Official Report 237KB pdf
Without further ado, I ask Lynne Raeside to introduce the witnesses briefly.
Thank you, convener, for inviting the Royal Institution of Chartered Surveyors to speak to the committee and to submit evidence on housing stock transfer.
Thank you. We would like to probe some of the institution's helpful submission and I will ask a few preliminary questions.
While some of our members work in the private sector, others work in the public sector—in local authorities, the Valuation Office Agency, central Government and Government agencies. We also have members who work for charities, housing associations and non-governmental organisations, as well as members who work for business and academic institutions. Therefore, we have a wide-ranging membership.
But the majority of members come from the private sector?
Yes, that is probably the case.
How did you arrive at the views in your submission?
The views were derived from the experience of members who work in public and private partnerships. We received written submissions in response to the housing green paper last year, which we met to discuss. Those views were drawn together with those of the four members of the institution who are present this morning and the views and experience of members who work in the various sectors involved in housing stock transfer.
What proportion of your members are, or have been, involved in Scottish stock transfers?
I am sorry, but I am not able to give an exact figure.
But you have some experience.
Yes.
Were the members involved in Scottish Homes transfers or in local authority transfers?
Although we have members in housing associations who have been involved in Scottish Homes stock transfers, we also have members in local authorities who have been involved in the other side of the stock transfer process.
That means you can draw comparisons between the two experiences.
Yes.
Has the fact that the Scottish Homes stock transfer process is different from the local authority transfer process affected your views abut the bidding process?
To be honest, most of the views that we have examined were based on the Scottish Homes bidding process.
That is helpful.
Yes.
They have been involved in both.
Yes.
Are any members involved in only one or the other?
That would depend on the firms for which they work. As general practice members are experienced in valuations and other members are experienced in stock condition, it would be unlikely for one member to carry out both operations.
But you can evaluate the experience of both categories of surveyor.
Yes.
Has your organisation drawn any conclusions from the stock transfer experience in England?
Not the organisation as a whole. The other members who are with me this morning might be able to expand on that point.
We will probably probe that point later.
Although we have generally examined housing association stock transfers, we have considered the public-private partnership issue and the experience of private developers that have worked with housing associations. One of our representatives who is here this morning works for a large private developer and has such experience with housing associations.
Thank you. We will move on to discuss undesirable property.
Your paper stresses the importance of location as well as condition when the value of housing stock is assessed, and you refer to blackspots where no one wants to live. What do you mean by undesirable properties? Are they in poor physical condition, or are they in areas affected by crime and vandalism? Are we talking about one street, a number of streets or entire neighbourhoods?
My background is in capital valuation. I dealt with rented properties for a number of years, and there are similarities between rented and private stock in that we must interpret the wishes of prospective purchasers or tenants. When they choose either to rent or to buy a property, they probably consider the location of the property before its condition. Although a number of other factors will follow from that, depending on people's individual circumstances, location is very important. That does not mean just transport, local facilities, the proximity of the centre or the type of houses. Although your point about vandalism and social issues is very important, there has been a trend in Scotland for people to want to live more in the city centre, and the poorer-quality stock on the outskirts of town, which would be quite expensive to maintain, is not people's first choice. As a result, people are now living in blocks of flats with two or three properties boarded up; and there are social problems because some tenants who have to be housed there might bring the area down.
Would you argue that there is no underlying demand for properties in peripheral areas that have social problems?
No. Peripheral areas in themselves are not the main factor; however, the fact that they are out of town is a negative point for most tenants. Although I would not say that those properties are totally undesirable, they are not people's first choice, and I find that tenants would prefer a house in poorer condition nearer the city centre, where there might be a bit more life and the transport costs are lower, instead of being isolated in a property in a multi-storey block, which seems to be people's last choice.
Your paper seems to suggest that demolition and complete rebuilding are the only option for areas that you describe as undesirable. Is that the case?
We would need to investigate the condition of individual properties. In some cases, it would be prohibitive to throw good money after bad by renovating houses just to find that no one wants to live there. Before we assess whether the houses are worth renovating, we should find out where people want to live.
Some people would argue that the way to deal with such areas is to promote a range of area regeneration policies instead of just moving tenants out, demolishing properties and bringing in a new population. What is your view on that?
Our paper tries to make the point that we want a balanced approach. We have some opportunities to bring in private housing for sale and rent as well as renovating some stock. However, before we do that, we need a condition survey that examines types of construction. Some of our members' discussions have centred on renovating properties. Public sector housing is a specialist subject; we should be able to survey the area to find out the condition of properties and whether there is a demand for them before we reach any quick conclusion about renovation. There must be some balance in the various types of housing tenure in communities. As a result, we have members in housing associations and developers who are involved in such initiatives.
It is just that your paper suggests that, in some circumstances, the only option is to demolish the whole area. That is happening in Ardler, in Dundee, where 4,000 public sector houses have been demolished and replaced with about 2,500 new houses. The problem is that the tenants who lived in that area are no longer there and are not part of the consultation process. Only about 150 of the original tenants are still involved; the rest have been disfranchised because they have been located elsewhere in the city. That cannot be the right way to give tenants a major say in what happens in their neighbourhoods.
Nor is it the right way to retain the community ethos. I hope that our paper does not appear to suggest that the simple answer is to clear away the housing on any part of the map. We discussed the issue at length when we were preparing our submission to the committee and tried to emphasise the need for a balanced approach. We now have experience of working in partnership in such communities to provide low-cost housing for private and housing association purchase, for rent and for people with special needs.
I am not suggesting that we should completely rule out demolition. However, do you think that tenanted market value is an appropriate method of valuation for properties that require demolition?
I will jump in on that question.
How do you value existing council properties that have been earmarked for demolition in the future as part of the stock transfer process?
In my experience, people tend to value the end of that process.
Not tenanted market value?
Usually not. I can speak only from our perspective, but I assume that associations take the same view on transfer for demolition in a balanced programme of rehousing, decanting and so on—the end value of the site is valued. We are experiencing such a situation in Maryhill at the moment.
Therefore, the site is valued when properties are already being demolished.
In my experience, district valuers will value the site, irrespective of what is on it.
In paragraph 5.4 of your submission, you draw a distinction between the money that is spent on buying stock and the value of the stock, in terms of the investment that will be put into it over the next 30 or 40 years. You seem to draw a distinction between price and value, especially in the long term. How would you change the present arrangements, to provide better value in such assessments?
This is a bit of a generalist response, but, as my colleague indicated, there is a bottom-line requirement for a return. The amount of money that is available for investment in stock is weighed against the money that will be gained from that. We are aware of policy on rent increases, and we are able to assess the yield from property returns in relation to that. If price is the critical factor, and if that price is particularly high, in the balanced equation, that reduces the amount of capital that can be raised in the marketplace for refurbishment or a modernisation scheme. Elsewhere in our document, we suggest that we might be involved at an earlier stage of a survey, when councils are making up their mind about the areas to consider. We have value to add to the process of deciding which properties should be modernised economically, as that has an influence on price.
Are you saying that the higher the price that is paid for the stock, the fewer resources will be available for investment in that stock?
That is correct. This is about price and value versus whether a housing association—
Does not your view on that conflict with what the Scottish Executive is telling local authorities—that it is their duty to get the highest price for the stock?
Our reading of the paperwork that we have received is that we are talking about best value. Our contention would be that best value need not always be related solely to financial best value, in terms of a bottom line.
Therefore, although the local authority gets the best possible price for the stock, that might not represent best value either for the local authority or for the tenants.
Our contention is exactly that. We should have a dialogue earlier, about the balanced approach, the housing mix that is required, the waiting list requirements, whether we will build the right type of houses, and whether there is demand for low-cost housing to buy. All those factors must come into the equation in place of a bid process that asks simply, "What is the price?"
We will raise that issue with the minister.
Thinking laterally, the other side of the fence is the income, and there are only two aspects of income in such projects. The first is the amount of private finance that can be raised on a property. A variety of issues, including quality, revenue income, investment in the long term, management and maintenance of properties, come into the equation. The second aspect is the ultimate public subsidy. However, those two amount to a limited investment. If a house costs 50 units—whatever we would call it—and 10 of those units are invested in the value of the property for the acquisition, only 40 units are available. If eight units are invested, 42 are available.
I have a follow-on question. In the report that you provided for the committee, you say that transfer should be based on a strategic project management approach. Could you outline for us some of the key issues, and perhaps give an example of the ideal process that we should go through to reach that approach?
We have outlined the problem of identifying the aspirations of the tenants. At the next stage of the process, it is important to have a proper survey of the area. My contention is that financial limitations on condition surveys do not always produce the right result. If more funds were made available for more detailed consideration, we might get a better picture of the finished result. We might be thinking about things on a short-term basis, whereas a longer-term view might help to build up the picture.
Partnership has been called a marriage of convenience, but too often the partners meet at the altar. [Laughter.] That is an important analogy, and usually gets the same reaction. The private sector is usually involved at the very end of the process. In the case of Ardler, a brief was put together exhaustively by a community over two or three years, and we received it almost at the point of delivery. We believe that a method should be found of establishing partnerships in an open, auditable, publicly accountable way as early as possible, rather than at the tail-end of the exercise. At the moment, regardless of whether we are talking about a housing association stock transfer or a strategic development in which a housing association and the public sector are in partnership, that is done at the very end, usually on the basis of who is asking for the least grant.
I know that you have to follow the procedure as laid down in guidelines, but could you give any examples of where red tape has been cut through? Are there any examples of good practice along the lines of what you have suggested today?
We had one project that was completed extremely quickly. In that case, the site had been identified and our company was already active in the area. All those involved—the local authority, Scottish Homes, the enterprise company, the housing association and ourselves—were there right from the start. We had slightly different agendas, but at least they were transparent right from the beginning. The result was that the project was turned round very quickly. It was the first new housing partnership that delivered houses as opposed to demolition. There was a joined-up approach from the public sector. Although the agendas were different, they were not so disparate as to make us question why we were getting involved in the partnership.
Did that joined-up approach include tenants?
The site was completely cleared. It was a hard-to-let area in Hamilton that was constantly appearing in the Hamilton Advertiser because the houses had been burned out. Community involvement was not, therefore, as much of an issue as it would be elsewhere, although political representatives were involved. We held a series of open days for residents, but this was not a stock transfer. However, it is conceivable that it could have been widened to include that. The situation was reactive, involving a small number of units—40 or 50 houses. However, we could apply some of the lessons that were learned there to larger projects.
Throughout your submission, you refer to excessive red tape and we have heard you speak about it this morning. Could you give us a specific example of what you are talking about and why it would be beneficial to everyone if there were less of it?
Partnerships involve a variety of interests. I appreciate that we are here to talk about stock transfers, but regenerating an area raises many different issues. For example, different parts of a piece of land may be in different accounts within the council—one may be in the parks account, one may be in the housing account and another may be in the planning account, administered by the estates department. One task of partnerships is to get a joined-up view of how all those hang together. It would help if the objectives or the mission were sorted out before an attempt was made to involve private partners, housing associations or registered social landlords. In my experience, that has been one of the most significant obstacles to getting a project from start to finish. It takes us about 18 months to do that, which entails a big investment from the private sector, ostensibly at risk, for an unreasonable period.
You have mentioned the problem of financial limitations on stock condition surveys. Could you say a bit more about the pressures that you understand local authorities to be under and the problems that limit the type of surveys that are done? What risks does that involve, and to whom?
I understand that local authorities are allocated a sum of money to carry out the stock condition survey. Experience has shown that local authorities select on the basis of price. As a result, the practices involved may not have sufficient time to carry out a detailed survey or may have to limit the number of houses surveyed. In our opinion, that does not give a proper picture of the current state and condition of the stock.
What are the potential problems?
If the survey is flawed, the whole business plan could be flawed. If a council is trying to build up a picture of how much investment is required and what needs to be done, and the initial survey is flawed, it may get the wrong answer.
If you were acting for the buyers or the lenders and you came across what you thought was a weak survey, what advice would you give?
That is a step further down the line, as the lenders will be brought in only after a business plan has been drawn up.
If the sample is limited, it may not be representative of the whole stock. If a lender wanted to lend on, say, 10,000 houses and the sample was 500 houses, we would need to ask whether those 500 houses were representative of the whole. If the lender was unsure of that, the sample would need to be enlarged, or the lender would be lending on properties that had not been surveyed.
Do you think that corners are being cut?
I am not aware of that, as I have not been involved in stock condition surveys, although I believe that a lot of houses have been surveyed. However, if we were acting for a lender in the private sector, we would have to say that the properties must be looked at first. In the case of a multi-storey block, it might be enough to look at the block and half a dozen flats. However, it is not enough to look at one estate among several, as that gives no indication of the condition or even the construction of the others.
Are there enough surveyors in Scotland to do the work for the new housing partnerships within the time scale that is being suggested?
In the paper we say that our experience in the property market indicates that, if there were a major increase in building activity, there would some difficulties in obtaining the number of skilled tradesmen required. I am not aware of any major problem with quantity surveying—preparing the bills of quantities or the contracts. As Lynne Raeside indicated in her introduction, we have a broad constituency of surveyors in both the public and private sectors.
You mentioned that the same person would not do a stock condition survey as would do an evaluation. Would two people in the same team or the same company do the two jobs?
Yes.
Is there such a thing as the right value for the stock seller under the TMV system, or is it a matter for agreement between the buyer and the seller? I am concerned about how stock is valued, about income stream and so on.
Earlier we discussed what is available overall for the project. We examine how many houses are involved and the condition of the properties. We are concerned that the approach of using a bit of paper that says "bid against this" is too sharp if there is no detailed survey. We feel that a consultative approach is needed. We should involve the potential housing association and the developer at an early stage to talk about value, for example. We must discuss such things in the context of what the housing authorities want from the transfer.
You also suggest in your submission that full appraisals are not being carried out, but that they should be. You state that every property can be appraised. What do you mean by appraisals? What would a full appraisal cost? At what level would it become unreasonable to carry out full appraisals? What size of appraisal is appropriate?
It is very difficult to answer those questions. Appraisal would take longer in some areas than in others because of different types of construction and so on. I could not place a value on appraisals now.
We would contend that, rather than giving a figure that we considered reasonable, we should determine what the community wanted and the objective of such a scheme. We must not just look at a bit of the map and say that we want better housing there. There must be an end-product—balanced communities have been mentioned, for example. From such information we can determine the extent of the condition survey that is required and what a realistic fee for that would be. I think that that answers Mr Watson's questions.
Charlie Gordon, the leader of Glasgow City Council, said in his evidence to the committee that the precondition for agreement to stock transfer was that the stock transfer in Glasgow should be a single transfer of around 90,000 houses. His reason for that was that that would result in a spread of the portfolio. If only the reasonably valuable houses and those that were in good condition and in good locations were transferred, the local authority would be left with houses in poor locations and in poor condition that were difficult to let. The public purse would, as a result, be substantially worse off. You seem to argue for a different strategy, which is to target the better locations and the houses that are in better condition and so on. Could you comment on the apparent contradiction between the two strategies?
I will not comment on Glasgow City Council's approach.
I would love it if you did.
I hope that you are not inferring from our paper that we would target only certain areas. Our contention is two-pronged. Our professional view is that stock transfer on a more compact scale is more easily managed. We believe in local solutions to local problems. We want to involve the community, but what is that? Do we mean the whole city or the local community? We believe that, in working in partnership with housing associations, stock transfer would be more easily achieved if smaller-scale transfer were undertaken. There is not a cherry-picking agenda.
From a business point of view and through prior consultation, is your experience that post-transfer management and raising the loan capital is easier using compact transfer areas than it would be in transfer of the portfolio of the 90,000 houses in Glasgow's stock?
Yes. Our contention is that fundraising and development would be much more difficult with a transfer of stock as large as the figures that you mention than it would be with smaller packages. I appreciate that that is not a particularly clever statement, but our experience shows that working with more manageable sizes of stock gives us better opportunities to raise equity and to address local problems.
I would like to refer to a point that Cathie Craigie made. I find that relatively small housing associations provide examples of good management. They are very good at communication. They deal with smaller numbers of houses and as social landlords they are popular with their tenants. If we want to examine what is best for the tenants, a smaller housing association would be the preferred choice.
Would you be prepared to provide the committee with a SWOT—strengths, weaknesses, opportunities and threats—analysis based on your experience of mass transfer as opposed to your strategy? Additional information and evidence would be helpful to the committee. I know that you do not want to get into specifics because you do not want to get into the politics of the situation, whereas I do. From a business point of view, from a housing management point of view and from a democratic accountability point of view, you seem to be in favour of smaller-scale transfers.
We are happy to acknowledge that, but we would like to emphasise that we are not implying that a large-scale transfer would not work. The Royal Institution of Chartered Surveyors would prefer to use the option of smaller transfers.
Your paper states that the two objectives of the stock transfer policy are, first, to find funding to upgrade housing and, secondly, to increase the level of community involvement. As I understand it, you argue, based on your experience, that those objectives would be easier to achieve with the kind of strategy that you suggest than with the kind of strategy that is under consideration in Glasgow.
I would not phrase it in that way. If there is an agenda for stock transfer in Glasgow on the scale that you describe, please be assured that our members' firms will be interested.
I have no doubt about that.
As Lynne Raeside mentioned, we gave submissions for the green paper on housing. We are obliged to give you a professional view.
Additional information would be helpful.
The earlier that partners—registered social landlords, housing associations, or private developers—are involved in the process, the better. If partners are not involved early in the process, a situation can arise in which people who do not have to deliver build up aspirations among tenants that cannot be met by those who do have to deliver.
Charlie Gordon was open and honest about this. He made it clear that he wanted the stock transferred in one go in Glasgow so that he could get cross-subsidisation—as it would be called in industry. You are saying that that would perhaps weaken the business case.
I am suggesting only that people should consider whether that is the best way of using the cross-subsidy.
Part of the strategic plan might be to demolish less desirable houses, but I do not agree that the poorer quality stock has no value. Surely the value of the land, less the cost of demolition, could be included in the business plan.
In putting a value on a property, a bank considers what, if all else failed, it could sell it for. One wonders whether transferring property that has no intrinsic value—other than that the rent contributes to the revenue of the project and helps to pay the mortgage—is the best use of cross-subsidy. Mr McAllion knows that at Ardler the main element of clearance is multi-storeys. Let us not beat about the bush: banks usually have problems with funding multi-storeys. That is why one needs to pool stock and to cross-subsidise. I do not know whether that is the best use of cross-subsidy.
Your paper refers to the right to buy. How would you ensure that the redemption value was greater than the remaining debt? Why do you think that that is so significant?
We noticed in the consultation paper the question of extending the right to buy. All we can do in a business environment is discount that type of option. If there is no right to buy, we can project an income stream, perhaps over a 30-year funding period. However, if legislation affords the right to buy, our income-stream projections are affected, which will be reflected in the level of bids and in the amount of cash that is available for upgrading and modernisation. We certainly do not say that there should be no right to buy, but we want to explain to the committee that any financial bids that our members made would have to take account of the right to buy.
How should we approach the question of the construction industry, which has been covered in evidence from other people? If there is a 10-year programme in Glasgow with £1 billion investment, many building workers will be required. Should the work be phased? Are there ways in which additional qualified people can be called on? What difficulties will there be with construction?
The construction industry suffers from peaks and troughs. This year, there has been a marked increase in construction costs, which reflects the level of activity at the moment. If there is a sudden increase in activity in the housing market, there may not be enough skilled tradesmen to do the necessary work. I know that some contractors are finding it difficult to secure adequate labour. If there is to be increased activity, provision must be made to ensure that an adequate labour force can be trained and skilled to meet demand.
How long does it take to make a significant difference? A year, two years or six months? You mentioned the problem of peaks and troughs. Throughout the 1970s and 1980s you had major tenement renovations to cope with. Does that help you to estimate the time needed to respond to the demand?
You certainly cannot expect the industry to respond immediately, and I know that you are aware of the time that it takes to train tradesmen. I think that it will take a reasonable amount of time. It is difficult to pin it down more exactly than that, but it will not happen in 12 months. It will take at least two or three years.
Let me put the question another way. If you allow contracts to build up, what implication does that have for the quality, the price and the ability to deliver?
It would certainly affect the price. Tender levels would increase dramatically. Again, you are right to say that the quality of the labour force may come into question. We would have to be diligent to ensure that quality of workmanship continued to be achieved. Allowing contracts to build up would create problems in all aspects of the work.
I have two further questions. First, the paper mentions special constructions, such as Blackburn and Orlit. Is there a general view that a lot of those peculiar forms of construction would be too expensive and would distort the business plan, or is there individual assessment?
There are some types of property that it is not economic to refurbish extensively. There are many unusual forms of construction, and some of them may need a fuller and more disruptive survey to find out the extent of the property's refurbishment requirements. I have seen the situation from both sides of the fence and I know that Blackburn buildings tend not to be a problem. However, the system-built stuff of the 1970s used methods and materials that would not be acceptable now.
My final question is about the sinking fund mentioned in section 6.2. You have put a lot of emphasis on the difficulties caused by right to buy and fractured ownership. What is the likely level of sinking funds? Presumably, people will have to pay management costs, and I wonder whether you can give us any average figures or guidance on that. Over and above those costs, what would be the appropriate levels of sinking fund contributions?
One would usually consider the life-cycle and maintenance programme of a house—perhaps renewing the bathroom in five years, the roof in 10 years and so on. One would consider the interest rates and, by a valuation method, consider what the value of one pound might be in so many years' time and how the market might discount that.
I appreciate that there must be a lot of variation among different properties, but is there a typical level? Assuming that one has a recently renovated property that is up to scratch to start with, how much would one then have to put into it each year?
There is no typical level. If the property is a flat-roofed ornate house, one may have to renew the roof every 10 years. If the property is a traditional brick-and-tile house, one may only renew the roof every 50 years. One must consider the facts of each individual case.
I am trying to get a feel for the level of cost. If people are buying on the edge of affordability, what costs might they have to take into account? Are there examples of sinking funds that have been established in such situations that might guide us?
In detailed appraisals carried out by Scottish Homes of historic stock transfers through housing associations, a formula was developed for either major repairs funds or sinking funds. One tends to find that the sinking fund is built up. The cost of funding a project—such as the amount one might pay in a mortgage—remains static for the life of the property. Sometimes rental growth involving transferred property has been slightly above inflation, but, through inflation, that residual fund is built up. Paul Letley was right when he said that one appraises that fund relative to life-cycle costing, which indicates whether one can re-roof the property in five years, fit new windows in 10 years and install new bathrooms in 15 years. Therefore, a sort of double scrutiny takes place.
You made a forceful point on the skills shortage. Last week, we took evidence from the trade unions on that particular point. The trade unions said that the maintenance on the houses that may be involved in stock transfer is carried out by direct labour organisations. Therefore, if a stock transfer takes place, would you agree that the expertise exists within those organisations to continue maintenance work?
I will explain what is happening now and what happened in the past. In the house building industry in particular, the delivery of the product is increasingly in the hands of subcontractors. Companies have not carried their own tradesmen for perhaps five or 10 years, which is a significant problem. At Ardler, we are in partnership with a local Dundee firm, which is more like a traditional contractor and which has a substantial training programme, the first aspects of which are coming to fruition.
I accept that and I am not asking you to comment on that. This committee is concerned with social inclusion and if, as the trade unions pointed out, such work is subcontracted, it might go south of the border, which will do nothing to aid social inclusion in Scotland. That is why it is important that we give that training in Scotland.
I just want to explain that we acknowledge the role of the direct labour organisation. The DLO is substantially involved in maintenance, but we are talking about significant upgrades. Our members know that we cannot just turn on the tap. However, if there is an issue, the industry will gear up to address it.
Thank you. I am sure that we will pursue that point. I have two points of clarification. First, I know that some of your members are involved in surveys and some are involved in valuations, yet they could work for the same company in the same team. Does that present a conflict of interest?
No.
What is the scrutiny for surveyors in Scotland? To whom are you accountable?
We have our own professional standards and disciplinary process. Our membership reflects the fact that some of the development companies will employ people who are skilled in valuation, as well as people who are involved in preparing bills of quantities to execute contracts.
There are no cosy deals between valuers and surveyors?
Are you asking whether we sit on both sides of the fence?
Yes, comfortably.
The answer is no.
The Royal Institution of Chartered Surveyors has a very strict code of professional conduct, which is administered internally. However, there is also a compulsory complaints handling scheme and arbitration service, which is administered by the Chartered Institute of Arbiters, not by the RICS. There are very strict rules about conflicts of interest. When problems reach arbitration, that process is not administered by the RICS.
Do you get many complaints?
There are quite a few spurious complaints from members of the public that are not taken forward. Those that are followed up are taken very seriously.
Finally, you are arguing for full appraisals. Who picks up the tab if a surveyor does not give the proper information? Who is held to account?
Our earlier discussions centred on the fact that currently, if the survey or appraisal is inadequate, the authority must eventually pick up the tab in the form of increased costs.
I presume that surveyors sometimes get it wrong.
Yes.
Action can be taken against surveyors. They have professional indemnity insurance. Claims of negligence can be brought against them.
I understand your argument for a full appraisal, but in the real world that is not always feasible. Would a sample of 10 per cent of the stock provide a reasonable basis for valuation?
To get a representative sample, one would need to consider the number of different house types. There would need to be one of each type of house and construction—perhaps more—to make a reasonable judgment.
There are location issues and flat-roof issues as well. It is not just a map.
Your organisation is probably uniquely placed in that you have the expertise and experience to comment instructively on stock valuations and related issues. Have you had any formal or informal approaches from the Scottish Executive asking whether you are prepared to lay down rough guidelines to be followed for stock valuations and condition surveys?
No, we have had no formal approach.
What reaction would the institution have to an approach from the Executive?
The institution would be keen to be as helpful as possible to the Executive. If we could assist in drawing up guidelines, we would welcome the opportunity to do so.
Did the institution have any formal input into arrangements made by Scottish local authorities following the right to buy brought in by the Tenants' Rights, Etc (Scotland) Act 1980 in respect of valuations?
To be honest, I have no idea. That was before my time. Alex has been involved with the institution for more years than I have.
Very tactfully put. We have valued the opportunity over the years to comment and we have done that not just in relation to this subject, but in relation to others. Property is such an important issue that I am sure, although I am not quite old enough to know, that our institution would have had the opportunity to comment.
Bill can remember then.
Unfortunately, I can remember. Indeed, I was heavily involved in the project. That gives away my age.
The contention of our institution is that housing is a national problem. I am not at all denigrating the situation in Glasgow, but the feedback that we have had from our members is that there are problems with housing across the country. We have to take a professional approach that looks at the condition of properties, and a realistic business assessment of what is achievable.
Is there nothing else that you would like to be changed?
We are short of time, so you will have to think quickly. If there is nothing else just now, you could always make a submission to the committee at a later date.
We would like to thank you dearly for the opportunity to contribute to your committee's inquiry.
As ever, we are running over time. We are good at that on this committee. We need to re-examine our planning, because we do not give ourselves enough time.
Many thanks for inviting us today. I will introduce my colleagues, who are based in my office in Edinburgh. On my left is Rosemary Carthy, who is the VOA adviser on housing matters, and in particular on transfers of public sector housing to housing associations or registered social landlords. On my right is my assistant, Philip Gay, who is responsible for operational matters in Scotland.
Thank you. I would like to begin with a fairly obvious question. What role has the Valuation Office Agency had in the past in valuing rented stock for transfer?
You will have seen from our brief submission that we are the independent valuer in transfers for local authorities, new towns and Scottish Homes. That has been our past involvement.
Is it correct that the Valuation Office Agency has replaced the old district valuer service?
That is right.
Could you explain the differences a little?
The differences are really in terminology. It was always called the Valuation Office, but people who used our services used the district valuer service. There was a district valuer in each location. When we became an agency of the Inland Revenue, the title was changed to VOA—Valuation Office Agency. However, the district valuers are still there. Both terms are now used.
Are there any differences in funding, accountability and so on?
No, other than our being a slightly different agency from the original. There is no real change.
Is there any difference between the Valuation Office Agency in Scotland and in England?
The major difference is that, in England, we deal with the rating function and the council tax. In Scotland, both those functions are carried out by the assessor—by local government. A vast amount of work is carried out in England and Wales on rating and the council tax, which is the prime function of the Valuation Office Agency there.
We want to get an understanding of the Valuation Office Agency before getting into more detail on the housing transfer. How are you funded as an agency?
It must come from a block vote, I imagine. I am not involved at that level. The head office in London deals with the funding principles. We presumably have a block vote from the Treasury.
When you are acting, for example, on behalf of the Inland Revenue, other central Government agencies, Scottish Homes or local authorities, do you compete for a commercial contract?
We charge for our services. We are obliged to recover our full costs in all our dealings, whether with the Inland Revenue, which we bill, Scottish Homes, a local authority or another Government department.
Are central Government departments, local authorities and quangos—if I can call them that—such as Scottish Homes obliged to use you for the services that you provide, or do you compete with private sector providers on some occasions? If so, when?
We compete with private sector providers on quite a few occasions. Some work is tied but, increasingly, quite a lot of work is opened up to competition.
Are there any parts of those local authorities or central Government departments for which you automatically provide the service?
I do not think so. We have to compete for local authority work.
So you have to compete for local authority work and for Scottish Homes work?
Yes.
How successful are you in competing?
Reasonably successful. We get our share of the work.
Do you price your work at cost recovery or at cost plus?
At full cost recovery.
Does that not put the competitors at a disadvantage if they are to make a profit?
No. The others are very successful in competing for our former work.
What has been your role in things like options appraisals and the housing stock transfers that have taken place through either Scottish Homes or local authorities? What role could you play in the new housing partnerships and the potentially massive expansion of stock transfer? Have you ever acted on behalf of the buyer of the stock, or do you always act on behalf of the seller?
On most occasions, we have acted on behalf of the landlord and, as independent valuers, have provided a figure to be used, effectively, as a benchmark—an independent valuation.
If I were a lender who needed an independent valuation and you had not provided the valuation for the landlord, who was, for example, a local authority—perhaps someone else had beaten you for the local authority valuation contract—is that the kind of the work that you would bid for?
No. The lender would be a privately funded body and we cannot act for the private sector.
So you act only for public sector organisations?
Yes. Our framework document prohibits us from doing work for the private sector.
Are housing associations counted as public or private for your purposes?
Public.
You probably heard a number of us this morning refer to TMV—tenanted market value. That does not mean that we know what we are talking about. We are told about such things. [Laughter.]
Well said.
Am I right in saying that TMV is the sale price placed on stock to be transferred, following a survey of the income and expenditure streams over the next 30 years, discounted to present values?
That is effectively correct.
Does that make TMV a form of discounted cash flow?
Yes. The discounted part comes from the fact that the inputs and deductions from rental income must be brought back to the present day. They are discounted. It is a discounted cash flow—an income stream approach.
Apart from being used to value rented housing, what is discounted cash flow used for?
It is used in the private sector by surveyors in investment. It can be used for industrial or office stock that is held as an investment. It is not a new idea.
Is there any reason why it was introduced for valuing rented housing? In your view, is it appropriate for valuing rented housing?
We think that it is an appropriate method. It is also a method of financial appraisal used by the lenders. We considered other methods and started off using a different one, but we moved to discounted cash flow because we felt that it was appropriate in the particular circumstances, with the number of inputs and outputs. It allows us to carry out sensitivity analyses. It is all on a computer spreadsheet. We feel now that it is really the only way to consider the stock transfers, bearing in mind that the landlord has to let the property at affordable rents.
You say that it is the only way for the stock transfers, but you referred to other methods that you used to use. What were they?
A considerable time ago, we examined evidence of sales of tenanted stock to private landlords and made adjustments to take account of the social rented housing policy. However, the evidence on that front has dried up, so that is simply not an option. It was an unsophisticated method of valuation. The discounted cash flow method allows us to have a more sophisticated look at the inputs and outputs, which is crucial.
You say that the previous method was unsophisticated. Would it have affected the final price of the asset that was being sold? Would the price be higher if that method were used?
Not necessarily—it may have given the same answer. The key point there was that that method was based on private market evidence of sales. That evidence is no longer available—the market in that kind of work has disappeared.
So it has not been dropped simply because it would cost more money to fund?
No.
In the TMV valuation, is there what is referred to as fat, or flexibility, in arriving at a price?
The method relies on a number of inputs, on which the valuer has to make a judgment. The valuer will have the stock condition survey, which will give a costing, over a 30-year period, of the capital works that have to be carried out. It will also slot the works into a certain year. There is the rental evidence, historical evidence of the number of cyclical repairs and of voids and evidence of the level of management. Using that evidence, the inputs are slotted in and a net present value is arrived at.
Considering the calculations that the valuer uses to arrive at a price, is there room for the valuer to say, "In the circumstances, I'll put it a bit higher" or, "I'll put it a bit lower"? Is there a rigid equation that dictates that it must be a certain price?
No. A judgment has to be made.
If the valuer judges that the price should be lower, does that not mean that, in a stock transfer, the Executive, for example, would have to pick up more of the debt associated with that stock?
I could not comment on that—I have no knowledge of the funding aspects.
But would it be possible for the valuer's judgment to affect the amount of debt the Scottish Executive will have to pick up?
If you are telling me that a lower value means that debt increases. The valuer makes the best judgment he can, based on the inputs. If that produces a lower value, that is the value.
In your judgment, who is at risk as a result of the valuer's judgment on the tenanted market value? Is it the buyer or the seller? How would you minimise those risks? Depending on the value placed on the stock to be transferred, somebody will lose out.
Yes. The only way, from a valuation standpoint, to minimise that risk is to ensure that a lot of good information is available to the valuer to help him make his judgment.
Is that judgment completely independent?
Yes.
So you are not trying to please the contractor by bringing in a price that would suit them?
The independent valuer will be independent of the bidders, or proposed landlords.
I want to ask about the price differences of stock. Do you accept that the valuations of stock that are sold under the right to buy tend to be quite a lot higher than the values being attached to general council stock through TMV? If so, why do you think that is the case? Is it right that there should be such a difference?
It is on a different basis. In the right to buy process, a vacant possession value is put on the property—probably by the district valuer, because we do most of them. An arbitrary percentage, as stated in the Housing (Scotland) Act 1987, is discounted. It does not have anything to do with valuation.
It is not possible to make a direct comparison?
No.
I would like to ask about the difference between the estimated value of Scotland's council stock as a whole and the debt sitting on the books. The committee was given a briefing at which we were told that the estimated value of council housing in Scotland is about £1.5 billion to £2 billion, whereas there is about £4 billion of debt on the books. Can you explain how there can be such a difference between the two figures?
I have no knowledge of that. It is not within my field and I cannot comment.
I accept that, but are you required to have an overall valuation of council housing stock across the country?
No. Our role in the right-to-buy process is to provide a valuation to local authorities. They send us the application forms they receive from tenants and we provide a value.
As and when you are asked, you do not keep a rolling valuation of property?
I am sure that somebody keeps those statistics, but it is not our function. Our role is to provide a valuation service.
So you have no strategic view of the value of housing in Scotland. Do you calculate value on a house-by-house basis?
Yes. It is for the Scottish Executive or other housing bodies to take a strategic view. We have no role in housing per se; we simply provide a valuation service.
On request, as it were—house by house?
That is correct. We do valuations for all sorts of things besides housing.
There may be obvious reasons for this, but why is the housing in some areas worth not much more than the value of one year's rent, when in other areas where a similar system for calculating value is used we can end up with a capital value five times the rental value?
Is that using the discounted cash flow method?
Yes.
Properties can have a very low value for many reasons. The two most important ones relate to the capital works programme and the level of rents. If, for whatever reason, stock is run down, the capital works programme spread over 30 years will be front loaded—in other words, there will be heavy expenditure in the early years. If that is combined with a relatively low rent, the result will be a low value. Another area may have a lower level of capital works and a higher rent, which will produce a much higher value.
Is the 30-year capital works programme the only factor?
The capital works programme and the level of rents are the two main factors.
So income stream is important?
Yes.
This is a slightly artificial question, but is there such a thing as the right price, or is it just a matter of agreement between the buyer and seller in stock transfer situations?
No. The independence of the valuer must be recognised. The valuer produces a valuation that is based on the evidence that he is given and the stock that he is asked to value.
Do you have any role in scrutinising the adequacy of the information that you are given—the stock condition survey or the like? Could you point out that not enough houses had been surveyed or that you had not been given the whole picture?
In the role of independent valuer, we would have to examine the stock condition survey that had been provided. If we did not like some aspect of it, we would have to query that.
In the Glasgow stock transfer there are two main parties—the city council and the body that will take over the houses. In that situation, would you act on the instructions of the council?
I imagine that the council would appoint an independent valuer to provide a best price.
So your client would be the council?
Yes, but the independent valuer is independent of both the buyer and the seller.
In right-to-buy sales, you are appointed by the seller. Is there not an appeal mechanism against the price?
No.
There is no appeal mechanism?
No—in fact, it is a determination.
Is there a need for scrutiny by anyone else? You would be appointed by one party which, given the variable figures, might lead to a conflict of interests, or whatever.
I cannot speak for other independent valuers, but we are used to our role and have no difficulty in standing on our results.
But from what I gather, you would not necessarily be the only valuers in the field; there would be competition for that work.
I imagine that there will be competition.
Could your comment about independent valuers be said with the same confidence about outside valuers?
I could not comment on that.
A number of landlords might compete to take over an amount of stock. Does the possibility of that competition influence the valuation?
No.
I will take a slightly different tack. When one is buying a house, competing buyers can push up the price. Does that feature not exist in stock transfer?
I imagine that the bids made for stock will vary and that the independent valuer's valuation will be used as the benchmark, but some bids may be higher than that.
Are we not missing something if there is no competitive element? Is there some way of replicating that in the way the valuation is carried out? I suppose I am referring to the desirability of the stock.
I am not quite with you—
I am thinking of the parallel situation of buying a house. I think we agreed that, if there is greater competition, the value is likely to be higher. Particular stock transfer proposals will be more attractive, or less attractive, depending on the interest in lending and so on. Is there any way in which that could be reflected in the valuation?
The bidders will undertake the same exercise as the independent valuer—they will carry out their own assessment of value and make their own judgments. It may be that, for some special reason, they will have a different view and therefore offer a different bid price. That is where the competition element comes in.
I wish to pursue the issue of scrutiny. Much of what you have spoken about involves small-scale valuations, but we are examining potentially very large stock transfers—a volume of business in the region of £1 billion-plus.
Are you asking who should scrutinise the independent valuer?
Yes, or who scrutinises the valuations that are made? Even in Glasgow, a variety of players are involved—the council, whoever it may pass the stock to and the Executive. Each has an interest in whether the valuation is high or low.
I suppose that the benchmark valuation provided by the independent valuer acts as a check on the bids.
Should you have a role in scrutinising proposals, or is your position compromised because you may have been involved in bids at an earlier stage?
As I understand the process, the council will appoint an independent valuer. The independent valuer's role is to provide the valuation of the stock, subject to various terms and conditions, which will act as the benchmark. Then bids will be submitted and, if the bid is higher than the benchmark valuation, the valuation acts as a check. If a bid were lower, one would wonder why.
Do you think that there is a need to improve the scrutiny of valuations, bearing in mind the new housing partnership proposals and the mass stock transfers?
I do not think so.
Are you happy with the status quo?
At the moment, yes.
If the independent valuer for the buyer and the independent valuer for the seller disagree, how is that resolved?
I can give you details of the stock transfer that I was involved with in Berwickshire in 1994.
What factors affected the valuation?
Because we took an income-stream approach, we had to consider everything that makes up the income stream, such as the level of rents, the level of voids, management costs, maintenance costs, possible right-to-buy sales and the programme of repairs that will be carried out in the foreseeable future. Those things are brought back to a present value under the tenanted market value process.
Did you then recommend a price?
Our valuation formed the independent valuation for the transfer of that stock.
Did the council take your advice?
The council took our report, which did not endorse everything that was in the valuation provided by the person that was going to buy the stock. Following much discussion, our valuation and proposals formed the basis of the transfer.
How would disagreements between you and the professionals who are doing the valuation for the buyers be resolved?
We would give our valuation to the council and it would be for the council to investigate the sources of the differences. We might be called in to try to isolate the differences.
This might have been asked before, but do you ever get the valuation wrong?
Valuation is not an exact science.
So there is discussion, and there can be movement one way or the other between the independent valuer—yourselves—and the valuers from the private sector?
No. Following any discussion, if the independent valuer was of the opinion that their valuation was correct, that independent value would stand.
So you are always right?
No. If we provide our valuation and, following further discussion, still think that our valuation stands on its merits, that valuation will stand as the independent value that is provided by whoever—whether the district valuer or whoever is providing the independent valuation.
So you are a bit like a football referee: even when you are wrong you are right.
That is a bit hard.
You mentioned that it is part of your professional role to judge the future income stream from any property that is to be transferred. You will know that the Executive intends to extend the right to buy to 40,000 housing association tenants throughout Scotland who do not have it at the moment. The Executive's assessment is that that will lead to an increase in right-to-buy sales of approximately 800 a year. Did it consult you, as independent valuers—or any other independent valuers—before arriving at that figure?
I do not recall being consulted on that.
Does your office keep abreast of the current national housing partnership developments? Are you involved in the on-going work and proposed transfers?
We follow what is happening with interest, but we are not involved in the major proposed transfers in Glasgow or Aberdeen. Under the new scheme, we are involved in trickle transfers in Aberdeenshire, but those involve small numbers.
We spoke earlier about whether there are enough professional tradesmen to tackle the work that we envisage over the next few years. Are there sufficient qualified and competent valuers, in your department and in the private sector, to deal with that?
Yes, I think so.
I have a couple of final questions. You said that the Scottish Executive will take the overall strategic view of the valuation of housing. Does the Executive have internal valuation expertise or does it rely on you?
The Executive has its own property department, which provides advice to ministers. However, the Executive also calls on outside valuers and surveyors to provide services. We are a major provider, but there are others.
You provide those services?
Yes, as do other private sector surveyors.
Your submission says that you provide advice on taxation issues to the Inland Revenue.
Yes, that is correct.
Have you advised it on any taxation implications of housing stock transfers? We have heard evidence on that and other issues, including corporation tax. Who is undertaking the work on that just now?
In my part of the world, we have not advised on the implications. Our head office in London may have an input somewhere along the line.
We may want to pursue that issue with you at some point, to find out what that advice is.
Please do.
Thank you very much for your evidence. I am sorry for keeping you waiting. Your contribution was extremely useful.
Thank you.