Words: Ashley Rigg
Published: 11th November 2009
Agent expulsion raises questions for overseas property industry
An estate agent in London has been expelled from the UK Property Ombudsman scheme for failing to protect a client’s rental deposit. Ironically, the sales and rental agent, who was ordered to pay £1600, joined the scheme voluntarily.
Ombudsman Christopher Hamer ordered estate agency, Global Realty to pay £1,600 (£1400 for the lost deposit and £200 costs) to a tenant whose deposit it had paid to the landlord without ensuring that it was adequately safeguarded under the tenancy deposit protection laws.
Whilst the Ombudsman recognised that the landlord’s behaviour was not Global Realty’s responsibility, Hamer said the actions of the agent had disadvantaged the tenant and led her into a situation that the agent could have avoided.
Deposit protection and market failure
Although some will consider the ruling harsh on Global Realty, the case is bound to receive positive press coverage and will help build buyer confidence which is prerequisite for the smooth running of any market.
There are parallels for our industry. The off-plan overseas property market suffers acutely from a lack of buyer confidence which is crippling transaction volumes. A spate of high-profile developer bankruptcies have left investors with little chance of ever seeing their deposits or stage payments returned to them.
Between a rock and hard place
One way to re-build consumer trust is to introduce compulsory bank guarantees or protected client accounts. However, the biggest obstacle to the introduction of such a scheme is the damage it potentially does to cash flow, both for the developer and for the introducing agent.
Co-operation is needed from the international banking community to ensure developer loans can be raised quickly using buyer deposits as security.
The unfortunate irony of the situation is that although now is the time we most desperately need such a scheme, it is also the time one is least likely to succeed.
I would be very interested to hear your thoughts.
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User Comments
Since banks are far less inclined to lend on real estate developments during this period, a new product is now available. Too complex to detail here but, suffice to say, several private syndicates & entreprenurial funding organisations are introducing applicants to the behind-the-scenes methods previously dominated by banks & big funding institutions. Developer needs a minimum of 200,000 Euros in liquid form out of a total of 10% collateral or hard assets in support. None of the cash funds nor collaterall is at risk throughout the transaction. Also, there aree No Upfront Fees. Anyone seeking information please make contact via Global Edge.
Brian Curtis,
Independent Finance Consultant
In Turkey, developers can issue a 'sennet' (the equivalent of a cash bond) to clients for all payments received before the deeds are transferred into their name. The sennet when accompanied by a notarised agreement are the equivalent of a "cash back" guarantee. IF the buyer had need to cash the sennet ALL of the developers assets are frozen....it is a simple system that works and empoers the buyer and keeps the seller focussed on delivering their obligations as detailed in the sales agreement.
Usually a third party holds the sennet(s) until the deeds are transferred to the buyer when the sennets are then returned to the issuer.
My company uses them all of the time - it makes developers perform as per the contract and it gives the buyer peace of mind.
Kelly Macfarlane,
Didim Sun Properties
Risk to capital is one of the key inhibiting factors amongst prospective buyers we've surveyed, so any scheme that has characteristics of protecting deposits would go a long way toward removing barriers to transactions and promoting confidence.
Whether any bank will have the appetite to take on loans to developers, even with security of deposits present is the million dollar question.
Robin Wilson,
Rightmove Overseas
The whole point of the legislation is to protect the tenant against loss of his deposit through no fault of his own. Of course developers can't use tenants' deposits to fund their developments. To allow that would render the whole protection useless. Developers have to be able to raise the development finance themselves.
Jonathan Price,
Origen Group
