“What do you think the rent will be settled at?”
“It’s probably worth about £30 per sq ft in the market. I’d say they’ll agree something in the region of £35.”
In the past 12 months this kind of exchange, between two West End surveyors about the likely outcome of a rent review, must have taken place many hundreds of times. But, you will say, it is not logical. Indeed it is not and the corollary is that the rent agreed at review does not fairly represent the open market value of the premises between willing lessor and willing lessee. This is the reality of the market today.
But why is the system so often producing the wrong result?
The West End office market is suffering from its worst period since the property collapse of 1973-74. Rents have fallen between 15% and 50%, depending on quality and location, from the peak of the market in the summer of 1989.
This rapid fall in rents, although acknowledged by those who are actively involved in the market-place, is a hard pill for landlords to swallow. Property companies, institutions and professional advisers are having difficulty coming to terms with the real world and, more important, they will sometimes choose to camouflage it, ignorance permitting.
Let us compare what happened in the “good times” with now. For example, in a multi-tenanted building in 1988, when reviews were about to occur, a landlord (with commercial acumen) would frequently endeavour to obtain vacant possession of a floor and relet it in the open market in order to prove rental levels within the building. Open market evidence is generally plentiful in a fast-rising market and this was a fairly safe and highly successful method for landlords.
The converse is true today. Owing to a scarcity of lettings, the evidence at review is often historic or relies heavily on other rent reviews or lease renewal agreements. This situation encourages distortions in the valuation process but, faced with an absence of good evidence, what is a valuer to do?
It usually depends on whose side he is on, and this is where the great imperfections in the system lie. A landlord’s negotiator will attempt to introduce open market transactions as far back as possible, as well as more recent rent review evidence. The tenant’s surveyor will, on the other hand, endeavour to demonstrate the weakness in demand by indicating the availability of comparable properties and the terms on which they are available. He will also research the review evidence to his client’s advantage. The layman would assume that both valuers are professionals and, accordingly, that they should not be far apart in their views on value. Sadly, he would be wrong.
When a review of the rent is about to occur it is usual for both landlord and tenant to appoint a surveyor to advise and negotiate on his behalf. In general it will be a qualified surveyor, who is employed in a department which specialises in rent review and lease renewal work. His work may embrace not only office property but also industrial and retail. He will probably not specialise in any particular location.
Alternatively, the surveyor appointed will be one whose mainstream activity is in agency, who is involved in the market where the review occurs and therefore carries out both rent review and agency work.
In my view, the former is less likely to know what the subject premises are worth without carrying out extensive research and liaising closely with his agency colleagues. The latter should know the level at which the premises might reasonably let in the open market, based on their knowledge of that market.
This, of course, excludes the niceties of the lease and peculiarities associated with the individual transactions.
The professional department valuer must obtain good evidence in order that he can assess the value accurately. If the evidence does not exist or is so poor as to be of little use then his ability to value is severely restricted, and yet value he will, frequently in ignorance. As a result, not only will his client suffer from bad advice but, if he is successful in his negotiations, this will be used as evidence elsewhere.
It is our experience that the number of “wrong results” in the West End office market is on the increase. This is not only a fundamental criticism of valuation practice but it also further restricts movement by occupiers who find that their leases are unassignable. This will always be a problem when rents are falling, but it is being exacerbated by the inadequacies of our own profession.
This is now apparent from the number of reviews being referred to third party. The differences in opinions are vast — in some cases over 50% — partly due to ignorance and partly due to the act of the “negotiation”.
A rent review is a hypothetical letting with vacant possession but, in reality, the investor already has a tenant on the hook and cannot be blamed for “having a go” if the so-called “profession of the land” permits him.
But once a review has been referred to arbitration it becomes the duty of the surveyors for the respective parties “to assist the arbitrator in coming to his award” and to give their honest views and opinions, just as if they were carrying out a portfolio valuation. I believe that too often this does not happen. A surveyor should not, in a submission, make statements to sway the arbitrator’s judgment in favour of his client. It is not fair on the arbitrator and he is not doing his job properly.
Professional integrity and client loyalty have become confused in rent review disputes and some of the blame must be laid at the door of the gentlemen appointed as third parties by the president of the RICS, as some experts simply are not expert. Procedural precision is all very well, but it is no substitute for true market knowledge.
Integrity and loyalty need not be incompatible, provided landlords and tenants are convinced that, whatever their views on value might be, they will have a true and fair rent imposed on them by independent experts and arbitrators. Confidence in a third party is the key to a better system.
Most leases will direct that parties in dispute may, by agreement, nominate a third party themselves, and if they fail to agree the nomination passes to the president of the RICS. In our experience, many disputes are being referred directly to the president without any prior discussion on a suitable candidate. In some cases, a request is made before negotiations on rent have even taken place. It would be better for all parties if more effort were made in the nomination of a mutually agreed third party: better for the landlord, the tenant and for the reputation and credibility of our profession.
