My word is my bond

By Lydia Stockdale

Introductions are one of the most complex arrangements in property

Handshakes and phone calls replace documents and signatures in the relationship between an investment agent and their long-term investor and developer clients.

When an agent introduces an opportunity to a client, the introduction fee they expect to be paid when a deal is done – usually 1% of the property in question's capital value – is never formalised. There is no paper trail, and there is therefore nothing to stop the client going back on their word.

In the midst of this tough marketplace, agents are starting to experience clients demanding lower fees.

'We have been challenged more on our fees in the last three months than in the last 15 years,' says David Ereira, a director at West End of London agency Ereira Mendoza.

Another investment agency head recalls how one client recently came back to him arguing that, although they had verbally agreed a fee, 'circumstances had changed', and he wanted to renegotiate.

In a relationship-driven marketplace, such back-tracking leaves a bitter taste. It is just not what investment agents are used to.

'We have one client that we have done £1bn of deals with and we never confirmed fees in writing,' says Daniel Mendoza, also a director at Ereira Mendoza. Even when transactions eventually take place years after the initial introduction, clients have remembered where that introduction originally came from and shelled out accordingly.

Ereira predicts that, over the coming months, 'a lot of agents will be put under pressure to reduce their fees in order to complete deals'.

David Hunter, managing director of specialist property fund consultancy Hunter Advisors, used to be a top client himself, most recently as former managing director of Argyll Property Asset Managers and says that now is an interesting time to raise the question of fees.

'In a market recession, it is more important [to honour fees],' he says. 'Deals are thin on the ground. But there are people with equity and there are some bargains.'

Investors and developers therefore need to maintain good relationships with agents so they are first in line when opportunities arise, he adds.

Crucial role

'Despite what some people think, the agent's role is crucial,' says Mendoza.

'Some people say, "But you only made a few phone calls",' he recalls. 'But it is years' of experience and you have to be in the right place at the right time to make deals happen.

'Our clients pay for the spark that understands clients' requirements, assessing the sorts of deal they want,' he explains.

Hunter agrees. 'Property is an imperfect marketplace,' he says. 'Nobody knows which properties can be bought or sold. A lot of the ones you want to know about are off market.

'There is a lot of equity sitting around out there waiting for forced sellers,' he says.

'A lot of those will not come on to the market.'

He suggests that those who are actually buying property in today's market will probably want to buy again. 'They will want to be seen as a very reliable and high fee payer,' he says.

'You have to honour fees, it is as simple as that,' sums up John Burns, chief executive of Derwent London.

'If you introduce a deal, you need to know you will be remunerated. No nonsense. A good reputation is hard to get, and you want to retain it. Nothing is more important that that.

(Abridged)