aon property eye summer 2016

Aon Risk SolutionsReal Estate

Risk. Reinsurance. Human Resources.

Introduction The UK electorate’s 52/48 vote to leave the European Union has caused uncertainty in markets, with property investment one of the sectors generating the most headlines. Aon Hewitt Partner Nick Duff provides our lead story ‘Brexit and the immediate aftermath’ with some practical observations. He suggests despite some pressure on valuations, the UK property market is likely to hold up owing to its attractiveness to long term investors.

As buyers of insurance, real estate investors will soon encounter additional reporting requirements due to the new Insurance Act coming into force this month, which fundamentally alters the duties between insurer and insured. Mark McGee, Client Director at Aon, considers some of the challenges for property investors.

Aon’s international viewpoint comes from Italy, as Andrea Giorgi, Unit Director at Aon in Milan, offers some helpful tips for developers, particularly when they are required to lodge collateral with public authorities.

Finally, our interview this issue is with Ryan Prince of Realstar Group who shares his views on the role of the UK private rented sector in tackling the housing shortage.

If you have any queries relating to any of the articles featured or otherwise, please do not hesitate to contact us at [email protected] . Our full contact details can be found here.

Newsflash – Fly tipping concerns at commercial industrial units. Property owners are reporting problems with illegal occupants running large scale waste disposal operations within vacant industrial units particularly in some areas within the M25. Units targeted include those with standard protective measures such as bollards, static security, CCTV and barriers. Owners would be advised to ensure their site management protocols are sufficiently robust to respond and site access should be monitored and limited. We recommend enhanced security features such as concrete barriers that are fixed to the floor rather than freestanding. Should you have any concerns or queries with respect to this issue please contact us.

In this Issue

2 Investors: Brexit and the immediate aftermath

3 Asset Managers: The Insurance Act

4 International: Italian developers find favour with surety solutions

5 Asset Managers: Dealing with major loss scenarios

6 Interview with... Ryan Prince, Realstar Group

8 Staff Profile: Anna Whitfield

9 Hotel and legal indemnity clients boosted by expansion of Aon Real Estate team

Property Eye Summer 2016

http://www.aon.com/unitedkingdom/products-and-services/industry-expertise/real-estate-contacts.jsp

Property Eye | Aon Risk Solutions | Summer 2016 2

Optional Page/Section Header

Investors: Brexit and the immediate aftermath

1 Source: MSCI IPD UK Monthly Index

Nick Duff | Aon Hewitt Partner

We do not believe that the UK commercial real estate market will suffer the same magnitude of capital value losses that followed the last downturn (mid-2007 to mid-2009) when values fell by 44% and net initial yields increased by 330 bps1.

However valuations are likely to be put under pressure as occupier demand wanes and foreign investment is reduced. The Central London office market is likely to be hardest hit given that a fully-fledged Brexit could see some employment falls in the financial sector and lower occupational demand generally.

We also expect to see some pressure on more secondary assets in non-core locations across the UK, reflecting weaker economic conditions in the UK as a whole. We would, however, expect core commercial funds with a focus on primer assets to outperform their peers.

Whilst we expect capital values to fall in the short term, the income producing nature of property means that it is still an attractive asset class for long-term investors and we would still expect positive returns over a five year period, all things being equal.

In addition, we are not in a period of oversupply as was the case in 2007, a weak pound should help to cushion the fall in overseas investment into the UK and there will now be a period of continued low gilt yields. All these factors will provide some protection against significant rises in UK property yields.

Key takeaways

• Property is a strategic asset class for pension schemes and we do not believe that economic and market conditions will deteriorate to a point where it is justified to incur the high round trip costs of exiting or underweighting property exposure

• Brexit has negative implications for other growth asset classes and we have witnessed sharp falls in global equity prices and widening of credit spreads; in our view property has not become less attractive overall relative to other asset classes. In addition, pension schemes are long term investors and this means they should be able to weather shorter term volatility and property’s key characteristics remain attractive

• Private Rented Sector: The case for PRS is driven by strong supply and demand dynamics; given the lack of new development since the start of the financial crisis, it is estimated that over 240,000 new homes are required each year until 2021 to meet ongoing and latent demand. Return assumptions for PRS funds are underpinned by positive rental growth expectations brought on by these changes

• We continue to recommend that UK pension schemes consider alternative real estate investments within their portfolio. Aon Hewitt Retirement

& Investment provides integrated and comprehensive solutions across actuarial, plan administration, investment and insurance disciplines.

Aon Hewitt Partner Nick Duff, shares his commentary on the prospects for UK property investors following the UK’s decision to leave the European Union.



Asset Managers: The Insurance ActAs buyers of insurance, real estate investors will soon encounter a new regime which fundamentally alters the duties between insurer and insured. Mark McGee, Client Director at Aon, considers some of the challenges for property investors.

Mark McGee | Client Director, Aon UK

There’s been a huge amount written about the Insurance Act in recent months, with very good reason, considering that it replaces legislation governing the insurance sector since 1906.

Whilst the tenets of the new act should be welcomed, it will impose a range of new duties on us as brokers, on insurers and also on you as buyers of insurance.

The most significant of these will require you to meet a new ‘duty to make a fair presentation of the risk’. While the definition of ‘material information’ has not changed, the new disclosure duty is more prescriptive than the current law in describing from whom such knowledge needs to be obtained and what the manner of disclosure is.

For example the Act states that what ”the insured knows” is deemed to include knowledge held by the insured’s senior management (i.e. those who make decisions about managing and organising the insured’s activities) and individuals with responsibility for the insured’s insurance.

The definition of “senior management” is intentionally flexible so that is suits companies of all shapes and sizes. Of course the more complex your company structure e.g. company control is vested in several operating divisions, the more individuals you will need to consult for risk information.

Additionally you will be required to disclose material information that your senior management and individuals with responsibility for your insurance “ought to know”. On the latter point, there may be a degree of nervousness in some organisations about involving senior management but senior managers are privy to information which could prove material to the success or failure of the business and while the board has probably only found itself responding to material disclosure requests in relation to directors and officers insurance in the past, their scope to get involved may increase.

Meanwhile, the disclosure obligation also means that you will need to carry out a reasonable search of not just information held by ‘the insured’ but also by ‘any other person’.

This includes agents and persons covered by the insurance, but is open to interpretation and may go far wider than this e.g. to include property managers and your professional team. There are a number of specialist service providers, involved in the ownership and management of property, who will hold “material information” on your behalf.

Finally you need to avoid data dumping i.e. providing large volumes of information without sufficient structure. All disclosures need to be accessible and clearly presented, structured, indexed and sign-posted. Your insurance brokers will be able to provide guidance on meeting this obligation.

We expect there will be an overall increase in the level of research and disclosure required by companies in order to meet these new obligations and Aon has already spent considerable resources guiding buyers through the new process, across all industry sectors.

What will one day be deemed ‘reasonable’ will depend largely on the approach the industry adopts as a whole. There will be a period of uncertainty where some risk managers might take a full and comprehensive approach to their research, and others will remain at the periphery of their core business. This is one aspect of the Insurance Act which remains uncertain until it is tested in court.

For real estate investors, the implications of the new duties under the Insurance Act, will need careful management. However we should recognise that you already do a great job in obtaining this information through your due diligence and management processes. The key will be ensuring that communication lines between, owners, property managers, professional teams and your insurers are open and that suitable guidance is provided to ensure this data is shared.

For further information on the Insurance Act and its implications go to http://www.aon.com/unitedkingdom/events/insurance_act.jsp



International: Italian developers find favour with surety solutionsMarket sources suggest Italy’s prospects for developers could be improving; but intimate knowledge is required for anyone navigating this historically opaque market. Property Eye spoke with Andrea Giorgi, Unit Director at Aon in Milan, who offers some helpful tips for developers, particularly when they’re required to lodge collateral with public authorities. Andrea Giorgi | Unit Director,

Aon Milan

Recent reports point to a positive outlook in Italy for developers. Milan was the eighth most active real estate market in Europe last year, with €4 billion invested between Q4 2014 and Q3 2015 and while Rome has some more challenges, development prospects in the Italian capital are judged to have improved significantly with a nine-place leap on one league table to Number 18 worldwide.1

Meanwhile, in March 2016, further signs that the residential market was recovering emerged when Italy’s Inland Revenue Agency reported an annual rise in property sales of 6.5%. Again this was driven by rapid growth in the northern powerhouse of Milan but also by a strong showing from its far southern counterpart of Palermo; both achieving 13%+ during the 2015 calendar year.1

Investors considering these growing urban development opportunities will find one common factor, namely the requirement to post collateral as bond for public works such as roads, sewers and other infrastructure, as well as a five year VAT Liability.

Andrea Giorgi, who heads up Aon’s office in Milan explains: “Obviously this isn’t a unique situation to Italy, but recently we have seen developers here using new forms of collateral to satisfy public authorities that they have the means to fund these works when they become necessary.

“In many countries this might mean you have to have a conversation with your lender to extend a line of credit, but in Italy the situation is more complex. Bank bonds in Italy are monitored by the central Italian bank, with strict limits on how much credit can be issued. This system of central control can be quite slow to get around.”

Andrea says this is the first reason why issuing a surety bond could be beneficial for real estate developers. “The surety market is not centrally controlled and allows the issuing of ‘Urbanisation Bonds’, raising capacity with only the company’s credit worthiness as cap; they are in many ways more flexible and cost effective. Typically rates are more attractive and this type of collateral can help shorten the time authorities will consider an application because insurance backed exposure is commonly utilised and accepted by public entities.”

In addition to developers’ urbanisation requirements, Andrea adds how a five year VAT tax liability is a further consideration. “The VAT Credit Refund Bond is another key issue for real estate companies,” he says. “Again, using the bank channel isn’t always the best idea, because your credit line is kept busy at least for three years while the surety option moves this off the balance sheet. Essentially, our message is that this is a competitive solution for developers which can really help them make progress in Italy. The banks are not the only means of posting bond for public works and VAT and we encourage developers to consider their options carefully.”

1 Source: Emerging Trends in Europe 2016 PWC



Asset Managers: Dealing with major loss scenariosAon Real Estate Claims Director, Dylan Allen says that the property owners and asset managers who are most successful in getting back on their feet are the ones who get their restoration response aligned with their insurance claim.

Dylan Allen | Real Estate Claims Director, Aon UK

Any property owner who has experienced a major loss will testify to the challenge of bringing that asset back into operation. Every day lost in the reinstatement process represents a significant risk to the bottom line both for investors and tenants.

Having worked with real estate clients on a range of major loss scenarios in recent years, Dylan Allen suggests that the process of claims handling should, for the benefit of restoration project management, be turned on its head:

“The traditional way, where the Insured meets the cost of the reinstatement project cost, presents their invoices to the loss adjuster and hopes to get the money back within a reasonable time frame from their insurer, is something we’re looking to move away from. We prefer instead a much more collaborative approach between the Insured’s project management team and the loss adjuster.”

Dylan adds how clients are finding more momentum when they align project management with the advocacy of Aon’s claims consultancy. “Costs are forecast at the outset and payments negotiated on an interim basis so the balance sheet risk is much less of a concern.”

ScenariosAs you can imagine, the circumstances leading to a major loss scenario are hugely variable and unpredictable, although Dylan says adverse weather across Europe has been a relatively common cause in recent years. “There were a number of major storm events across central Europe in 2013 and 2014. We worked with a number of clients after flat rooved industrial units were damaged by hail, with significant claims resulting from the loss.

“What can make a claim complicated is when the building is damaged but the tenant remains in situ. If the building is unusable, both the tenant’s and the landlord’s claims will run in parallel with a similar set of objectives, that is to reinstate and reoccupy as soon as possible. If the tenant remains in occupation however, the reinstatement project has to be considerate of the tenant’s operational needs. In this situation an early agreement between tenant’s and landlord’s insurers with regard to meeting any additional costs in this respect should be encouraged.”

PreparationWhile the insurer’s own process following a claim is relatively well known, Dylan advises that the client should be thinking more carefully about the type of professional team they would like to appoint when the worst happens.

“At Aon we encourage all of our clients to appoint a project manager to deal with reinstatement works in the event of a major loss. Where there is significant water or smoke damage we would also recommend using a restoration company to help mitigate the extent of damage. The PM plays a vital role in organising and driving the reinstatement project but in tandem with this we would advocate the appointment of a claims consultant, who can carefully align themselves to the PM process and ensure that the claim does not lose any momentum. For our clients who have purchased Claims Preparation cover, the cost of a claims consultant will be met by the insurer as a valid part of the claim.

Improving cash flow and forecastingDylan says. “A claims consultant brings additional resource when a client needs it the most, managing the insurance claim so that the PM is able to focus on reinstatement without having to be concerned about communication with loss adjusters and insurers.”

As Dylan alluded to earlier, the aim is for Aon to turn the claims process on its head, in favour of the client’s own cash flow management during restoration. “The client can ensure cash flow is being managed by working with the Aon Claims Consultant and producing cost forecasts that the insurer will authorise interim payments against.

“This money won’t always be ‘volunteered’ so it’s easy to understand the importance of having someone on the team to ensure this process runs smoothly.”

In ideal circumstances this process can begin even before overall quantum has been established. “This is a customer business and it’s in everybody’s interest to get these types of claims settled with the absolute minimum, additional costs,” Dylan adds. “Integrating our claims consultancy as a conduit for cash flow management so the client’s project manager can drive forward the restoration makes perfect sense.”

For more information, please [email protected]



Interview with... Ryan Prince, Realstar Group

1. Over the past 40 years Britain has become an increasing nation of home owners. How can build to rent operators change the perception of home ownership as the ideal?

That’s a very complicated and challenging question. I have two suggestions:

First, we need public policy that enables the sector to develop new-build product at scale. Once there is meaningful product in the market of a suitable quality and management offer, customers (and they are customers, not tenants) will finally be able to see for themselves the difference between ‘buy to let’ and a genuinely professionally run rental property.

Secondly, the government and media messaging needs to change dramatically. Renters are not failures or second class citizens. There are many reasons for this including the number of phenomenal urban metros where renting is the norm. Millienials, for example will have an average of 11 jobs in their careers. For them, renting offers flexibility, choice and no hassle without having to personally guarantee loans for upwards of 10x their annual salary.

2. Planning for private rented sector in London – a new mayor, a new dawn?

Like his predecessor, the new mayor recognises the contribution that a new rental sector at scale can bring to help solve London’s housing shortage. At present, the mayor has limited powers with no real ‘teeth’ to make this happen. The silver lining, however, may be that many of the former mayors team are now at No 10, so maybe this will be the shot in the arm the sector needs.

3. From a property perspective, what can the UK learn from North America and vice-versa?

The British rental housing sector has already spent a great deal of time studying the North American operators. The ULI guide that was published a couple of years ago and updated recently talks to a number of these learnings, including: customer service, design, amenities and operating models.

On the flip side, London is arguably the most global city in the world and North Americans can learn a lot from its diversity and regeneration areas such as Shoreditch, Stratford and Elephant & Castle. We’re also a bastion of architectural and design innovation, so I’m sure there’s something in that as well.

4. What initiative (or issue) has had the greatest single impact on the property sector in the course of your career?

In 2008, going into the financial crisis we were one of the largest hotel owners up and down the country with over 10,000 rooms. We had CMBS bonds as part of our capital structure and one of our joint venture partners was Lehman Brothers. That was a pretty ‘challenging situations. The good news – we made huge improvements in operational efficiencies, all of the shareholders were supportive and put money back in the business in order to de-lever the capital structure and as of December 2015 we completed the final disposition which resulted in a highly successful investment over the 12 year life of venture.

Ryan Prince | Vice President, Realstar Group



5. What, in your view, will be the biggest challenge facing the property sector over the next five years?

The over-arching question for all sectors is of course, demand. This will be driven by job growth, GDP and safety and security.

From a UK perspective, the largest challenge will be uncertainty. Uncertainty permeates a range of critical elements for investment decisions in our sector, for investors, developer and operators as well as a corporate occupiers and residential buyer/renter. Government policy and taxes, employment laws and rules, and construction materials and labour will all play a serious role in where the industry stands in 5-10 years time.

6. Brexit – calamity or opportunity?

Fair disclosure: I was strongly in favour of Remain. From here, I think the best we can hope for is:

i. Visibility as soon as possible as to what the outline of a deal will look like between the UK and Europe. In real estate parlance, an agreed non-binding Heads of Terms.

ii. No contagion or break-down across the rest of the EU. If the far right gains true voter traction in places like France and the Netherlands, this would be a huge negative for investment and society at large.

iii. Minimal high profile corporate defections out of the UK – i.e. if Google or Facebook announced they were significantly downscaling their UK presence, this would be a big psychological blow.

7. What alternative career might you have pursued had you not gone into property? I’d like to be the person responsible for choosing musical scores for films.



Staff Profile: Anna WhitfieldAon Real Estate has welcomed one of the real estate insurance market’s best known names to its team, with Anna Whitfield joining this April as Client Director. Property Eye spoke with Anna about her move into the broking market and how her role as Chair of the Insurance Institute of London (IIL) Property Investors’ Committee can help Aon customers looking for the ‘satellite view’. Anna Whitfield | Client Director,

Aon UK

Having spent 10 years at AXA and previous to that 12 years at RSA, Anna reflects on the switch from underwriting to broking as one which benefits both sides. “Working directly with clients was a less frequent demand when I was on the insurer side and was an aspect of my role that I really liked, so it’s something I’m really enjoying now. Being a part of the team at Aon has given me an opportunity to focus my work around client needs at whichever point they are in the real estate deal lifecycle.”

Her breadth of client knowledge is considerable, having dealt with real estate investment customers her entire working life. “Primarily I’ve been exposed to pension fund customers and those with large scale property investment vehicles as well as major residential landlords,” says Anna. “The market is there to support a range of diverse organisations with interests in real estate investment, including Build to Rent and specialist student sectors.”

One of the defining aspects of Anna’s profile is her presence as Chair of the IIL Property Investors’ Committee. “I’m very privileged to have this role, which affords me the time to spend with my peers discussing the latest hot topics in our sector. We have a regular programme of lectures which are always very well attended at the Lloyd’s Old Library and there’s no doubt it keeps my finger on the pulse on the issues that matter to our customers.

“The guest speakers we are able to attract are probably the highlight,” Anna continues. “For example in 2015 we had a firm of architects who specialise in the conversion of office-to-residential use explain the challenges of working in this market. We are seeing this trend on an increasing basis across the UK by virtue of Permitted Development Rights legislation so it’s essential that we’re able to understand what the impact on insurance of property portfolios will be.”



Steve Chapman | Client Manager, Aon UK

Mark Manwaring | Legal Indemnity Director, Aon UK

While you might be forgiven for thinking the traditional hotel industry is under threat from ‘disruptors’ like Airbnb, Steve Chapman’s experience suggests otherwise.

“The UK hotel market is performing well with both occupancy and average daily rate numbers increasing year on year. Having supported clients in this area since 2002 it will be one of my main focuses at Aon,” says Steve.

While the Aon Real Estate team looks after a range of clients with international portfolios, Steve says “the UK hotels market is predominantly dominated by the global players, typically the large US/international brands, largely operating under a franchise agreement with the hotel owners.

There are very many UK/European-specific operators and it’s a really dynamic space for real estate investors. We will be providing programme analysis and due diligence to clients with large asset bases, where it’s not just about the bricks and mortar, but the other factors which contribute to the hotel’s income stream, particularly where the owners are managing the operational side of the business for their own account or outsourcing these activities to other hotel management companies.”

The operational hotel sector’s income streams set them apart from other more general property owners, says Steve “with more complex risk profiles and additional opportunities for the business to be interruption by unforeseen events. It’s not just about buildings, but also contents and stock and the other things which make a hotel function effectively and attractive to visitors. We are also very used to the franchise model, with minimum insurance coverage requirements being dictated by the franchise/brand owners, so our role will always be to understand these unique characteristics, help clients analyse their programmes and avoid the sorts of pitfalls that threaten gross profit and other risks when an insurable loss occurs.”

Meanwhile, the practice’s Title/Legal Indemnity team has responded to increasing demand with the appointment of two new law graduates, India Campbell for admin/case management and Paul Weston who has many years of Legal Indemnity broking experience.

Mark Manwaring, Client Director for Title/Legal Indemnity says the expansion gives Aon Real Estate the capacity for further growth. “Delivering service is the key factor and with a contingent of five now in our title team, we’re one of the most experienced in the market. The risks we see are becoming increasingly complex and clients require their cover shaped to fit their needs rather than a broker acting as a post-box for title underwriters.”

As Property Eye reported in its Spring Edition, one of the areas in demand has been judicial review coverage. With no slowdown in the volume of JR applications against developers, the team has seen a substantial increase in enquiries during 2016. “It’s been a very busy year so far, with JR coverage a big factor, as well as advice on restricted covenants, access ways and rights of light,” says Mark.

Hotel and legal indemnity clients boosted by expansion of Aon Real Estate teamAon Real Estate continues to grow and diversify following the appointment of ACII Chartered Insurance Practitioner Steve Chapman as Client Manager and the addition of two legal professionals within its Title/Legal Indemnity team.

Risk. Reinsurance. Human Resources.

About AonAon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit http://aon.mediaroom.com/

Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Aon UK Limited Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AN. Registered No. 210725. VAT Registration No. 480 8401 48. Some links on this website may redirect you to third party sites. Aon is not responsible for this content. Telephone calls are recorded and may be monitored. © 2016 Aon UK Limited.

FPNAT234

Property Eye should not be construed as giving opinions, assessment of risks or advice of any kind (including but not limited to actuarial, re/insurance, tax, regulatory or legal advice). The content of Property Eye is made available without warranty of any kind and without any other assurance whatsoever as to its suitability for any purpose, completeness or accuracy.

Aon UK Limited trading as Aon Global Risk Consulting does not accept any liability to any Recipient or third party as a result of any reliance placed by such party on the articles within Property Eye. Any decision to rely on the contents is entirely the responsibility of the Recipient. The Recipient acknowledges that Property Eye does not replace the need for the Recipient to undertake its own assessment or seek independent and/or specialist risk assessment and/or other relevant advice.