to the public). Specimens in Annexes C and D are subject to fewer restrictions because these species need less protection. The good news for the antiques trade is that specimens that have been “significantly altered from their natural state for jewellery, adornment, art, utility or musical instruments before 1 June 1947” are exempt from the CITES restrictions. However, there is a caveat: antiques that fall into this category must have been obtained in this condition and require no further crafting for the purpose for which they were intended. So a raw rhino horn could not be considered as an antique under the regulations, even if there were proof it had been acquired before 1947. Nor would an ivory snooker ball reworked into an umbrella handle since 1947 fall under the exemption. It would require an Article 10 certificate from the WLRS to allow a dealer to use it commercially in any of the ways outlined above. The rules apply to both living and dead animals and plants and anything that comes from them including eggs, feathers, tusks, teeth, shells, blood, wood and seeds. Diligence is required: CITES can apply even when objects no longer resemble their original appearance, so even though a whale tooth or stuffed bird may ring alarm bells, the ivory umbrella handle or a piece of carved Madagascan Spider Tortoiseshell may not be quite so easy to spot. The WLRS points out: “Antique dealers in particular should bear in mind that CITES controls can apply not simply to movements across international frontiers but also to commercial trade within the EU, including within the UK.” An example of how CITES can catastrophically impact on a trader’s business was played out in a recent case, in which I was involved. Canadian clients held some rather extraordinary sculptures in storage in France. These were transported to Edinburgh for viewing and then to Manchester with no problems. However, when they were then sold to a collector in Los Angeles, an eagle-eyed US Fish and Wildlife Service (USFWS) inspector noticed that embedded in the sculptures was a substance requiring a permit under CITES. It was then that the trouble began. The restricted substance was not overt or easily observed and had not been revealed before. The clients could be forgiven for the oversight, but now they were in trouble – the sculptures were impounded. Together with a Los Angeles lawyer, I became mired in the provisions of the US Endangered Species Act. We attempted to negotiate but made little headway. Eventually, the USFWS relented and the sculptures were sent back to the UK. Problem solved – or so we thought. On arrival in the UK, the Canadian clients received a letter from the CITES team at the Home Office advising that the sculptures did not have the relevant permits. The Latin names of the restricted substances were quoted, as were various CITES and EU Regulations, along with the provisions of the Customs and Excise Management Act 1979. Once again the sculptures were impounded. We now had two options: bb to apply for what is known as ‘Restoration of the goods back to the client’; and simultaneously but entirely separately bb to appeal against the legality of the seizure. These two procedures run alongside each other but the one does not affect the other. In the event we decided to go for both. As a result of making a legal challenge, the HM Revenue and Customs commenced what is known as ’condemnation proceedings’ in the magistrates court. We were now entrenched in two separate actions: the restoration application and magistrates court proceedings. Fortunately, the sculptures were worth fighting for. The legal challenge became bogged down in procedure, but we ploughed on in the hope of having the goods restored. I was promised an early response, the indications were encouraging and we had our result in a number of weeks. The letter was brief and to the point: I had failed. All was not lost. We were entitled to a ‘review‘ and took up the challenge with a new approach. There were more written submissions – more elaborate than previously, and this time I dampened my optimism – rightly so, because I failed again. Hope springs eternal. We were entitled to a third attempt, but this was by way of a far more expensive full-scale tribunal hearing. The advantage – or so we thought – was that we were entitled to be heard and the Review Officer had to justify their decision. Preparation was thorough and time-consuming. The clients were in grim mood on the day but much to the surprise and delight of us all, we won. The sculptures were finally out of jail and what the clients described afterwards as a ‘Kafkaesque nightmare’ was over. Curiously, six months later I found myself involved in another similar case from South America, where a client had inadvertently omitted to obtain a material CITES permit. This time we lost at the first stage, but won at review. What all this demonstrates is the importance of getting to grips with the CITES regulations before export. Better, by far, to be thorough beforehand and avoid the nightmare. A n k Specimens significantly altered for jewellery, adornment, art, utility or musical instruments before June 1947 are exempt from the trading treaty rules