The importance of Technical Due Diligence: Why you cannot rush a property valuation
Paul Belfield, Director at Rund Partnership, discusses the importance of Technical Due Diligence, as featured on BTR News.
“When news broke that Grainger PLC had acquired The Forge in Newcastle, a build-to-rent project of 283 rental apartments plus a commercial unit from Moorfield Real Estate Fund III, it was news that reflected a labour of love for all of us at Rund Partnership. Back in 2020, we had been appointed by Grainger to provide Technical Due Diligence services in the acquisition of The Forge. Whilst some may argue, the quality of The Forge makes this acquisition a no-brainer; however, Grainger, in tandem with our team took a slow and steady approach to ensuring every detail was scrutinised, and would live up to their high standards. This is a smart approach, but highlights one of the biggest mistakes tempting property investors across the country – rushing a property evaluation and Technical Due Diligence.
“Quite simply, acquiring a property is never as easy as it may appear. Whilst on the surface, it looks as basic as exchanging capital between two parties; the process can be far more complicated and take months and even years to finalise. With so much money, reputational risk, and many stakeholders to consider, negotiation, research and expert Technical Due Diligence is essential before any deals are finalised to ensure both parties get the best possible outcomes.
“But thorough Technical Due Diligence takes time. It involves a systematic review and analysis of all the physical characteristics of a property and/or land, alongside current and emerging legislative requirements, to essentially discover if the space in question has any defects or deficiencies that could have a long-term negative impact on the asset and the safety of its occupants in its performance. But I have to stress, this analysis is not just about today or tomorrow. This is about understanding how the asset could hold up in the long term – if any deficiencies in design could cause chaos in years to come, if deleterious materials have been used, or if the building is compliant with regulations and codes. This is about going above and beyond to note any misuse or neglect to the building, to highlight if there is any planned and actual maintenance of the property, and to ultimately understand if the property is at or beyond the end of its useful economic life.
“But, at the heart of Technical Due Diligence, is safety. Following the tragic events of Grenfell Tower, there is an added impetus to ensure that the health and safety of occupiers is always prioritised, and avoiding any risk to life through thorough searches is key part of this process. For potential buyers, it is important to put into perspective the risk they’re taking on when buying an existing build having not been involved in the building design and construction from the outset. Leaving things to chance is not an option. It is vital to establish what materials have been used in the build of the property and identify if these still fall within the ever-evolving health and safety building regulations.
“A further priority, not to be overlooked in an acquisition, is the environmental impact of a building, seeking out which buildings would be ‘stranded assets’ – property which will not meet future energy efficiency standards or market expectations, making the investment undesirable. Whilst there are existing Minimum Energy Efficiency Standards, legislation is quickly changing, and minimum requirement expectations are increasing, alongside the introduction of metered energy consumption and carbon emissions. There is increasing pressure on the built environment to reduce the sector’s emissions, and as regulations evolve, Technical Due Diligence has an important role to play. Through benchmarking the carbon emissions and energy use of an asset, and investigating if there are opportunities to make improvements to a building, this analysis could add value, make a building more sustainable, and futureproof a business’ property portfolio, stopping the assets from becoming non-compliant.
“Whilst Technical Due Diligence has rapidly become a standard practice in commercial property transactions; it is not as widely used in the residential property market. This is something I hope changes in years to come, as it could have a vast impact on weeding out subpar housing in the UK, which as we all know has been a blight on the UK’s housing sector. That being said, it is great to see property investors entering into multi-unit residential schemes taking cautionary measures and conducting these technical appraisals, in order to better protect all stakeholders involved.
“They say Rome was not built in a day, but investigating a property post build, is just as much a lengthy and complex process, with intricacies that cannot be overlooked. This process ensures that the acquirer of the property is fully informed about the risks involved and even potential improvements that can be made. This is particularly vital in a BTR scheme, like the Forge, where the durability and robustness of the assets are essential, to provide long-term high rate accommodation and facilities for those living within this scheme.”