Little impact from proposed commercial property management licencing exemption laws: Shopping Centre Council

Property ObserverMarch 21, 20160 min read

The debate around the NSW government's recent decision to amend the Property, Stock and Business Agents Act to exempt large commercial property managers from holding real estate licences rages on, with the Shopping Centre Council of Australia preparing a list of FAQs around the issue.

The council cites a lot of Victorian data -- it claims the Victorian Valuer General has a lot more relevant data -- but the NSW figures would be roughly the same, it says.

The SCCA argues that the impact would be even less in NSW as the state government has set higher thresholds for exemptions.

For context, the Independent Pricing and Regulatory Tribunal's 2015 Reforming Licensing in NSW report recommends that large commercial property managers who manage an estimated property value of at least $40 million, or a gross floor area of at least 20,000 square metres, or are managing properties for a related corporate entity should be exempt. 

Frequently Asked Questions

Q: How many commercial buildings will be affected?

A: Less than 1 percent.

In Victoria, according to the Victorian Valuer-General, only 510 commercial buildings (of a total of 72,857 commercial buildings) exceed 10,000 square metres. This means only 0.7% of commercial buildings would have been affected.

The NSW Valuer General has advised that he is unable to supply similar data for NSW. There is no reason to believe, however, the proportion in NSW would be substantially different to that in Victoria.

Q: How many commercial property sales will be affected?

A: Fewer than 4 percent.

According to RP Data, fewer than 4% of commercial property sales in NSW are for amounts greater than $10 million. Therefore, more than 96 percent of commercial sales will be unaffected. According to JLL's Australian Shopping Centre Investment Review and Outlook there were 41 sales of retail properties (including shopping centres) in NSW in 2014 which exceeded $10 million.

The buyers and sellers were, in all cases, either institutions or wealthy investors who understand property risks and do not need the protection of legislation.

(Many sales of commercial buildings worth more than $10 million already occur 'off market,and no real estate agent is involved. This change will therefore actually involve far fewer than the 4 percent of commercial sales referred to above.)

Q: How many real estate agents will be affected?

A: Around 2 percent.

In Victoria in 2014 SCCA members held 302 agent and agent representative licences. According to Consumer Affairs Victoria (CAV) there were a total of 23,279 such licensees in Victoria at June 30, 2014. Assuming all SCCA members had taken advantage of the regulation, only 1.3 percent of licensees would have been affected. If we assume the number of licensees managing commercial buildings is around 200 (an estimate we believe to be excessive), then only 2.2 percent of licensees would have been affected. We don't have figures for NSW but believe the proportion in NSW would be similar.

Q: How many real estate agencies will be affected?

A: Around 0.2 percent.

Sales of commercial properties in excess of $10 million are almost always handled by the large commercial real estate agencies (JLL, Savills, Colliers, CBRE, Knight Frank), not the smaller commercial agencies. These agencies are members of the SCCA and/or the PCA and support the SCCA and PCA policy to provide these exemptions.

In reality, the same agents who handle the sale of these properties will continue to do so because they are very experienced in such transactions and shopping centre owners are likely to continue to utilise the services of these specialists in the large agencies because of their expertise, not because they are licensed. The transaction threshold of $10 million will therefore have negligible effect on the commercial real estate agencies.

According to CAV, there were 3,599 real estate agencies in Victoria in 2014. Only six (i.e. 0.2 percent) would have been affected if the exemptions had been in place in Victoria in 2074 and had been applied to retail property sales over $15 million. This is also true of NSW.

Q: What is the current cost of this regulation to commercial property owners in NSW?

A: In excess of $4 million a year.

During deliberations on the National Occupational Licensing System, we provided details of the cost of only three aspects of regulation - licensing, professional development and trust account regulation - for commercial property owners around Australia. This amounted to more than $12 million a year. The cost in NSW could therefore reasonably be assessed as $3.84 million a year, This does not take into account a range of other costs such as management time involved in implementing and overseeing systems to ensure compliance with the legislation. (There is also a cost to the NSW Government in staff resources in Fair Trading currently occupied in licensing, compliance and enforcement).

Q: What impact will this have on tenants?

A: None.

Retail tenants have never been protected by the Property Stock and Business Agents Act. This Act regulates the relationship between property owners (the'consumer') and property managers ('estate agents'). Tenants remain fully protected by the Retail Leases Act, which regulates the relationship between the owner/manager and the retail tenant, and is unaffected.

The RLA, as well as regulating most aspects of the owner-tenant relationship, also provides dispute resolution provisions involving the Small Business Commissioner (mediation) and NCAT (arbitration).

Q: Is the exemption supported by retail tenants?

A: Yes.

The real estate license concentrates on residential property and real estate agency matters and teaches the licensee nothing about shopping centre management or leasing or the Retail Leases Act. This is why the exemptions are supported by both the Australian Retailers Association (ARA) and National Retail Association (NRA).

Q: What impact will this have on trust accounting requirements?

A: None.

Property managers receive money on behalf of owners in three ways: Sale deposits (i.e. when a building is sold). There is currently no requirement in the Property Stock and Business Agents Act for such deposits to be paid into a trust account i.e, it is unregulated. Therefore nothing changes. It is a matter for the sale agreement as to where such moneys are deposited. As a matter of commercial practice, such deposits are usually held in trust accounts until the sale is finalised. This will not change.

Security deposits for leases (i.e. tenants are required to pay a security deposit equivalent to some months rent). This is regulated by the Retail Leases Act (s.24), not by the Property Stock and Business Agents Act, so nothing changes. In NSW, as a requirement of the Retail Leases Act, cash security deposits are required to be deposited with the Rental Bond Board so nothing changes. In practice, however, cash deposits have largely been replaced by bank guarantees so money is not involved.

Rent. This is currently required by the Property Stock and Business Agents Act to be paid into a trust account. Once the rent is paid by the tenant, however, this is the owner's money and it should be up to the owner to decide how it is banked. Large commercial owners move it immediately out of a trust account into an operating account in order to meet the operating expenses of the centre or building. This is 'double handling' and an unnecessary expense for owners. Large commercial property owners don't need Parliament to direct them how to bank their money.

Q: Is this the 'the thin end of the wedge' for deregulation of licensing?

A. No.

It is nonsense to suggest this will be the 'thin end of the wedge' and will lead to the complete removal of licensing. These exemptions do not apply to residential real estate or to rural property and no government is likely to ever deregulate in these areas. Nor is it likely there will be further exemptions for commercial property. The SCCA and PCA have no interest in pushing for further exemptions and are not arguing for wider exemptions. Once the exemption is granted the SCCA has no further interest in real estate licensing (as we have shown in Queensland).

Q: Will this mean the entry of 'cowboy operators' in the industry?

A: No.

Those who would benefit from the exemptions are/ in nearly all cases, publicly listed entities. They have an obligation to investors to manage their assets responsibly and only contract the services of reputable individuals and companies to manage and lease their assets or conduct sales transactions. It is insulting to the directors and senior management of these entities to suggest they would now contract 'fly-by-night' operators or that commercial property management will become the 'wild west'. The sums of money involved in exempt transactions means property owners will continue to do due diligence and only contract reputable companies to handle such transactions.

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