COMMENT: Letter from London

In his monthly comment on the workings of Europe’s real estate industry, Peter Bill, author of Planet Property and former editor of Estates Gazette, gives a new interpretation to Sir Thomas More’s quote ‘If honour were profitable, everybody would be honourable.’

‘If honour were profitable, everybody would be honourable,’ medieval martyr Sir Thomas More said.

An exasperated under-bidder on two nine-figure development deals in London complained over his omlette last month about the lack of honour among agents when it comes to conflicts of interest. ‘One agent was representing four separate bids on one project. How the hell can that work? On the other deal, we were the highest bidder. But the agent decided to sell to someone offering £3 mln less. Our money was good. We complained to the vendor, but got nowhere.’

An unusual, but not unsurprising complaint. For the bidder is a newcomer, someone who has yet to swallow the unpalatable fact that agents in the tight-knit London market hold more power than principals. Power derived from acting as intermediaries in a market where there generally tends to be more buyers than sellers, where transparency is the enemy of profit, where who you know is as important as what you know. A market where favours are traded.

Occasionally clients say ‘enough is enough’. The last attempt to stamp out this low-level but chronic complaint came in November last year, initiated by the UK’s Investment Property Forum. A group of respected fund managers sat down with an equally respected group of investment agents. The agents readily agreed on a need to construct written ‘barrier policies’ to inhibit conflicts. After all, one agent’s lack of honour is another’s lack of business. ‘The high-level protocol has been established to ensure that agency firms have clear and concise guidance as to how they can demonstrate to clients that there are barriers in place to prevent conflicts of interest,’ says the document. ‘There must be no internal communication on the instruction between different deal teams.’ There must be ‘security of electronic documents to ensure they can only be viewed by the relevant deal team.’

I once worked for a merchant bank which had a strict Chinese Walls arrangement between the floor where stocks and shares were traded and the floor below, where mergers and acquisitions were plotted. Over my right shoulder stood a set of double doors. They led down from the broking floor to M&A. When a stock analyst was preparing a note on a business that was being floated by the M&A team, the doors might as well have been wedged open.

What can be done to prevent the conflicts that afflict property? To misquote Sir Thomas More (who had his head parted from his shoulders by Henry VIII in 1535 for sticking honourably to the Catholic faith), ‘if it were profitable to erase conflicts of interest, honour would insist it be done’. The fact is that when the deal is hot enough, Chinese walls are as much use as a chocolate fireguard. There is also a secondary barrier to conflict removal: fear, among clients.

Most agents are honourable. Some are mighty fed up with those that aren’t. One comes up with the following tale over lunch. The story concerns a major fund manager who discovered a case of conflict of interest against an agent it had instructed to sell an investment property. A formal complaint was considered, but never issued. Why not? The principal did not want to aggravate the agent. Why not? Fear of the agent excluding them from future purchases.

Another tale, same source. Within agencies there are pecking orders. Low-order dealmakers will be under pressure to defer to higher-order dealmakers, if both dealmakers are pursuing the same deal. Why? Because the career of the junior dealmaker is partially determined by the senior dealmaker. A deal surrendered to your senior today can bring preferment tomorrow. A one-off client is less important to a junior dealmaker than his always-present senior.

Clients can and do ask agents to declare conflicts of interest when issuing instructions. The rules have been stiffened by the IPF. But human behaviour cannot be governed by protocols. Fruitless to rail against the system. Go with the flow. Seek out the best senior dealmakers in the best agents, convince them of your credentials. That, at least, was my shrugged-shoulder advice to the complaining newcomer.

Peter Bill,
Author of Planet Property and former editor of Estates Gazette