With a surge in UK assets set to hit the market as many funds come to their end of life, Paragon’s Mark Sherrell believes it is essential to be honest about vendor’s reports.
Vendor’s surveys are commonplace in both portfolio and individual commercial property transactions, but if they aren’t reliable and independent, are they even worth the paper they are written on?
These reports were first initiated by the RICS to remove the need for a second pair of eyes in a bid to speed up property transactions. In theory, the process is simple. A seller commissions a vendor’s report, which the purchaser reviews in advance of purchasing a commercial building. The purchaser can then rely on this report to form their bid, and ultimately take reliance on the report once they complete on the purchase.
However, these reports have sometimes developed a reputation as a way for vendors to hide issues and understate ongoing costs, which inevitably leads to a longer, more costly transaction process.
In some cases, the vendor’s reports are heavily caveated and contain limited cost information. The purchaser will then need to instruct either a desktop peer review, or sometimes a completely new report, to get comfortable with the advice. The discrepancies between the vendor’s report and the new purchaser report can add to the complexity of the deal and create difficult, protracted negotiations.
This back-and-forth increases the time and cost for both parties and can add between two to three weeks from start to finish – hardly the efficient process that the RICS intended.
Exploiting grey areas
Of course, vendor’s reports should not contain any information that is categorically untrue, and a purchaser can take legal reliance on this, but there are grey areas which could be exploited if care is not taken.
One such example of these grey areas is cost tables for repairs identified. These are not a black-and-white exercise. In a five-year cost plan, it would be possible for a surveyor to massage figures by moving a significant investment into year six, thus reducing the apparent costs associated with the property.
It may seem a small adjustment but replacing air conditioning units, for example, could cost millions across a large property. It is easy to see the difference this could make to a five-year cost plan if this cost falls into year six rather than year four. Similarly, the timescales for replacing a roof are very open to interpretation.
Vendor’s surveys still have an important role to play, if they are done properly – the thinking behind them is still sound and the industry can rebuild trust in them. However, the nature and content of vendor’s surveys could be under greater scrutiny in the coming years as experts predict a surge in UK and retail assets being put up for sale.
INREV, the body which represents nonlisted real estate funds, said in its most recent Funds Termination Study that as many as 50 funds in Europe are set to end before the close of 2021. Between them, these funds have UK and retail assets under management totalling €13.2bn (£11.7bn) and many will sell the assets because of current market conditions and because they have to stick to their original manifestoes, INREV said.
If this happens, it is likely to result in a surge in vendor’s surveys, particularly with the type of assets held within these funds.
Proposing a solution
So how do we restore confidence and return to a point where they are trusted, valid documents without the need for additional reports?
The key is to ensure that surveys remain succinct and commercially focused, providing vendors and buyers with key information and costs in an accessible way. This doesn’t necessarily need a drastic change to the content of vendor’s surveys, but more a renewed focus on what’s important when it comes to a building’s condition.
If implemented across the board, this would improve sale times and reduce costs for all parties – which was, after all, the very reason they were introduced.
To do so will take an open mindset from surveyors and vendors, with both being willing to be transparent at the start of negotiations. It will require clarity, trust and a healthy dose of realism concerning the building, its condition and any major upgrades that might be due. Isn’t that always the best way to start a transaction anyway?