brokerage or consultancy? the provision of investment agency advice in uk commercial property...
TRANSCRIPT
Brokerage or Consultancy?The Provision of investment agency advice in
UK commercial property acquisitions
Keith Lown MSc MRICSSenior Lecturer in Real EstateNottingham Trent University
Conference, Eindhoven June 2011
Background to Paper
• My background
• Conflict in role: Brokerage or consultancy?
• Research methods - Interviews
• Key issues:
• Client/agent relationships
• Moral and ethical hazards
• Professional ethics
• Conflicts of interest
Contents
• Global Context and Market Size
• What is Investment Agency?– The role and skills of the investment agent
• Ethical Considerations– The acquisition process– The introductory process– Client/agent relationships– The fee basis– Professional ethics
• Conclusions
Global Context and Market Size
• Total UK commercial investment stock = c. $520 bn
[Source IPF and ONS]
Therefore, UK stock = c. 5.2% of global stock
• Global commercial investment stock = c. $10 trillion
[RREEF and Tiwari & White 2010]
• Total UK commercial property stock traded = c. $38 bn pa
[Source DTZ, 2010]
• Total Global Commercial Property Stock traded in 2010= c. $290 billion
[Jones Lang LaSalle, 2010]
Therefore, UK stock = c. 13% of global stock traded
What is Investment Agency?
• A discipline within the broader agency field
• UK = ‘Investment Agent’. US = ‘Realtor’ or ‘Broker’; elsewhere = ‘Broker’
• Providing advice on buying and selling Commercial Property
• Fee structure
• Jack of all trades – master of none?
What is Investment Agency?
• Department within multi-disciplinary surveying firms
• Experts in their field
• Acting on sales and acquisitions
Sales
• Provide advice on: • Pricing• Likely demand and purchasers• Marketing Campaign
• Prepare and distribute sale particulars• Invite bids• Negotiation• Prepare Heads of Terms• Exchange and completion
Acquisitions
• Source Product• Introduce opportunities• Advise on suitability for investment• Market research• Prepare a bid• Negotiation• Agree Heads of Terms• Exchange and Completion
The Role of the Investment Agent
Vendor PurchaserVendor’s Agent
Vendor’s Agent
Purchaser’s Agent
Purchaser’s Agent
The Transaction
Key Investment Agency Skills
• Access to information
• Negotiation
• Short term view
• Persuasion
• ‘Wheeler dealer’
• ‘Cowboy’ image
• Persistence• Patience!
• Persistence
• ‘Gift of the gab’
Brokerage Consultancy
• Market Knowledge
• Excellent advice
• Long term view
• Trusted adviser
• Professional
V
Conversion Rates
• Very low ‘hit rate’
• 95% speculative
• Most work is abortive
• Lack of control
= Frustration!…and a degree of cynicism!
But in the good times…..it can be very rewarding.
Ethical Considerations
• Research concluded that this model predominated in the UK – accounting for approximately 95% of transactions
• The acquisition Process
The Introductory Process
• Information Required?
• Introduction introduced via:
– Email– Internet (i.e. CoStar Propex System)– Via Letter or fax– Through verbal means
• Fee basis confirmed
• Introduction Accepted and Registered
• Introductions only accepted on ‘first come first served basis’
or “First Past the Post”
Common Practices Associated with the Introductory Process include:
• Multiple Introductions
• Speculative Introductions
• ‘Rogue’ Introductions
• The practice of ‘halving’
• ‘Matching-up’
The Introductory Process
Research Concluded that:
“..if they [buyers] are prepared to invest in crap, you may as well be the one who introduces it to them.”
Best quote from a participant:
Client Agent Relationship
• The Client delegates work to the agent, the agent seeks to act in the best interests of their client.
• However, two main problems can arise:– Priorities of the client and agent are not aligned or indeed, are in conflict– The client and agent have inherently different attitudes to risk
• Most common fee basis is 1% of purchase price
• There is no incentive to make the client pay less for an investment.– “NO WIN - NO FEE” - “No prizes for coming second”– “Winner takes it all” - “First across the line”
• Consultancy fees? – Little desire
• Abortive Fees? - Unlikely
The Fee Structure
Example
Client bidding for a c.£25 million property
If client pays £24 million, the fee based on 1% is: £240,000
If the client pays £25.5 million, the fee is £255,000
NOT A BIG INCENTIVE TO ENSURE THE CLIENT PAYS LESS
Research Concluded:
• Advice provided outside of the Red Book
• “Opinion of Worth”. “Purchase Rationale”. “Pricing Recommendation”.
Professional Ethics
Regulatory Regime for Valuations
• Eg: Acting for more than one party
• Transaction Support– Valuation– Building Surveying– Leasing advice– Landlord & Tenant advice
Conflicts of interest
Is a ‘Chinese Wall’ solution enough?
• The internal conflict
• Evidence that the discipline is moving towards pure brokerage. Why?:
– Fees – large but infrequent– Short termism– Remuneration– The introductory process
• No desire amongst participants to move towards consultancy fees or abortive fees.
• Client and agent acceptance of contradictions – it’s a bit of a game
ConclusionsBrokerage or Consultancy?
Brokerage With a Consultancy Gloss?
Brokerage or Consultancy?
Keith Lown MSc MRICSSenior Lecturer in Real EstateNottingham Trent University
Conference, Eindhoven June 2011