As published in EG on 24 November 2022

The “fire sale” is a common theme at a time of economic turmoil. It is characterised by the need for a quick transaction turnaround as a market adjustment is made between those who need to release cash by disposing of assets and those who have finance available for opportunistic purchases.

I have been in the game long enough to have witnessed a few cycles and the fire sales that come with them, so while the sudden rush on our technical due diligence surveying service didn’t come as a surprise, this time around there have been some very significant differences. Some of the most notable have been:

  • the push from sellers to have vendor survey packs ready for multiple assets;
  • first-come-first-served transactions;
  • the insistence from lenders to see thorough ESG reports with EPC improvement plans and costs;
  • the level of data required on everything from building fabric to mechanical and electrical, to leasehold issues; and
  • the desire to see detailed feasibility modelling and costs if further financial injection is required.

The rise of vendor-led due diligence packs

Vendor surveys are nothing new but they have never really taken off in the way they probably should have done.

The biggest benefit of them is that, as long as they are seen as trustworthy, they enable deals to be completed quickly without hassle or having to compromise on the gathering of quality technical due diligence.

We are starting to see them come into their own at the moment, with the specific requirement demanded by a variety of parties involved in the fire sale merry-go-round.

The current economic uncertainty, fall in the value of the pound and rise in interest rates is forcing investors to re-evaluate their property portfolios and, in many instances, “cash in” by offloading assets. For pension funds, many are selling because they need to keep the right level of cash available. Other investors are looking at loans that are due over the next 12 to 18 months and choosing to exit rather than having to negotiate refinancing deals at significantly increased rates.

Where vendor-led due diligence is proving to be invaluable is in satisfying the level of detail needed by purchasers. We are seeing opportunistic buyers from the UK and overseas looking at multiple opportunities at the same time. Often the decisive factor in determining which assets they purchase and which they leave alone is quite simply the speed with which they can gather all the data they need to close the deal.

A director of one of the largest real estate agencies told me recently that buyers are favouring deals where they are presented with an independently gathered technical due diligence pack that leaves no stone unturned and that they can trust to be reliable and transparent.

But it is not just buyers that are hedging their bets on the market and looking at multiple assets before settling on just one or two. Vendors are also bringing more properties to the market than they intend to sell and agreeing deals on a first-come-first-served basis. They are putting batches of properties out at the same time, all with their own technical due diligence packs. Once they have offloaded enough to meet their cash targets, they take the rest off the market.

Pressure from lenders

One thing we are seeing a lot more of during this downturn is lenders demanding specific information ahead of agreeing any financing package. While they have always been diligent, there are some very clear valuation risks they need to consider at the moment. For example, funders are very aware of the changing regulations around EPC ratings that will be taking effect over the coming years. We have therefore seen lenders requesting detailed ESG reports so they know that their investments are protected and assets are not going to be deemed worthless in five years’ time if they do meet EPC C or B levels in 2027 and 2030 respectively.

These reports need to set out any investment needed to ensure assets achieve the necessary carbon reduction measures.

No stone unturned

When it comes to providing technical due diligence survey packs to potential buyers, there is no such thing as too much data. Very few deals are done without data analysts trawling through every detail and the more they are given, the better the judgment they can make about future income and expenditure on the asset.

To this end, we have seen vendor packs become bigger and bigger over the years. Where as 10 years ago an instruction for a vendor survey would have literally just involved a building condition survey, it now involves – or at least should if done properly – an almost 360-degree inspection and analysis of an asset looking at area referencing; mechanical; electrical; plumbing; fire; 10-year life cycle costings; environmental; recoverable and non-recoverable costs; and information which  will soon be required under the Building Safety Act 2022 (which will be fully enforceable from October 2024).

Building condition surveys only tell one side of a story, as do any detailed estimates as to the likely future costs of maintaining the condition of an asset or making the necessary improvements to meet changing regulations. Investors also need to have a clear picture of all other aspects that may affect the future value of their investment or the returns they receive. For example, we are increasingly looking at lease terms and any liabilities that may be associated with them that buyers should be aware of. We have also produced a number of speculative dilapidations reports that outline possible claims and the costs involved. Buyers are also increasingly aware of issues such as fire and cladding safety and ESG.

Some of the most active buyers during periods of fire sales are savvy opportunistic investors. They look for assets they can not only get at the bottom of the market price, but on which they can maximise future returns by making cost-effective improvements that add value for when they sell them on. For these buyers, they want vendor packs to provide them with comprehensive feasibility studies, backed up by image referencing and data analysis.

Transparency and access are essential

When it comes to vendor surveys, not all are created equally. What differentiates a good-quality, comprehensive vendor survey from the rest are those that give full scope of a building with a full risk profile and are carried out by independent experts with the necessary skills and competence to provide sound, reliable input on a range of key technical issues. A good-quality survey will show potential purchasers you have considered all aspects of the building, providing solutions alongside any issues.

For all the parties involved in a transaction, there is nothing more frustrating than delays being caused by ambiguous reports that breed distrust between the buyer and seller, or reports that are hard to get hold of and access.

It may seem counterproductive for a seller to provide a buyer with a wartsand- all report that highlights the risks as well as the rewards, but experience shows us that in doing so, vendors are more likely to secure the deals they want in the timeframe they need.

What should be included in a good vendor technical due diligence pack?

Vendor packs are being looked at as a solution for sellers because it means that they can take their assets to market with all the documentation a buyer needs in order to make a quick decision. A good pack should include:

  • building condition surveys with length of life estimates on the building fabric, which highlight “risk” areas and associated costs for repairs and maintenance
  • reviews of existing leases in place on the asset, that outline any costs and liabilities associated with them that buyers should be aware of
  • reviews of possible dilapidation claims and reinstatement costs
  • length of life assessment of the mechanical and engineering aspects of the property, with timeline guides for when installations might need replacing
  • area referencing measurements to ensure they tally up with any historic drawings (don’t assume that old drawings are accurate, they are often not)
  • risk assessments for fire safety issues, especially where changes in regulations may apply
  • environmental and sustainability audits that take into account the regulation changes regarding EPC ratings
  • data and image referencing to assist with feasibility planning for future development work

Mark Hampson

Head of Commercial and Clients
Management Board

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