Forcing Liquidity into Real Estate

The Investment Property Forum (IPF) have just launched the latest edition of their guide to best practice in real estate transactions. It is a worthy effort compiled by a committee composed of experienced and knowledgeable individuals. This is the third iteration since the idea of improving liquidity came to the property investment industry in 1996, some 10 years after most other investment markets underwent their “Big Bang”. For a 22-year-old concept it hasn’t moved on very much but those of us who have been a part of the industry during that period would probably have needed an extra dose of Phyllosan if it had.

Everybody knows that liquidity and real estate are effectively mutually exclusive. So, describing a route meandering through a typical timeframe of between 3 and 8 months (including 1 or 2 months getting the due diligence accepted by the buyer) actually feels a bit rushed. Where are the allowances for Christmas, Ski season, MIPIM, Easter, Spring half-term, Ascot and, of course, the 8-week summer hols? This reality has not recently become an anachronism, it has been one for longer than it wasn’t.

What will the next version of the guide look like? Does anybody think that the “Typical timeframe” will be shaved by a few weeks? Will the concept of readiness for sale catch on in the next 3 or 4 years? Is it even conceivable to squeeze the sale of a single sizeable asset into the period between the autumn half-term and the 1st December start of Christmas? That would be… erm, awesome. It may not have exactly the same definition as high-frequency trading but for the veterans this is like a car journey with Mr Toad.

We must do better, massively better. How could we do better? Like any recovery it can only start with accepting that there is a problem and that may only become apparent when the impact of HM Land Registry’s amble towards the data flood gate is felt. You won’t have to spend long researching this one as sites like Datscha and Nimbus Maps are already there to see and use. They want your business. Once that motive force is in place:

·         More compulsory registration of leases and associated documents. You might feel like you have wandered into the street without your trousers on, but transparency is good for the industry and those who understand why.

·         Widespread adoption of data exchange standards, including Unique Property Reference Numbers (UPRN). Note: UPRN is currently covered by an Ordnance Survey policy, which needs to be addressed – see what I did there?

·         Use machine reading and other AI related technologies to turn documents into structured data (I declare an interest here – ask me about it),  giving access as necessary to purchasers, funders and valuers.

·         Spend more time on your Heads-of-Terms and your own investigations. You will spend less on lawyers’ fees and you don’t do that without spending less time too.

·         Don’t accept an offer without verifiable funding evidence from the purchaser. Obvious to you I know but someone is still doing it because it happens all the time when ££££s are offered.

·         Stop issuing pointless pre-contract enquiries, which are frequently rejected by the seller’s lawyer.

·         Restrict the number of searches (they go out-of-date to quickly anyway) and use insurance to cover the less likely negative results.

·         Don’t allow YOUR lawyer to make pointless alterations to the sale and purchase contract.

·         Make audit regulations such that readiness for sale is a basic requirement.

·         Get ready for Blockchain. Don’t panic, it isn’t really here yet but if you want to be on that wave when it arrives, you MUST have full, accurate, up-to-date and transferable data.

Remember that every minute that passes between agreeing terms and exchanging contracts increases the chances of your deal failing.

If you don’t know what counts as data …ask lots of people. Or me.

Trust me on this one: more liquidity = more transactions = more investors

UK Solar - A buying opportunity?

I have spoken to a number of investors in UK solar power generation of the last few weeks and all of them are reassessing their positions following the announcement of further reductions in Feed-in-Tariffs (FIT).

The overwhelming view is that large scale installations are unlikely to be viable at the new tariff levels, even accounting for recent reductions in equipment prices. The vast majority of investors are well below the target size for their portfolios and given the likely lack of new opportunities are considering their next steps.

I envisage a period of consolidation, with some investors deciding to exit and others using that as a buying opportunity.

I am in close contact with a number of investors who are keen to expand their portfolios, so if you are a seller, or have a client who is, please get in contact.

Intelligent monks farm God given energy

Following the completion of a recent project I visited our customer to present the handover file for a 34.5kWp photovoltaic (PV) installation designed to produce around 31 megawatt hours of electricity a year. As the site in question is a Benedictine abbey providing a home for a community of monks as well as a venue for concerts, conferences, study and of course worship I thought a few words might be of interest and demonstrate the value of persistence on the part of both customer and supplier. Here are the essentials: Planning The grounds of the abbey contain several listed buildings, so planning permission was needed for this installation. The basic requirement turned out to be that the whole installation would need to be invisible from the ground; a bit of design tweaking and an acceptance that not every available surface needed to be filled with modules dealt with this. Energy Performance Certificate (EPC) We encountered the bizarre workings of the Feed in Tariff system and the requirements for energy efficiency. Background

  • When the Government was looking for ways to bring the costs under control a couple of years ago it introduced a condition that installations attached to buildings with poor energy performance ratings would receive a much reduced level of subsidy. Superficially this seems fair, as was the use of the Energy Performance Certificate (EPC) system as the measure of that performance.

  • You now need to produce an EPC showing class D or better before you can collect the subsidy; still logical in a world where all subsidies are going to homeowners. Now the Government and their advisors are surprised that the take up by the controllers of commercial rooftops is very low; which is bad because the greatest environmental (as opposed to electoral) benefit is achieved when rooftop PV systems supply the occupier of the building with energy to match the use within the building. Transferring electricity to the grid starts to create losses and that is largely what is happening on a sunny day in June when most households do not use much in the way of lighting, heating or heavily consumptive appliances.

  • Most commercial buildings have a fairly high and continuous use of electricity throughout the year and any element of air-conditioning is likely to increase demand further in the summer months, when PV is at its zenith. The calculations required for EPC rating do not take into account the equipment in use within the building, just the "climate control" aspects of heating, cooling and insulation, plus lighting. Summary

  • The subsidy system gives most to those who have the best heating and insulation, even though they have virtually zero effect when the solar energy production is most efficient. Relatively therefore it penalises industrial property the most, which is the biggest user of on-site electricity relative to available roof space.

  • The good news is that buildings that do not have heating systems are exempt from the EPC requirement. They should be able to collect the higher subsidy rate to encourage them to try to overcome the costs of retrofitting PV modules on large rooftops which were not originally designed for such installations.

  • The snag is that most unheated industrial buildings are simply there for storage and use very little power. The sting in the tail

  • Good news again. There are a number of other classes of property that do not require EPCs, including (yes I am getting back to the subject) Places of Worship!

  • Guess what; it's not such good news as these other exemptions are not recognised by the Feed in Tariff rules, so unless you can produce an EPC of D or better you are stuck with the same tariff as a 5,000 kWp solar farm.

  • Even if you had a well-insulated church you still couldn't collect because EPC assessors will not assess a property which is exempt from requirements. So don't expect to see many more churches use their large south facing rooftops to supply the place of worship or the attached nursery, community hall etc. Sting avoided The trustees of the abbey are used to long term planning though and are not frightened of a bit of technology, so when a new library was added a few years ago low carbon was up there with shelving on the wish list. They used ground source heat pumps to extract not only heat from 80m bore holes but also an EPC rating of C..... Bazinga! A good outcome for all We were in business. The arcane rules, based on residential property, decree that one building on the site needs an EPC. We were able to overcome the obstacles (which could have been designed to collect votes and save money rather than achieve a low carbon economy) to install a system which will provide all the power requirements of the abbey and ancillary buildings for brief periods during the summer and overall significantly reduce both costs and carbon footprint. Even this wouldn't have been possible however had the trustees not been prepared to take a long view and see the investment for what it is, a way of fixing a substantial proportion of electricity costs for at least 25 years with a massive saving in carbon emissions, even after allowing for manufacture and installation. In case you are worried, not a single module can be seen from ground level; so no blot on the architectural qualities of this beautiful and tranquil haven. The moral(s)

  • Long term thinking wins over a poorly designed incentive scheme.

  • These benefits could be available to British industry too.

  • The Government is now of the view that commercial property as a basis for micro generation needs to be exploited and accept that rule changes need to be considered.

  • Experience has shown that being prepared and ready to take advantages of new initiatives gets the best results.

  • If a location and use is fundamentally suitable for solar power generation (we can tell you pretty quickly if it is not) then persistence and a creative supply partner can deliver.