Property Archives - Bad Buying

After our last article featuring criticism of the UK Ministry of Defence (MOD), there has been more positive news in recent days, even if it relates to past failure. The development relates to the organisation gearing up for a legal battle with a private equity firm headed by billionaire businessman Guy Hands.

Twenty-five 25 years ago, MOD sold off houses that were used for military families. The deal was controversial at the time and has continued that way, as it became more and more obvious that it was a lousy deal for the taxpayer and indeed for many occupants of these properties. As The Guardian described it,

“In 1996, the Conservative government sold 57,400 properties in the so-called “married quarters estate” to Annington Homes, which was then bought for £1.7bn by Nomura, a Japanese investment bank that employed (Guy) Hands. He later left Nomura to found the Terra Firma private equity firm, and bought Annington for £3.2bn in 2012”.

An odd aspect of the deal was that the MOD retained responsibility for maintenance and refurbishment of the properties, whilst paying what was supposedly a discounted rent on a 200-year lease. In other government PFI-type deals of the period (including a vary large one that I was personally involved with), the buyer of the property took on full responsibility for maintenance, so at least the taxpayer was transferring a significant element of risk. In the MOD case, the aim was to use the money raised from the sale to renovate the properties – but of course that would benefit the new owners too. But in any case, the MOD has not done a great job of maintaining the estate in the intervening years.

The commercial naivety shown by MOD has enabled the buyers of the property to make huge profits on the back of house price inflation, with an annual return averaging over 13%, according to the National Audit Office. That gain included Annington issuing debt last year (against the property income stream) that enabled it to pay a dividend of £794m to its parent company. Here is what I said about the deal in the Bad Buying book.

“A National Audit Office (NAO) report in January 2018 laid out failings in terms of the buying and contract management process. The Department’s own calculations suggested retaining ownership would be cheaper – but for fairly nebulous “policy benefits”, the sale went ahead anyway. It then made very cautious estimates about future house price inflation and failed to build any mechanisms into the contract to claim a share of windfall gains. Of course, house prices rose faster than MOD’s cautious model, and the rate of return for Annington and its investors has been far higher than expected.

The NAO identified other problems – for some reason, MOD retained responsibility for maintaining the property, which it hasn’t done well, and there has been little collaboration between MOD and Annington to seek further benefits. Overall, it’s an example of failure that could comfortably sit in several different chapters here, but a lack of commercial understanding and negotiation skills in MOD were certainly amongst the issues; the NAO report estimated that the Ministry of Defence would have been between £2.2 and £4.2 BILLION better off if it had retained the estate”.

But the government is now taking an interesting stance. Defence Procurement Minister Jeremy Quin is trying to take back ownership of the properties through exercising “statutory leasehold enfranchisement rights”, a somewhat obscure legal manoeuvre. The MoD has sought to take two houses initially to test whether Annington can be forced out, whilst as you might expect, Annington claims the government has no right to do so and is behaving badly. This may end up in court; but the firm has now offered a one-off payment of £105 to contribute to refurbishment if the MOD backs off from the legal route.

So that suggests Annington knows there is some chance it might lose in court; and arguably that is already a potential £105 million “procurement benefit” for MOD. Not bad on Andrew Forzani’s end of year savings report… But maybe there is more if the Minister has the appetite for a fight.

And just to complete the story, the chair of Annington is Baroness Liddell, an ex-Labour Party MP and now a Labour peer. It’s quite amusing hearing her now justifying the unfettered capitalism that Hands has always propounded, whilst it is the Conservative Party that tries to claw money back from the billionaire’s firm …

Sadly, my mother passed away last month, aged 93. A broken hip, covid and pneumonia all hastened the end, but “frailty due to old age” was probably a fair enough cause on her death certificate. So we have started the process of selling her property, a bungalow, in Sherburn, an ex-mining village near Durham. I met the valuer from the estate agent last week, and he talked about the market situation and what has happened over the last 18 months.

“When lockdown started last year, we had a team meeting”, he told me. “I said to my boss, this is going to be a disaster! No-one is going to want to move during a pandemic – prices are going to crash”.

Of course we all know that he was wrong, and my new friend was very thankful for what has actually happened. He gave us a valuation some 15% higher than it would have been 18 months ago and is confident the property will sell quickly. (Just to make potential home buyers in most of the UK envious, we are still only talking £150K for a three bedroomed detached bungalow).

The point is that I don’t remember any experts predicting a property price boom in early 2020. Of course, the UK government helped with its reductions in stamp duty and now schemes to help first time buyers. But even so, there seems to have been a surge in people assessing their lives and homes. Many have reconsidered where they want to live, and the importance of having a garden for instance has gone shooting up the priority list. The valuer said that flats and apartments were not sharing in the bonanza in quite the same way, even larger examples, and he had clients who had been locked down in such properties who were desperate to get into something with even a small patch of land of their own.

It is not just property prices of course that have surprised most of us. Timber prices have risen sharply due to a triple hit of high demand, HGV driver shortages and climate crises, reports Supply Management.

“The Timber Trade Federation (TTF) said suppliers have faced a post-pandemic “surge in demand” for timber this year, leading to the average import price of softwood increasing by 50% between January and May – a situation which is expected to continue”.

This is another example of the power of markets to surprise us. Even the experts get it wrong – in fact, it sometimes seems that they get it wrong more than the non-experts! And that applies to the markets that we deal with as corporate procurement people too. No matter how much analysis you carry out, how many numbers you crunch, the variables that aren’t predictable can screw up the best-researched forecast.

That might be human behaviour, which largely explains the housing boom, or it could be the weather in the case of crops for instance, or political upheaval, or even a pandemic. The “unknown unknowns” or black swans can cause havoc with our plans, and even smaller issues can disturb specific markets. In my book I quote the famous Rowntree Mackintosh cocoa market disaster, which cost the firm huge amounts of money when they got their forecasts wrong for that commodity’s forward prices.

So we have to consider all the facts if we want to avoid market-related “bad buying”, and think hard about less obvious risks. In some cases, we can use advanced techniques such as hedging to protect against future cost increases, and mechanisms such as long-term contracts to guard against shortages (but of course getting locked in to long term contracts with unfavourable conditions is a risk in itself!)

Carrying out scenario analysis, which looks at various “what ifs”, is another approach that can be valuable. Certainly, considering a range of possible events and outcomes is better than simply working on the basis of a single prediction of the future. But this is one of the most difficult challenges procurement faces and no one can pretend that it is easy to forecast what is coming next. Let’s face it, if it was, we would all have bought timber futures, a second property and a large stock of PPE back in 2019!

Tag Archive for: Property

MOD Versus Guy Hands – Seconds Out for the Big Fight!

Forecasting Prices Isn’t Easy – Who Predicted the UK Property Boom? (Not Me …)