Examination of Witness (Question Numbers
20-39)
RICS
8 DECEMBER 2009
Q20 Chairman: Perhaps you can correspond
with the Committee on that point.
Mr Rusholme: I will.
Q21 Chairman: I have seen some very
different presentations of rentals from pubcos certainly to their
tenants or lessees: some are exemplary and others are, frankly,
shocking.
Mr Rusholme: Would you mind if
I draw a distinction here? There is a distinction to be made between
rental proposals by chartered surveyors who have been engaged
to carry out this work and business development managers or representatives
of landlords who are doing this without any reference to chartered
surveyors. As to the latter category I agree that there is much
concern about what information has been provided.
Q22 Chairman: That is also my view.
Without going into the details of it, how important is the Brooker
case for rent review purposes in dealing with the issue of divisible
balance?
Mr Rusholme: I believe that from
time to time in all areas commercial valuation cases come along
which have particular significance and the Brooker case
is one of those.
Q23 Chairman: Therefore, is the figure
of 35% a new benchmark?
Mr Rusholme: What I like about
the Brooker case is that it has helped to dispel the myth
that RICS or any other body sets in stone that there should be
any particular split of divisible balance, be it 50-50 or whatever.
Within Brooker there is a lot of discussion about risk
and how one encapsulates it ultimately in the amount of money
the tenant will pay. That is a very healthy discussion to have
and an area where our guidance will provide a lot more support
in terms of exactly where risks and rewards are taken into account.
Q24 Miss Kirkbride: One of the recommendations
in the report of the Select Committee on Trade and Industry in
2004 was the establishment of a national register of rents to
make things much more transparent. It appears you have suggested
a national database of trading information as a better alternative.
Can you explain how that would work and why you think it is a
better proposal than our original one?
Mr Rusholme: We recognise that
for a long time there have been calls for a national register
of rents. Various groups including ourselves have looked at the
practicalities of achieving that. There are lots of difficulties
related to data protection issues and gaining the co-operation
of the industry to make that happen. We came up with a better
idea in the forum report. We looked at a number of other industries
which had a trading element, for example hotels. There is a good
deal of benchmarking information provided in that industry which
is very helpful in getting the parties to come together in negotiations.
That is one part of it. The other part is that chartered surveyors
who act in that sector have their own databases of information
and it is part of their skill and job to put together that information.
One needs a whole range of information sources to make the process
easier. We believe that benchmarking will do that job and that
is achievable because there is an averaging of data from different
sources; it is not just identifiable to one particular public
house, for example. By averaging and making trading information
slightly more discrete one is better able to get the whole industry
to start to make more of that data available. We believe there
is a lot of mileage in pursuing a benchmarking scheme and at the
moment our efforts are devoted to trying to make that happen.
Q25 Miss Kirkbride: Are you getting
both landlords and tenants to co-operate on this idea?
Mr Rusholme: At the moment there
is a very good basis in that the ALMR runs a benchmarking scheme
which takes information from a lot of tenants and lessees in this
sector. We are looking at that and have a very healthy dialogue
with that organisation on whether or not that is the place on
which we should build. We are talking to a number of commercial
providers of such databases in the marketplace. In addition our
working group will be conducting a lot of work on the type of
variables in a benchmarking system which will be useful to the
industry and in the course of the next few months we will be able
to pull the whole thing together and recommend the right direction
in which it should go.
Q26 Miss Kirkbride: You said you
were obtaining information from tenants and lessees. Did you mention
landlords?
Mr Rusholme: Most of the existing
information provided to the ALMR system comes from tenants. What
we would like to see is the development of a benchmarking system
which works on the basis of all the industry including the operators
and pubcos being able to feed into that as well. That is vitally
important.
Q27 Miss Kirkbride: Have the pubcos
and landlords refused to co-operate so far?
Mr Rusholme: We have not reached
that stage in our investigations.
Q28 Miss Kirkbride: Is that because
you have not asked them or they have just ignored you?
Mr Rusholme: We have not asked
them directly. What we want to demonstrate first is that there
is a system which will comply with data protection and give comfort
to all sides that if they provide information to the benchmarking
system it will be secure and useful. We would encourage all pubcos
and owners to co-operate on that.
Q29 Miss Kirkbride: Who will maintain
and update it?
Mr Rusholme: It is still to be
decided whether it is the ALMR, an outside commercial body or
whether the RICS has the capacity to take that on.
Q30 Miss Kirkbride: Who would be
allowed to access it?
Mr Rusholme: It should be open
to both lessors and lessees in the sector. The one in the hotel
industry works on the basis of subscription; the one currently
run by the ALMR does not work on the basis of a charge so it is
pretty much open to all involved.
Q31 Miss Kirkbride: The Independent
Pub Confederation has put forward the argument that in the cost
basis of a rental calculation allowance should be made for time
spent on pub business by the lessee. Is that something you are
thinking of including in the database?
Mr Rusholme: Certainly, it is
a variable that can be captured in a database. Yes, one can identify
those costs by running a database or benchmarking system.
Q32 Miss Kirkbride: Are you going
to include it or are you thinking of doing so?
Mr Rusholme: There are perhaps
two separate issues here. First, the question is whether it is
information that can be captured in a benchmarking system. Clearly,
it can be. I suspect that the second part to the IPC's argument
is whether in rental calculations allowance should be made for
a manager's cost or a salary cost. I think that is a little more
difficult. If it is included the consequences may be a little
more than we wish because it goes back to the basis of valuation
which is to establish what someone would pay in the market. What
variables you put into the hypothetical calculation are only a
way of getting to that answer. I am unsure whether it will add
a great deal to that process.
Q33 Mr Clapham: Obviously, the code
of practice will be enormously important. You referred earlier
to the rent analysis statement being a very important aspect of
the code. Are we likely to see in the code a reference to the
types of variables that will be in the rent analysis statement?
Mr Rusholme: Very simply, yes;
that is very much the direction we are looking to take with this.
Q34 Mr Clapham: In developing the
code have you had discussions with the BBPA? Are you working together
to avoid the possibility of two codes? If there were two valuation
codes operated in the industry they would present a challenge.
Mr Rusholme: I agree with the
comment that this seems to be an industry with quite a lot of
codes.
Q35 Chairman: It would help if they
followed them occasionally.
Mr Rusholme: As to a RICS and
BBPA code I am aware of the latter which is being developed. It
has not been published but we have had some sight of the direction
that it is taking and we are very encouraged that it seeks to
cover quite a number of issues we have recommended in our pubco
report. As to whether we should join with that code or provide
our own, our thinking is that we should provide a free-standing
RICS code covering the issues that pertain purely to property
and rent setting. It is stronger if it is free standing. I recognise
that perhaps there are issues of enforceability of the code. If
it is free standing it is clear that for our members it is mandatory
and they should follow it.
Q36 Mr Clapham: That is an important
statement. If there are too many codes it just makes for difficulties.
If we have a RICS code it will be one that is acceptable throughout
the industry; it will make things much easier when it comes to
working out rent issues. Will you be pressing for that to happen
rather than that there should be two or three codes? We now have
the BBPA talking in terms of a code which you say is encouraging.
Is it not possible for the two of you to come together and introduce
one code that will be important for valuation?
Mr Rusholme: It is our intention
to develop a free-standing RICS code.
Q37 Chairman: The important objective
must be that nothing in the BBPA code, which deals with issues
much wider than valuation, should conflict with the RICS code.
Mr Rusholme: I think so. If ours
is only part of that code which deals with a wider range of issues
there is a risk that it may become somewhat diluted and there
will be confusion as to where authority and enforceability lie.
Q38 Mr Clapham: When are we likely
to see the code? When will it be implemented?
Mr Rusholme: Our thinking is that
it should be in place by the spring of next year.
Q39 Chairman: For politicians spring
can be a rather flexible feast. What do you mean by "spring"?
Mr Rusholme: Our working group
is to have its first session in January and perhaps it can come
to its conclusions in six or seven weeks. I am mindful that there
must be proper process; it must be got right, and to rush into
something would be the worst kind of advice. Like this Committee,
we consult on guidance that we publish. A consultation period
would be built into that, hence it will probably be April or early
May before it is published.
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