BUILT ENVIRONMENT JOURNAL

Why TDD in Australia calls for prompt reporting

While technical due diligence in Australia resembles the process elsewhere in the world, consultants must be aware of tight time frames – as the first of two pieces in our ongoing series explains

Author:

  • Andrea Brown MRICS

14 February 2023

Aerial photo of Sydney central business district

Over the past two decades, Australia has seen the rise of technical due diligence (TDD) as a service offering, with most institutional building owners and real-estate investment trusts now requiring such reporting as part of the transaction process.

Vendors value reports for major disposals

Building consultants – the name by which chartered building surveyors tend to operate in Australia – not only need to balance the professional standards they uphold with the clients' requirements, but also understand that TDD reports are often regarded as a tick-box exercise.

In Australia, TDD is more likely to be requested by the purchaser during acquisition than it is by the vendor; reports for the latter are generally reserved for disposals of portfolios or large single assets.

In keeping with global practice, such vendor due diligence reporting can be a means of reducing price risk – so-called price-chipping – by providing transparency on the assessment of the building condition. It can also help accelerate progress along the overall transaction timeline.

However, despite having good reason to do so, many private-sector organisations will not typically commission a vendor's report where assets are of small value, or if market conditions are inflated.

Timing and assigning reports

Although property sales happen all year round, there are two particularly important times in Australia – generally, around Anzac Day at the end of April, and again around the Melbourne Cup horse race on the second Tuesday in November.

Traditionally, your property sales campaign needs to have started by either of these indicative dates to ensure that deals can be finalised by, respectively the end of the financial year on 30 June or before the Christmas shutdown – around 23 December – after which the whole property sector seems to disappear until the end of January for the Australian summer.

As elsewhere in the world, vendor reports typically allow for a single assignment, meaning that only the original client can rely on them and they cannot be used as part of future transactions. Additional assignments of that kind are not common, given the original consultant would incur greater risk and liability should another purchaser rely on it.

However, even provision of an assignable vendor TDD report will not necessarily mean that the purchaser does not engage a consultant to carry out their own acquisition due diligence. If the purchaser is an investor, for instance, its requirements may differ from those for which the vendor instructed the consultant.

While a vendor will only do what it needs to do to provide a position on the asset, the nuanced requirements of purchasers for their investment cannot always be forecast. Therefore, not all due diligence reports are created equal: a vendor report may only record building fabric and building services, but an investor may require that specialist facade or environmental advice is also assessed as part of the process. Having an appropriate vendor TDD scope can therefore be very valuable by reducing and quickening a purchaser's own TDD process, and therefore transaction timeline.

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Fulfilling instructions with integrity

The need for building consultants to fulfil the specifics of their instructions is of course reflected in the current edition of RICS' Technical due diligence of commercial property, and it is important to ensure that your client understands the scope and limitations of any advice provided.

In recent years, there has been an increase in short-format due diligence reporting, which tends not to include most descriptive elements and instead highlights the likely capital expenditure needed to address the most significant risks. Also common is reporting that analyses the suitability of the advice in the vendor reports, which would often be called a peer-review TDD report in the UK. Alternative report formats such as these have a purpose, so long as clear instructions are obtained on scope of service outputs, and professional integrity is maintained.

How client timelines and risks will be managed, for instance, needs to be agreed at briefing stage. There are several areas where building consultants need to frame advice to let clients meet their deadlines in a way that fulfils their requirements but does not expose the consultant themselves to potential liability.

Outputs must be timely

As in the UK and New Zealand, overarching due diligence timelines tend to be between two and four weeks.

In a competitive market, however, there is a need to adapt the way that information is reported to keep pace with commercial discussions, particularly if due diligence is a precursor to a final and binding bid.

It is, therefore, normal in Australia to provide the client with a verbal update that focuses solely on any technical red flags identified during an inspection. A review of information shared in the online data room is usually excluded by written agreement at this stage. Such data rooms are usually set up by the vendor or its legal team, and are not something that the building consultant manages; sometimes, though, these are used to lodge requests for information and similar.

Within 48 hours of inspection, a written summary of red flags, initial capital expenditure forecast and schedule for requested information can be provided. Needless to say, these preliminary findings are qualified by the caveats agreed in the briefing phase, and the building consultant will remind the client in writing that the findings cannot be relied on in themselves and should be read in conjunction with the final full report.

However, these findings do at least provide clients with confidence about the technical aspects of the transaction, subject to any significant divergences from the assumptions made in the financial modelling.

How this plays out in practice can be seen from one recent transaction. In 2021, asset and investment manager ESR Milestone Partnership (EMP) purchased 45 industrial assets and the rights to manage them from Blackstone for A$3.6bn. This made EMP the third largest manager of industrial and logistics real estate in Australia.

The portfolio went to market with vendor's TDD reports but EMP and all the other bidders engaged their own due diligence teams as well. The size of the portfolio and the fact no bidding group could use the same consultants effectively meant that most building consultants who carry out TDD in Australia worked on the transaction. Inspections on site were also limited, so the purchaser advice came with extensive caveats, and analysis of the differences from the vendor report.

This was just part of a national market for commercial assets across all sectors that has been calculated at A$64.8bn by Real Capital Analytics.

Given the depth and liquidity of the Australian market, it is not even unusual for assets to return to market shortly after a transaction.

In these circumstances, vendors often add historical TDD reports to the data room, as they are often requested by the purchasers' legal teams. Typically, though, if risk is to be managed correctly, any report more than 12 months old requires the asset to be reinspected and reassessed from a TDD perspective.

'It is normal to give the client a verbal update focusing solely on any technical red flags identified during inspection'

Working within extent of expertise

Knowing the extent of your expertise is critical in due diligence. It is important that what you can and cannot advise on are clearly defined, and any associated caveats made. Is the inspection visual only, and conducted from the ground floor? What will you comment on? Are you going beyond your skill set and insurance coverage by doing so?

Although building fabric and building services are the traditional subject of TDD reporting, combustible cladding and sustainability now see similar attention, with further consultants appointed to advise on these specialist areas.

The former can result in considerable capital expenditure, while interest in the latter is increasing, given investors' board-level reporting goals and the potential to enhance – or blight – asset value.

How Australian legislation and regulation is addressing the issues of fire safety and green buildings, and the impact this has on TDD, will be discussed in the subsequent article – as will the vital role that chartered building consultants play in these processes.

'It is important that what the building consultant can and cannot advise on are clearly defined'

 

Andrea Brown MRICS is a partner, national head of client solutions, at Knight Frank Australia
Contact Andrea: Email

Related competencies include: Client care, Inspection

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