In a competitive market, due diligence is about solutions
Investors are under growing pressure to deploy funds and make returns. Since UK real estate has always rightfully been perceived as sound investment, demand is outstripping supply, with investors often competing for the same properties.
Off-market deals, speculative development and grey-stock demand – phrases missing for some time – are now back in the industry vernacular. As investors compete for opportunities, decisions often need to be made in shorter timeframes and sometimes based on less satisfactory information than the norm.
The Technical Due Diligence process needs to balance rigour with pace if investors are to close deals. Volumes of technical surveys are often not digestible or comprehensible within the time available. Here, investors need quick access to the red flags, with effective solutions to turn them amber, or better still, green.
Focus on solutions, not problems
Simply making statements about potential pitfalls doesn’t help close the deal (or cut the price) when the vendor is in the driving seat and the investor is looking for wins. Solutions to issues are required so the due diligence process needs to include mitigation, collaborating with the investor (and vendor), to work through issues so the risk profile can be managed, enabling investment rather than thwarting it.
There’s also a shift in what constitutes institutional alignment. Incoming EPC controls are serious, and their implications must be met head-on if acquired assets are to remain liquid. Renewables and increasingly, Net Zero Carbon, are becoming the base position. Limited combustibility is good but non-combustibility is the long-term goal.
Technical Due Diligence must now look beyond current standards to what the market may regard as deleterious in time. A red flag item maybe something that, while compliant with building regulations today, could be a barrier to liquidity or insurance cover tomorrow.
Answering the right question
In a market where both stock and time are in short supply, the Technical Due Diligence brief needs to be clearly defined. What is the business plan? How important is the acquisition? What is the timeframe?
Understanding the client’s appetite for risk is crucial. A more commercial position may mean red lines can be drawn at the outset, allowing time to be saved by only reporting those matters which need to be resolved. A lower risk threshold may mean more time is needed for a deep dive, or alternatively, could result in an early decision to abort, to refocus finite energies on more compatible opportunities.
Crystalising the reporting parameters at the outset allows the process to concentrate on matters crucial to the investor, setting aside those that aren’t: thus expediting the process. Clients can then make decisions in a timeframe that enables them to complete in what is likely to be highly active summer market.
This redefined solutions-based due diligence requires agility and experience. The hardest part for surveyors will be having the confidence to say less, rather than more.