Richard Aitchison on why technical due diligence is growing in importance.
Confidence has begun to return among banks, funders and investors in backing building and infrastructure projects. In this new post-crash construction environment there has been a subtle shift in the requirements for technical due diligence (TDD) monitoring compared to the regime that existed pre-crash.
TDD can be defined as the analysis and mitigation of commercial risks associated with property and the development of assets in the built-environment. This is conducted in parallel with legal, tax and company due diligence in initially assessing a project and then in monitoring and policing the project when underway. The analysis aspect of the project monitoring role is predominantly conducted as a desk exercise, particularly at the proposal stage and in reviewing designs, before becoming more of an inspection role once the project moves on site.
Prior to 2008, when undertaking technical due diligence, project funders were mainly focused on cost. The monitoring surveyors therefore tended to be either a quantity surveyor with project management experience or a cost consultant. Construction quality has now become increasingly important to funders as new requirements concerning sustainability and future proofing projects comes to the fore. Cost will still play an important role, but better cost control has allowed funders more flexibility to increase their focus on quality.
"Technical due diligence is no longer viewed as just a box-ticking exercise. The monitoring surveyor now works as part of a multidisciplinary team, examining projects at inception, so risks can be avoided, designed out or planned for."
Partly driving this shift towards quality is the fact that banks and investors had their fingers burnt during the recession with many experiencing difficulty in offloading substandard or unfinished developments on their books after the debtor defaulted.
Significantly, TDD monitoring surveyor teams now incorporate surveyors with both building and quantity surveying skills. The way they work has also changed. TDD is no longer viewed as just a box-ticking exercise. The monitoring surveyor now works as part of a multidisciplinary team, examining projects at inception, so risks can be avoided, designed out or planned for.
Sustainability has also risen up the rankings of areas of concern for TDD teams in the past six years. The 2011 Energy Act is seen as particularly challenging by the construction and property industry. Under the Act, buildings with an energy performance certificate rating poorer than an E is likely be illegal to let after 1 April 2018.
In addition, a national target for zero carbon non-domestic building has been set for 2019. Set against this, there is a risk that buildings that only meet current requirements could become illegal to let as sustainability standards continue to tighten.
Property investors and occupiers are also paying increasing attention to building energy performance measurement metrics, such as EPC, BREEAM and Energy Star. For metrics such as BREEAM, a weakness lies in the fact that achieving an “Excellent” rating does not necessarily mean that the energy performance of the property is equally good. For this reason, project monitoring teams will double-check the energy assessor’s calculations if they believe there to be a discrepancy, or if the client specifically requests the team to look at the energy performance rating, as is often the case.
Currently, there is little empirical evidence that the most sustainable buildings will achieve the highest rents. However, across the world, high-quality building stock that inherently has good sustainability performance is in greater demand from occupiers and investors compared to poorly performing building stock, which is being discounted for sale and for lettings.
As a result, environmental performance of buildings will affect their future asset value. This means that the monitoring surveyor must analyse the future-proofing of the building or development asset, particularly against a background of tightening environmental legislation and the demands of occupiers and stakeholders.
Richard Aitchison MRICS is a partner and head of monitoring TDD and Construction Banking Support at property and construction consultancy Tuffin Ferraby Taylor
