Institutional investors once confined themselves to traditional core sectors, where the risks were known and understood. Then came the move into what were originally termed ‘alternatives’. Today, the newer asset classes are developing into established markets in their own right – but are these asset classes mature enough to provide sufficient consistency of product and quantifiable risk?
With yields continuing to compress, the specification and condition of an asset becomes more important, and sensible investors are placing greater emphasis on the pre-acquisition process. Traditionally, investors and developers were familiar with their building types, and could easily recognise warning signs for shortcomings.
We are now seeing newer methods of construction, alongside re-purposing of existing stock, in a less regulated environment. This has resulted in the arrival of assets that have not been fully tested from a long-term investment perspective.
The detailed condition of a building and its surroundings can have serious implications for the deal price or the transaction time. It’s vital that appropriate concerns are raised, and that statutory compliance requirements are met. In this way, the proposed investment can be properly assessed and informed decisions taken at the right time.
A pragmatic approach to quantifying and grading of risks can mitigate problems and adhere to the timeframes of the deal.
There is certainly greater fragmentation in the design, ownership and operation of the newer asset classes and it’s increasingly difficult to establish whether these assets are truly sound without delving under the surface. For example, if a repurposed building was originally designed for a different use, it may retain inherent sector-specific problems. It may not have been a quality product in the first place, or maintenance may have been lacking for some time.
It’s not only the physical construction and condition of the asset that’s important. The statutory requirements and warranty obligations should also be considered.
Successful technical due diligence hinges on the nuanced interpretation of the client’s brief. Developers, funders, institutions, investors and occupiers all have different needs and these multi- stakeholder perspectives must be considered. It’s a detailed process and may require sifting through decades of historical documentation, as well as physically inspecting the asset.
The building services should never be neglected, especially on repurposed buildings. Remedial work is time-consuming and disruptive, due to surrounding finishes of concealed services and the importance of maintaining an acceptable internal environment.
Post-Grenfell Tower, fire safety measures and the shortcomings highlighted in the ensuing Hackitt Review interim report, remain high profile. The newer asset classes are more likely to be domestic settings – student accommodation or care homes, for example. Issues with these assets may bring reputational risk in addition to the normal balance sheet considerations.
A decade of over-dependence on contractual safeguards, rather than physical inspection of actual work undertaken during construction, will require years of rectification. The heavily partitioned nature of these buildings, like those with quality finishes, usually results in more disruptive opening-up works to reveal the extent of the fire compartmentation problems. It’s not unheard of for purchasers to negotiate reductions of up to 10 per cent where such problems exist, illustrating the importance of astute technical advice.
As these asset classes continue to mature, a detailed pre-acquisition review will remain essential. Faithful+Gould’s national team of technical due diligence specialists supports investors and owner-occupiers on transactions across all property sectors, for stand-alone or multiple building acquisitions or disposals.