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