“The reports of my death are greatly exaggerated,” Mark Twain once remarked when an overexcited journalist transmuted the illness of a friend Twain was visiting into the fanciful poverty-stricken death of the author.

Many in the P2P industry will know how he feels after the insolvency specialist Damian Webb reheated some leftovers from his AltFi 2019 “State of the Market” article at a recent NARA (Association of Property and Fixed Charge Receivers) conference. As the man charged with recovering funds from the Lendy wreckage, Webb, a crocodile tear welling up in his eye, pronounced that “P2P lending, from my perspective, is dead”.

For his “perspective” read, “from the point of view of one whose main professional interaction is with patients who are dead, or nearly dead”. It’s like asking an undertaker who will win a marathon. We called Mr. Webb out on the same material nearly two years ago [1], and yet the record hasn’t changed.

Yes, Lendy was an appalling car crash which should never have been allowed to happen. But we (along with other informed commentators on P2P, such as 4thWay) were calling out Lendy’s bad practices long before they came to Mr. Webb’s professional attention.

In fact, long before they appeared on the administrator’s slab, 4thWay actually refused to list Lendy among the P2P institutions they commented on, citing “lack of access and little information about its processes, performance, people and legal structure. Its publicly provided information left a lot to be desired and serves as a warning to prospective lenders attracted by high interest rates and vague concepts of property security” [2].

Mr Webb’s pronouncements at the Insolvency Practitioners’ jamboree were reported in an article entitled ‘The downfall of P2P lending: self-valuation, excess capital and no experience’ [3] and described “the shocking details of how the once booming P2P property lending market collapsed”.

By “collapsed”, he of course means that, of the scores [4] of regulated P2P lenders, 26 have withdrawn from the market and only 8 of those actually went down owing money to investors. Of the remaining 18, three switched to institutional only lending, three changed to a new business model, four were sold and their new owners discontinued P2P operations and 8 decided voluntarily to close down. But only 8 actually went bust [5].

Of course, that’s eight more than anyone would like – and we truly feel for those who lost money to these bad platforms – but to suggest this represents a “collapse” of the industry is playing fast and loose with the facts. We would expect better of a financial professional.

And in his cataloguing of this “collapse” he somehow neglects to mention the many thousands of homes that would never have been built if P2P hadn’t stepped into the breach to help fund the building industry after the banks stopped lending in 2008. CapitalStackers has been instrumental in raising the money to build 118 houses and 433 apartments.

Webb cites the platforms’ withdrawal as “natural selection for the benefit of the market because the poor players are effectively being killed off because they are not competitive”, as if such a process is a unique feature of P2P. It’s not, of course.

Banks have gone bust, institutional lending operations have gone bust. So have newspapers, supermarkets, lawyers, accountants and even insolvency practitioners [6]. Badly-run, uncompetitive or ill-prepared companies in every industry have gone bust owing money – yet no one is writing about the death of supermarkets or accountants. Or even, dare we say it, insolvency practitioners.

So clearly Mr. Webb has an agenda, and to this Damian, all omens are bad. A man with the gift of hindsight is presuming to tell us the future.

He wipes a few smudges and finger marks off his crystal ball and pontificates that, “I think there will be more failures in that P2P space, but it has largely been fixed or closed down by the Financial Conduct Authority” [7].

Again, this is ill-informed. The tweak to the regulations imposed an obligation that retail investors must pass an “appropriateness test” and, in the absence of taking independent advice, limit their lending to 10% of their investments until sufficiently experienced (which equates to lending on two deals within the last two years) at which point they could change their status from “Restricted” to “Sophisticated”, for P2P purposes. Those platforms that voluntarily left the regulated space did so because the regulations were too much of a faff – but they weren’t “regulated out”. They simply weren’t committed enough to go the extra mile and left the business to those that were.

At this point of his speech, Dr. Hindsight may have managed the kind of frosty smile that killed off all the houseplants in the building and mustered an attempt at cheeriness – “There are a number of operators in that space that will do well. They are well run, they’ve got a good client base and they will continue” – Gee, thanks Damian – “but the market is moving very much towards alternative lending out of institutional funds” – Oh.

So then the man who has no professional knowledge of healthy P2P companies went on to proclaim that, “The future is alternative lending – P2P may be an aspect of that but it’s going to be a very small aspect”.

What exactly does this endgame specialist know about institutional funds? Or lending in general, for that matter (apart from the kind that’s ossified into terminal debt). Does he follow the view of some investors that the mere presence of an institution in a deal gives them comfort because people who deal in finance must ipse facto understand all forms of finance? Does he think the institutional lenders have some sort of expertise in property lending that would have prevented the Lendy bellyflop?

Well, they might have done, not because they understand property debt, but because they can smell the stench of bad practice.

But why on earth Webb feels institutional lenders are “the future” is an unsolved mystery. True, a few platforms have found them to be a useful source of funding fast growth, but at CapitalStackers we’ve only proceeded down that route (as indeed we do all routes) with caution, because our retail investors are so important to us. And since stability outweighs speed of growth in our book, we haven’t been in a hurry to secure a large institution’s funds. We’re not against an institutional tie up. Far from it – just as long as it doesn’t cut across our highly valued relationship with our existing investors who, after all, have been with us from the get-go.

On the other hand, we do work hand in hand with banks on almost every deal, which is an institutional partnership of a different kind. While we’re regulated by the FCA, banks, for their part, are subject to very high standards of regulatory control through the Bank of England’s Prudential Regulation Authority, which tightened controls further after 2008. In effect, this means banks can only lend up to around 60% Loan-to-Value ratio, otherwise they require more regulatory capital and business becomes less economical.

Which is the basis of our business model – funding the gap between a property developer’s equity and the amount it’s economical for the banks to lend – which is a sensible position for crowdfunding. Small investors who prefer not to tie their capital up in REITS or unit trusts can get involved in the kind of regulated, transparent deals that banks normally fund. This gives them more choice and flexibility. Not to mention the confidence generated by a deal fully funded from the outset.

And yes, this means we take a junior position in the “stack” to our bank partners, but this is a calculated and painstakingly assessed risk. Whilst in the repayment cascade the bank would be out first, it’s worth pointing out that they would never enter into a deal with a junior lender where they expected that junior lender to go into default, since this would also cause issues with their own deal.

Anyway, continuing to paint a portrait of the entire industry through his keyhole, Dr. Hindsight goes on to explain that the “historic failures in P2P lending over the last decade” (all eight of them) were all down to “shareholder greed, too much capital, using technology to cut out credit risk processes, and lack of experience in lending”. Furthermore, he states that “many of the people involved in fintech were more technology than finance-based, they had no financial background,” tarring the entire seagoing fleet with the same brush he used to damn the few that sank.

“There was no grey hair”, he goes on (boy does he go on!), “there was no experience, people just jumped into the sector, worked out there was an ability to deploy money and did so with minimal review of credit or understanding of lending.

“And they went into areas I think they deemed to be simplistic, i.e. property lending, but they didn’t really understand the issues involved.”

Which, to be honest, sounds a bit like, dare we say it, an insolvency practitioner predicting the future of an entire industry when he doesn’t understand the issues involved.

The above litany is nothing like our experience. In fact, it pretty much describes the opposite of the CapitalStackers business model. As catalogued by 4thWay, our shareholders’ demands are modest. Where there is still hair, it is grey. The experience of our directors’ spans decades of specialist property lending in major banks. Our credit processes are not automated, but still go through the time-proven process of staring into the borrower’s eyes and seeing his very soul (plus a lot of exhaustive financial modelling, independent surveys and information sharing with banks). And while we’ve had no difficulty raising funds for the kind of deal we publish (we recently broke our own record, raising half a million pounds in under a minute), deep due diligence into the quality of the deals is more important to us than the need to deploy vast amounts of capital quickly.

In other words, it doesn’t matter how much capital we have – if the deal doesn’t get through our narrow gates, that capital ain’t getting deployed.

So the suggestion that the kind of serious property lenders who form the backbone of this industry would “run roughshod over credit processes and standard banking processes that had been in place for years, creating significant value for themselves in the business but at significant expense of the retail investors investing into the platforms” would be libellous if they weren’t clearly the words of someone suffering from insolvency practitioner’s myopia.

The future of property-based P2P, Mr, Webb, cannot be borne on the broad shoulders of institutions alone. Yes, they bring a source of capital (in return for a steady income) – but if they had lending expertise, they would do it themselves. This is why they come to the P2P platforms in the first place. No, the future, as ever, is partnership – a marriage of resources and skills, with each team member bringing their best game.

As the interlopers and charlatans get weeded out, the field will be left to experienced property lenders, well-versed in banking best practices, lending on high quality deals with appropriate LTV ratios and maintaining complete transparency in all areas and at all stages with their investors. They will happily work with regulators, banks and investment institutions to create the best of all possible worlds for all investors, borrowers and, of course, the many happy people who benefit from the homes they help to build.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

CapitalStackers investors pledged the best part of £1 million in just a few days to part fund the development costs of 48 apartments for the Over-55s in Thornton Cleveleys, standing to make returns from 10.21% to 14.66% at a Loan to Value of 65.6% on the highest risk layer.

The scheme is targeted at downsizers who’d like to be part of a community, and the developers – Torsion Care Ltd – are creating a highly desirable “Silver Village”, with communal lounges, gardens, a twin-bed guest suite and 5-day concierge service. It’s appealingly sited next to a bowling green, playing fields and the Marsh Mill Shopping Village with all the amenities the residents might need close by. It’s the final segment of a larger development of forty 2-5 bedroom houses and is priced below a similar recently completed McCarthy & Stone project in Poulton-le-Fylde, two miles away which has already sold 44 out of 50 apartments.

The scheme comprises 32 one bed and 16 two bed apartments, and while the one acre site only allows for 26 car spaces, there’s ample free parking in the surrounding roads. It’s also very well connected – 5 miles from Blackpool, 17 miles from Preston and just 10 minutes from the M55, which links to the M6 and beyond.

The Deal

Senior debt of £4,546,000 is being provided by United Trust Bank at a Loan to Value ratio of 50% at an interest rate of 6.5%. The borrower owns the site having put equity of almost £1.1 million into the scheme.

CapitalStackers invited bids for slices of the £960,000 loan, which were fully sold out in five days on Agreed Bids – meaning the investors offered the borrower a discount on its target rate.

The annualised returns were therefore agreed in the following risk bands:

Layer 3 – 14.66%

Layer 2 – 11.75%

Layer 1 – 10.21%

And the borrower benefits from the reduced rate of 14.05% instead of the 15.00% target.

Torsion Group’s credentials for this project are strong. They have a track record in building retirement apartment schemes for third parties such as Morgan Sindall Later Living and Cinnamon Care. Launching in 2015, they’ve grown quickly from a turnover of £19m to £50m with consistent profitability, cash reserves of £1.75m and no company debt. They employ 58 staff and will subcontract this project to a local builder, Melrose Construction Ltd who’ll put up a 10% performance bond. Melrose have sound experience of building in the area and have constructed 40 houses on the adjacent site.

The Loan to Value ratio at 65.6% for Layer 3 gives a comfortable cushion to investors and is based on the sensitivity assumption that 21 apartments will be sold in the 5 months after practical completion with a build period extended by one month to 18 months to allow for any construction delays. It means sales values would have to fall by more than 34.4% before impacting top layer investors. In the event that properties remain unsold, the net rental income should easily allow the borrower to refinance the completed scheme with a long term mortgage.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

Who came up with the wheeze for housebuilders to retain freeholds on the sale of a house and charge the new leasehold owner a (seemingly innocuous) ground rent that doubles every ten years? And how did they get away with it?

It’s a game that will soon be up when legislation outlaws the practice, following a passionate crusade by the National Leasehold Campaign (NLC).

But some beneficiaries of this large and lucrative industry are still unwilling to acknowledge its demise. Just to be clear, the beneficiaries are generally: (1) housebuilders who sell only the leasehold to new homeowners, retaining the freehold to sell at a further profit, and; (2) the companies who buy those freeholds and are then free to charge homeowners ground rent and “management” fees at whatever level they choose to set.

Unfortunately, despite the protests, this is hardly a new story. The battle has been long and nasty. The Guardian kicked up a fuss about it over three years ago, spotlighting a company called E&J Estates, which it found is one of “an extraordinary web of 85 ground rent companies” owning the freeholds of more than 40,000 homes across England and Wales”. You may like to read it before continuing [Ref1], but I’ll summarise below.

At that time, The Guardian reported, this entire empire was controlled by a sole director named as James Tuttiett. Just one of Tuttiet’s companies, SF Funding Ltd, showed an £80m jump in the value of its ground rents from the previous year, taking turnover to £267.4m. That’s just one company reportedly owned and run by this one man.

“An unjustifiable way to print money” – Sajid Javed

His leaseholders (and lest we forget, these are people who have bought their own homes, usually taking on a big mortgage to do so), have not entered into any voluntary agreement with Tuttiett, but are obliged to either pay him ground rent or hand over the deeds to their home. The scandal came to light as momentum grew behind the NRC campaign and complaints from residents allegedly approached “panic” levels at the realisation that, even after they had fully paid off their mortgages, many of them would still be paying tens of thousands of pounds a year to live in their own homes after retirement [Ref1, para 8]. Others have complained that the exponential escalation will make their homes unsaleable in a few years, since what buyer would take on such a mounting burden? [Ref1, para 9] It’s been likened to an arranged marriage – except you can’t get an amicable divorce.

As Katie Kendrick of the NLC says, “England and Wales are among the last countries in the world where you can buy a property, but don’t ever own it. People’s homes should be theirs alone and not an asset for people to invest in and trade. That is the position elsewhere in the world”.

It’s a scandal that prompted Sajid Javed to comment on BBC Radio 4’s Today programme, “Enough is enough. These practices are unjust, unnecessary and need to stop,” adding that the methods used were “an unjustifiable way to print money”.

But further investigation reveals that E&J are far from the only floater in the pool. Even a cursory trawl of TrustPilot will show levels of dissatisfaction in some of these companies that would make it impossible for them to continue if their “customers” were not bound to them for life [Ref2]. And there are literally hundreds of these companies, all making easy money without creating a penny of extra value for their inmates.

Because of course, the chiselling doesn’t stop at the ground rents. No sirree. To misquote Teddy Roosevelt, when you’ve got them by the balls, you can empty their pockets. E&J charges its leaseholders fees for such “services” as allowing them to sublet, or add patios and conservatories to their own homes [Ref1, para 19]. An Englishman’s home, it seems, is not his castle if there’s a robber baron in a bigger castle taking his cut.

And when I say easy money, you will be alarmed, gentle reader, at quite how easy it is to turn a buck in this gilded world. Buying up ground rents from new-build homes is arguably a better investment than gold: it brings a steady income stream, you never have a bad debt (you can simply turf the owner out of his home and flog it to pay your own bill) and you don’t have to provide even a half decent service because… well, see above.

Which means the banks have historically fallen over themselves to lend money to these neo-feudal barons at ultra-low interest rates. Tuttiett, for instance, managed to borrow £128 million at a reported rate of 0.95% (although admittedly the actual rate he’s paying is probably a shadehigher) [Ref1, para 13].

So it should come as a surprise to no-one that the Competition and Markets Authority is now taking enforcement action against the most prominent offenders [Ref5].

Better still, the campaign and its surrounding furore have led directly to changes in the Help to Buy Scheme – which in turn has forced five of the UK’s biggest housebuilders to scrap ground rents on new flats, and to desist from selling-on freeholds.

“Developers have not taken this decision because it’s the right thing to do” points out Katie Kendrick. “They are being forced to change their poor practices because the applications for the new Help to Buy scheme opens from the 16th December and Homes England have stipulated that ground rent charged must not exceed a peppercorn.”

So where appeals to their conscience have failed to move the big housebuilders, financial constraint appears to be having an effect. There’s still a long way to go to dismantle this distasteful practice, but the first bricks have been chipped from the wall.

Are we anti-developer?  Is a weather vane anti-wind?

Of course, some freeholders have put on a good show of acting surprised, even going so far as to accuse us of being anti-developer, merely for pointing out which way the wind is blowing. Is a weathervane anti-wind?

We’re highlighting this because it is going to happen. It’s quite simply our job to know the direction of travel and alert developers to take care what they spend on sites going forward. Freehold owners may carp and cavil (and by golly they will) and protest that the practice isn’t as widespread as people think; that most captive leaseholders must be content with their lot because they haven’t yet risen up and put the freeholders’ head on a pikestaff. But of course, when you ask them for hard figures, or details about these happy leaseholders, they ooze away into the darkness again. And anyway – what leaseholder will put his head above the parapet when his balls are in a vice? The Guardian itself cited difficulty in putting names to quotes since many people trapped by ground rents prefer to remain anonymous while they negotiate.

However – leasehold reform has been on the agenda for quite a time now and has gathered pace as awareness burgeoned in the last couple of years. In July, the Law Commission unveiled a comprehensive set of measures to give leaseholders the full rights to the homes they paid for. The NLC’s submissions persuaded the body to endorse reforms it had previously ruled out, extending the benefits to even more leaseholders. The government’s senior legal advisors went as far as recommending that commonhold, a scheme for the freehold ownership of flats successful in other parts of the world, be the “preferred alternative” to leasehold.

So those in the know generally expect ground rents to be capped or abolished altogether. We have a government with a substantial majority, 4 years remaining in office and this is a popular, vote-winning policy. With a senior housing minister using words like “unscrupulous” and “pernicious”, the writing is very much on the wall. Developers and their funders will have to adjust. Most have already.

So let us lay our cards on the table. At CapitalStackers, we are proactively, practically and passionately pro-developer. Many developments simply wouldn’t happen without our advice and service, which is more than can be said for the ground rents “industry”. We put together deals that work and otherwise might fail. Our pricing is fair and market-driven, so that both developers and investors come back time and again to us.

But we’re also pro doing the right thing. If Mrs Miggins is being fleeced simply for living in her home, we don’t want a part of it, so in our view, regulation is no bad thing.

Thus, we can safely say that none of our developer clients has sold houses on leasehold in order to extract more profit by packaging and selling the ground rents.  The law will prevent it in the future anyway, not that they would consider it. We’d like to think they share our values of fair play.

In the interests of open declaration, we do have clients who’ve built flats and sold leaseholds to buyers, packaging and selling ground rents to a freehold investor because that was the accepted practice at the time. But again, we can state honestly that none of these clients would have entertained onerous leasehold terms.

We, and the senior lenders with whom we collaborate on deals (i.e. banks), have not incorporated the capital value of ground rent sales in development appraisals for some time now – mainly because proposed legislation could wipe out the value. It would be lunacy to lend against it. It’s unfortunate for those developers who have bought sites on the expectation of selling ground rents, but that’s commercial life. There is some comfort in the fact that ground rents aren’t normally a significant part of a project’s Gross Development Value.

The likelihood is that legislation will force ground rents down to zero. As that happens, the Residual Site Value will fall and developers will adjust the amount they pay for sites. There will be a relatively short-term adjustment period for developers.

Our developer clients’ interests are perfectly aligned with ours – in that they too want to produce stock that will sell.

That means it must be mortgageable.

When this situation started unfolding, led by the Nationwide Building Society, mortgage providers changed their lending policy en masse. Almost overnight, they refused to lend against leasehold security where the ground rent was more than 0.1% of the capital value of the property. This left thousands of owners unable to sell because buyers couldn’t get a mortgage. This, of course, included some of their own existing customers – so ironically, they were already lending against property they wouldn’t lend against for a new buyer! Doh!

However, even today, some freehold buyers are still putting out terms which will fail this basic 0.1% mortgage criterion. Are they really that naïve? We’re in the golden age of disruption. There’s now a perfect opportunity for them to set out their stall to offer fair pricing, exceptional service and best-in-class communication. To swap avarice for an enhanced reputation and treat their captive audience with the humanity everyone deserves. We hope more and more of them will.

So we’re shining the spotlight on how we got to where we are now, what’s currently happening and trying to join the dots to work out how it will unfold. And that’s not difficult. Here are our top tips for developers:

  1. If you build houses – only ever sell your buyers the freehold.
  2. If you build apartments, work on the basis that ground rent will be nil. If it turns out to be more, doubtful though that is, it’s bunce. Until there is absolute clarity, don’t factor ground rents into your development appraisal – and buy sites based on the resulting residual site value.
  3. Keep up to speed with the Law Commission and Government progress.
  4. Steal a march on the competition and only sell leasehold interests on fair, buyer-friendly and, above all, mortgageable terms.
  5. If you have to sell the freehold to investors, limit yourselves to the reputable ones – those with a decent score on TrustPilot. A leaseholder can’t choose their landlord. They’re stuck with them for evermore, unless they band together and buy out the freehold.
  6. Anticipate that the proposed Commonhold alternative will be adopted at some time in the future.

All the above will enhance your reputation in the residential development world. You’ll become one of the ‘good guys’ and make your finished properties easier to sell. And that’s great for you, your funders and Mrs Miggins.

Everyone wins, except the Robber Barons.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

A highly attractive scheme in Surrey has tempted CapitalStackers to invest outside their normal corridor of expertise in the North – and also to partner with a new senior lender.

A luxury apartment project aimed at wealthy downsizers, a prestigious street and an affluent and popular village combined with an experienced, high-quality borrower to convince the CapitalStackers team of the scheme’s worth, and investors clearly agreed as the £950,000 required to fund part of the land purchase was raised in four days.

With the borrower tabling equity of £810,000 and a personal guarantee for the whole CapitalStackers loan, Shawbrook Bank entered its first ever partnership with CapitalStackers – putting up the senior debt of £8,014,000 which will fund the remainder of the land value and 100% of the construction costs. This, as regular investors will know, fulfils CapitalStackers’ prerequisite, namely that the entire scheme should be fully funded to completion before any of its investors part with any cash. Such a condition may have seemed over-cautious to its competitors pre-COVID 19, but has proved its value in recent months as other platforms have run out of investors midway through construction.

So with a total debt of £8,964,000, the completed scheme (post Covid-19) is valued by Strutt & Parker at £12.33 million – an overall £529 per sq ft with a gross rental value of £508,800 per annum for the 14 spacious two-bedroom apartments with 28 covered car spaces. Each bedroom will have an en-suite and fitted wardrobes. Each apartment will have its own laundry room and enjoy the added appeal of landscaped gardens and water features. The block is prestigiously placed on leafy Furze Hill in Kingswood, Surrey, 30 minutes from Gatwick and Heathrow airports, and a pleasant walk from the rail connection to London Bridge (50 minutes), and the good local amenities in and around the village including two golf courses.

The CapitalStackers investors were offered a choice of three risk/reward layers – and competed to earn from 10.19% at a Loan-to-Value of 68.3% up to 14.36% at 74.6% LTV. Regular investors will have noted that even at the highest risk layer, the housing market would need to fall by 25.4% before their loans would not be repaid in full and their investment is ringfenced  with a personal guarantee from this asset-rich borrower – facts which partly explain why CapitalStackers investment schemes tend to be oversubscribed and sell out within days, hours or even minutes of publication.

As always, the CapitalStackers team exercised comprehensive risk modelling on the site, borrower, COVID, possible threats to sales and cost overruns.  On the Sensitivity assumptions, 8 properties would sell within 10 months of practical completion reducing the LTV ratio to 50.8% and rental values would provide gross interest cover of 1.08% assuming an interest rate of 4.5%. This downside scenario demonstrates the opportunity to refinance the remaining 6 units in the event of sluggish sales. The Base Case indicates the project will be fully sold out within 7 months of completion.

Risk assessments complete, the legal due diligence was expeditiously completed in two weeks to meet the Borrower’s site acquisition completion date and strong working relationships developed between the senior lender, broker and borrower which helped the lawyers to make this happen.

This deal highlights yet again that even in straitened times, the CapitalStackers model provides valuable opportunities for sound borrowers and investors looking for prudent, high-value returns.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

If you want high returns you need to do your homework and know what questions to ask – not just take a punt at the sexiest looking schemes.

Just how far some people will go for a double-digit return never ceases to amaze. Not just to Europe, or the Caribbean or Australia, but also far beyond their own comprehension of investment risk.

True, many have done so following the advice of trusted IFAs. But surely common sense suggests that ploughing your hard earned sterling into schemes on the other side of the world – and thus riding the switchback of different jurisdictions, multifarious laws, diverse, fluctuating currencies, wildly varying cultures and unfathomable mindsets – demands much more of the investor than the “sophisticated/HNW” test required to invest in UK schemes. It demands global knowledge, eyes in every corner, supreme clairvoyance and balls of steel.

For instance, a cursory analysis of the (currently under investigation for alleged fraud) Dolphin Trust would have shown a huge, successful operation which seemed to be making great returns from redeveloping listed buildings in Germany and flogging them on. Your investment would seem to be secured by a “First Legal Charge”, with the promised return of 10% per annum looking more than adequate compensation for such a risk. Several hundred British investors read enough into that to consider it worth a go.

Had you dug a little deeper, though, you’d have noted that Dolphin was classed as a high risk, Unregulated Collective Investment Scheme – i.e. not the sort usually regarded as suitable for retirement investors. However, the fact that a few less than scrupulous IFAs were enthusiastically promoting it in return for an alleged 15-25% commission certainly made it sound convincing enough for UK investors to stump up more than £600 million through their SIPPs [1].

Of course, your “Spidey-Sense” might have prickled when you received a letter on 2nd October 2019, where Dolphin Trust GmbH said it was “rebranding” to the new name German Property Group GmbH, and incidentally, “maturity payments could be held up by up to a year”. But perhaps your nerves might have been settled by the Chief Executive, Charles Smethurst cooing about “wider factors” such as “finalising building permits and legal titles, and arranging third parties such as constructors” and purring “I must stress at this juncture that your capital investment is not at risk.” [1]

You may also have been reassured by your IFA’s silence on the matter, but by then of course, he’d have already pocketed his chunk of your investment as his “thankyou” from Dolphin and moved on to the next fee opportunity. It needs to be said that the vast majority of IFAs are principled, upstanding citizens that you could trust with the keys to your bank, but Dolphin seem to have found some bad apples here.

So then of course, a few things went wrong behind the scenes at Dolphin/GPG (or whatever they called themselves this week) and “poof!” the whole lot’s gone. Billions of euros have disappeared into a black hole and no-one has any idea how much will come back out. The first legal charge proved worthless since “discussions over the possible sale of properties” faceplanted at the first hurdle. Not only were most of the properties undeveloped – many were deemed totally unsuitable for development, and therefore unsaleable. This – as close followers of the CapitalStackers blog will know – is a fundamental point which we will never tire of pointing out. If the funds to complete construction are not committed at the outset DO NOT INVEST. If the developers run out of money you will lose your investment. This is why we never ask our investors for a penny until all the construction funds are in place, and it’s also why we partner with banks who are best placed to provide the ongoing construction liquidity. That way, with your second charge on the property (after the bank), you have assurance that the scheme will be completed and there will be an actual asset to sell.

But of course, Dolphin/German Property Group are far from the only unregulated scandal. For instance, Harlequin Properties tickled an estimated 400 million euros out of investors’ SIPPs to build 6,000 hotels and rental properties in the Caribbean.

Again, this investment was totally unsuitable for retirement funds, but again, a handful of less than ethical IFAs offered financial advice that was far from independent, taking their cut from a scheme where only 300 properties were built of the 6,000 promised [2]. Thankfully, Harlequin is now being investigated by the Serious Fraud Office.

But the list goes on. In Los Pandos, investors were duped into funding vineyards marketed as high-end, low risk schemes but which were in fact unregulated, unprofitable and completely inappropriate for retail clients. The Resort Group offered the chance to invest in high-return holiday “hot spots” like Cape Verde, but the investment was unregulated, and the risks were far higher than they were led to believe. Billions more have been cheated out of people hoping for a yield from unviable Brazilian teak plantations, unsown Australian farmland, sham sustainable fuel plantations, unsellable storage pods and car parks planned on illiquid and unprofitable land [3]. And closer to home, Dr Alan Louis, a South African third generation evangelical Christian businessman, waved his Bible, prayed his prayers and duped investors out of tens of millions of pounds for property investments in the Isle of Man. Most of the money was ferried to shady companies owned by Dr Louis and his family in the British Virgin Isles, a fact recognised by the IOM Court as Louis and his co-directors were struck off the register of Company Directors, before Louis himself was arrested by the IOM police for allegations of money laundering and fraud [4].

What makes people invest in these crackpot schemes? The sums involved suggest we’re talking about High Net Worth, sophisticated investors. Okay, many were ill advised by shady IFAs who preferred baksheesh to balance sheets and best advice. And in the case of Harlequin, seduced by a very glamorous marketing campaign which was fronted by football stars and prominent figures.

But many will have simply seen the return and not bothered to research the risk.

Which is about as silly as driving away a car without asking the price. A high return obviously carries risk, and the sophisticated investor earns his or her money researching whether that risk is one they’re comfortable taking. The high interest rate usually means borrowers haven’t been able to raise funds through more mainstream channels and you should make it your business to find out why this is. In the case of CapitalStackers, for instance, the relatively low-interest debt available from a bank at typically 55% of project value will usually leave a developer with a funding shortfall which CapitalStackers crowdfunds, up to a maximum Loan to Value of 75%. This secured junior debt is then priced accordingly and at the top end of the stack can command returns in the high teens. You can inspect the property being funded by driving by it in your car or digitally, from the comfort of your favourite armchair.

However, assessing the risk to yourself as an investor goes far beyond this, and relies heavily on the transparency of the investment company. For instance, what’s the track record of the borrower? What’s his working history with the contractor? What factors might affect the sale of the homes being built (transport links, employment, amenities, demographics, pricing)? Have building and sales delays been factored in? What environmental and civil risks have been considered? What’s the prospective value of the completed scheme? Is this independently verified? By whom? What will it sell for and what’s the total profit? Who’s behind the investment platform? What’s their experience of the industry? How much are they taking from each deal?

Investors in CapitalStackers will know that all these questions are answered in detail, with charts and independent professional documentation, on a personal dashboard for each and every investment they make. And updated on a regular basis, following frequent site inspections and borrower meetings.

I doubt investors in Dolphin, Harlequin, Los Pandos et al had the luxury of such information. Unfortunately, this level of detail is difficult to come by when you’re punting cash across the world into schemes in the Caribbean or the Antipodes, relying on local professionals to interpret their laws for your benefit. But the question remains, why did they invest in such schemes without knowing those fundamentals?

Still, for the rest of you, it must be a comfort to know that such double-digit returns are available much closer to home, with total transparency and full, regular disclosure. Administered by a team that according to P2P research agency 4thWay, is ”right up there as one of the most competent we have seen doing development lending”, on a  platform  that “takes diligence in checking and monitoring loans to a whole new level”.

That’s why we stick to what we know best. Who needs the Caribbean when the sun can shine on your investments from Solihull to Llandudno?

Sign up here.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

It’s often quoted that economists have predicted nine of the last five recessions. But the Cassandra tendencies of most economists are as nothing compared with those at the Bank of England, who seem to take a perverse pleasure in talking down the economy.

Last week the Old Women of Threadneedle Street predicted a 16% fall in house prices as a result of COVID 19, [1] compared with the much less hysterical figure of 7% forecast by the property market professionals (whose business depends on them getting these figures right).

Now, the Bank has never made any secret of its fondness for “cooling” the housing market (economist-speak for ‘talking down”), but why such a wild variation? A drop of 16% would compare with that of the financial crisis of 2008. However, two of the main factors which led to that historic drop – unavailability of mortgages due to the credit crunch and a lack of first time buyers – don’t apply today. Halifax and other lenders confirmed this week that mortgage products are available across a wide range of Loan-to-Values (LTV) [2] and after a pre-COVID surge in first time buyers [3], the sector came back even stronger after lockdown. The first-time buyer property portal, Share to Buy, reported its highest number of registrations in a single day following the Government’s easing of restrictions last week. [4]

Other property market professionals were similarly sanguine. MovingHomeAdvice.com said this week, “The fundamentals of the property market remain strong and with unemployment mitigated by the Government furlough scheme, cheap and available mortgage money and pent up demand from the hangover of Brexit, we argue that house-prices will not drop significantly anytime soon despite the anxiety of a market frozen by Covid 19 temporarily.” [5]

Nationwide, Halifax, Virgin and Santander have all made it easier for buyers to qualify for loans. Nationwide resumed loans at 85% LTV last Wednesday, while Halifax raised its LTV level from 80% to 85%.

Mark Harris, Chief Exec at SPF Private Clients said “Lenders are adapting and innovating,” observing that lenders have found ways to deal with some of the problems and “there is a willingness to lend. Problems have mostly centred around staff resources, handling the surge in mortgage payment holidays and those staff self-isolating who have children and no childcare”. [6]

Reflecting the general mood, Chris Sykes, mortgage consultant at broker Private Finance stated that this “is great news for the market and for borrowers who will have increased choice going forward. It also means the post-lockdown recovery should be swifter when some semblance of normality returns.” [7]

Regular readers will note that CapitalStackers anticipated a strong return to the housing market after people staring at the same four walls for two months searched for a change of scene. And sure enough, a mere two days after the housing lockdown ended, Miles Shipside, Rightmove director and housing market analyst reported: “The traditionally busy spring market was curtailed by lockdown, but we’re now seeing clear signs of returning momentum, with the existing desire to move now being supplemented by some people’s unhappiness with their lockdown home and surroundings.” Who knew? [8]

Rightmove recorded a 45% jump in visits on Wednesday following the Government’s lockdown-lift announcement on Tuesday, along with a 70% increase in email enquiries about viewings and 2,115 new property listings during the first five hours of trading yesterday. [9]

So where does the Bank of England wring its pessimism from? Might it be the Daily Mail, who wailed this week, “Desperate sellers are dropping the prices of their homes after a glut of properties flooded onto websites today as Britain’s housing market was reopened in a bid to get the country moving again during the lockdown.” [10] Well, yes – it’s undeniable that the number of houses increased when the block was lifted, but even the greenest of new estate agents would not call it a “glut”, any more than taking one’s thumb off a hosepipe could be called a flood.

But such figures would need to be rooted in reality, and the roots of the Bank’s mathematics would seem to be on rocky ground. Predictions of house price falls are realistically based on reports from estate agents of the actual discounts buyers ask for when they make an offer.

And the reality is that in March – according to Liam Bailey, Global Head of Research at Knight Frank – homes were sold on average for 98% of their asking price. Since then, sellers have been accepting offers at 94% of the asking price – a further drop of just four per cent. A far cry from the Bank’s extravagant 16%. [11]

To facilitate a drop of such magnitude would require buyers and mortgage lenders reluctant to take part  – neither of which seems to be happening – and those sellers already on the market becoming so desperate that they’re willing to accept such insulting offers, rather than just sitting tight and waiting for the generally predicted rise next year.

“The key question is,” says Bailey, “Will vendors accept discounts of more than five per cent? Some will, but there is growing evidence from the widening spread between average offers and the offers that are being accepted, that many simply won’t.

“If we add into the mix the fact that we have low new-build rates coming through in 2020, low inventory and low interest rates, it becomes less likely we will see significant further falls from here.”

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

A hugely viable building scheme that failed to launch through a pooled lending platform has raised all the funding it needed in 15 minutes through CapitalStackers.

Converting Charles House – a five storey former HMRC office in Preston – into 70 apartments, all priced at an affordable £90K to £130K (with 27 covered car spaces) certainly has its attractions for investors.

Particularly when you factor in that it’s sited in Winckley Square – traditionally a prime office address for solicitors, accountants and banks, a mile and a half south of University of Central Lancashire and a few minutes’ walk from the mainline rail station and retail centre. The square enjoyed a recent £1m upgrade and Charles House is just the latest of several buildings around the square to be converted to residential use.

The scheme targets the many first time buyers, young professionals and investors flocking to Preston’s revitalised city centre, but is also close to the M6, M65 and M61 interchange and just 40 minutes from Manchester and Liverpool via rail or road. The city’s railway on the West Coast Mainline can whisk residents to London Euston in as little as two hours fifteen minutes.

However, the initial failure to launch highlights the importance of matching the right sort of funding to the investment opportunity.

Contracts had already been exchanged on the site purchase when the P2P lender pulled out – although clearly not because of any problem with the deal.

The broker, Real Property Finance offered the deal to United Trust Bank, who quickly put up £3,966,000 to cover all the construction costs and brought in CapitalStackers – with whom they had successfully collaborated on other deals – to raise the mezzanine finance.

CapitalStackers Director Sylvia Bowden said, “We found absolutely nothing wrong with the deal itself – it’s one of the best we’ve come across. It’s just that longer term building projects aren’t really suitable for the pooled lending model. You need to ensure all your construction capital is in place before anybody lifts a trowel, rather than assume you can attract new investors once building is under way. Otherwise you run the risk of it falling out of bed like this one did”.

Managing Director Steve Robson added, “When RPF approached us, we did our usual deep and granular risk assessment and despite the COVID-19 situation we were bullish about raising the £750,000 needed in time.”

“Once again, our investors didn’t let us down and we’d like to thank them for continuing to support projects. Their appetite for deals remains as sharp as it’s ever been, but it’s important to point out that this isn’t just due to luck. Our due diligence has delivered for them time after time, and they have once again proved they have a nose for a good deal.”

The particulars of the deal certainly shine through. Aside from the £4.7m raised, the developer has put in £1m of his own cash and once completed, the scheme will generate net sales of £7.2m.

CapitalStackers investors had the choice of three layers ranging between a Loan-to-Value ratio of 60% (paying annualised interest of 9.66%) and 69% (paying 15.80%).

The conversion will be carried out by Empire Property Concepts, who have an impressive track record in completing similar developments, the original 10-person lift is to be retained along with most of the windows. A contingency sum of 11% is included in the budget costs and no structural works are required.

Naturally, the risk assessors have cast an eye at the dark clouds of COVID-19 hanging above the industry and built in a pessimistic assumption that perhaps 40 of the apartments will be sold in the 9 months following completion, with the rest taking even longer.

However, should any units remained unsold, CapitalStackers’ modelling shows that the project could be refinanced with more than enough interest cover from rental income. Rent receipts, after an allowance for voids and management costs would cover interest on a refinance mortgage of the senior debt by 173% even if no apartments were sold. The equivalent ratio based on aggregate debt is 139%. Furthermore, these ratios should increase as sales proceeds reduce debt.

On the other hand, the borrower is confident of exchanging contracts on most of the units before the building is even finished – primarily through targeting Buy-To-Let investors. The market rent has been independently assessed at £550 pcm for the one-bed apartments and £650 pcm for the two-beds. This gives a total gross market rent of £546K.

This deal is becoming typical of the kind of attractive pickings to be found in the COVID-19 climate. As more deals fail to launch, the CapitalStackers model is capable of ploughing on, thanks to its unwavering policy of nailing down all construction finance before work commences. It’s even become a source of comfort to the banks, knowing that when mezzanine finance from other sources fails, they know where to come for a fast (and steadfast) solution.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

It seems that staring at the same four walls every day has forced many of us to contemplate the nature of housing. And human nature being what it is, we’re searching for someone to beat up and blame for the ills of society.

And I’m sorry, Landlords, but right now, it’s you.

Notwithstanding the fact that 20% of the UK population rely on you for a roof over their heads [1], you’re being fingered for “pushing up the cost of housing and creating an affordability crisis for almost everyone else”. [2]

That’s quite a charge. So the rise in house prices was nothing to do with a free market economy that allowed six million more households to buy their own homes since 1980, and the two million more who were helped to do so by housing associations? And the rise in people entering private rented accommodation had nothing to do with the decline of social housing?

Presumably, those 20% would have all bought their own homes if it weren’t for you exploiting them – despite the fact that 12.5% of households still chose to rent privately way back in 1980 – before any encouragement from Mrs Thatcher and all the social changes since. [3]

We’re not saying the decline in social housing is not a problem, of course – we’re just saying it’s not a problem that can fairly be blamed on landlords.

But seriously, if it’s not The Daily Telegraph wishing your demise in an article about COVID-19 precipitating a housing crash, it’s the article’s readers chucking all their furniture on the bonfire.

On 18th April, The Telegraph cranked up the air-raid siren, saying that the 28% of landlords who owned properties outright (and therefore would not qualify from Government-backed mortgage relief) “faced bankruptcy” if tenants were unable to pay rent and that “as many as 80% (of landlords) could be forced to quit the sector”. [4]

This prediction was met with glee by a significant proportion of those commenting on the article – a typical example being, “A massive clear out of the ‘get rich quick’ Buy to Let industry will be one of the many welcome and long overdue effects of the COVID crisis”.

Jeepers! Whose side are they on? Certainly not the side of those families who will have nowhere to live if landlords pull out (which they won’t of course – what kind of investor sells an asset in a sliding market?).

Neither is the Shadow Cabinet too bothered about those families, with Labour demanding a tightening of the coils around landlords in their manifesto [5] and Emily Thornberry screeching that empty houses should be confiscated from their owners [6].

Local activist communities like the London Renters Union and Acorn stirred the pot further by concocting a Renter Manifesto which demanded “Homes to live in, not for profit”, insisting that landlords should sell their properties to local authorities (as opposed to on the open market) and again pinning the blame squarely and unfairly on those who rent out properties rather than the Government which doesn’t build and society as a whole which feels an Englishman’s home is his asset.

The Guardian and The Independent, of course, have been banging this drum for quite a while. Last April, Mike Segalov responded to Government changes to BTL legislation by calling landlords “exploitative and inhumane charlatans” and pointing out that “someone earning minimum wage would find the average private rented home unaffordable [7]. Landlords can point to “the market” to justify charging high rents and feel they aren’t to blame”. Well, thanks for that, Mike – would you mind explaining to us how landlords specifically are to blame, if ordinary homeowners aren’t? Or don’t you want to go there (you didn’t, so I suppose that answers that question).

And back in July, one could imagine George Monbiot wringing  his tear-sodden hands as he typed a piece about tenants “paying landlords to live like kings”, mewling that “the UK has become a paradise for landlords” [8]. He rages that “in the 13 years between 2002 and 2015, average wages for people who rent rose by 2%, but their rents rose by 16%” without a sniff of context. The context, of course, is that housebuilding in this country has always lagged behind population growth, and the period he highlights saw a massive increase of 9.7% coupled with a rising trend of single occupancy due to social changes. This massive increase in demand pushed house prices up 95% over the period that George bewails rents going up 16%. [9]

Why he feels renters should be immune from the market forces that toss the rest of us around, he doesn’t say. In any case, renters in the UK have it better in the UK than they do across Europe and beyond. We have more tenants with subsidised rents per head than in any other country bar Slovenia. [10]

Also worthy of note is the fact that people living in Denmark, Germany, Austria and Switzerland rent, rather than buy, and presumably by choice, judging by the above chart.

Quite why the heavyweights of “social justice” are queueing up to give Mrs Miggins a kicking it’s equally hard to fathom. Of course, painting landlords as the Robber Barons de nos jours is a populist way of stirring up class hatreds and hastening their comrades to the barricades.

However, it’s simply a spiteful campaign of emotional propaganda, by grown-ups who should know better. It wants us to believe that all renters are poor and all landlords are rich. And when we see the reality it starts to look a bit silly.

There are many reasons why people rent – high-level job relocations, postings, marriage breakups, not just through lack of choice – and let’s not forget that most private landlords are just ordinary folks who got stuck with their mum’s old end terrace, or moved in with a second spouse and kept the old place on “just in case”.

Even those who kept buying and built up a string of rental homes to keep them in their retirement are hardly grinding the faces of the poor into the dirt, for the most part. Yes, they’re using property to make profit – but profit is simply another word for “income”, and why is that somehow worse than using any other means to make an income? Why is it different to making money from selling cars, or apples, or the sweat of your brow? Why, for that matter, does someone investing to ensure their own self-sufficiency in retirement make them a legitimate piñata for the illiberal elite?

And why vilify people who are providing a much-needed service? Why try to hound them out of the business, when we know that if they weren’t doing it, the UK’s homelessness problem would become considerably worse, not better?

The simplistic argument of Monbiot, Acorn et al is that fewer buyers means lower prices, so if you took private landlords out of the equation, all homes would become more affordable. But this is naïve reading of economics. It completely ignores the fundamentals of the cost of housing.

Private housing is built to sell to people. The people who build it do so to earn their crust. So unless it’s heavily subsidised, private housing will only ever be built when it’s economically viable. And since the cost of materials and labour isn’t going down, the only moving part in this equation is the cost of land. And in tough times, that goes down. Not so long ago in some parts of the country, sites couldn’t be given away because the cost of building houses was more than they could be sold for. So nothing got built and who suffered most? The people at the bottom of the housing chain, that’s who.

Of course, the social justice nihilists don’t tell us this; either because it’s inconvenient to their argument, or because they don’t understand it.

Do these people hate the idea of landlords so much that they would rather make the poor homeless than see a few people make an income from homing them? Because, if those landlords were really serious about making money from property, they could do a damn sight better than Buy to Let, anyway.

As we pointed out years ago, [11] Buy to Let is a seriously tough way to turn a penny.

Investing your redundancy or pension drawdown (say £100K) into perhaps a modest flat costing £275K – with maybe a 3% mortgage, might yield you a 3.5% return once you take into account void costs, management fees and maintenance.

And, of course, that’s after shelling out £15,700 up front for stamp duty, legal fees and mortgage costs. Not to mention all the stress, costs and headaches of managing an asset with real, living people occupying it (and sometimes not). And if you got fed up of the wildly erratic income and tried to sell within 6 years, unless there’d been a hike in property values, you’d lose money on it.

That’s a heck of a lot of pain for a slippery 3.5%.

Particularly when you consider that you could invest that same £100,000 and make annualised returns of 10%+ out of property development in just a year or two (with some projects having paid as much as 20%). The bottom end of that range is significantly more than our landlord would make even if he held on for 20 years and enjoyed 3% compound annual growth in house prices.

Investors in CapitalStackers have been making these kinds of returns with none of the pain landlords go through – and with a lot less capital exposure, because the borrower is taking the first loss risk if the market falls. Rather than having to service a huge BTL mortgage, investors can participate in property developments with as little as £5,000.

In reality, these are the people making smart money out of property – not your poor old Buy-to-Let landlord. So please, let’s cut landlords some slack.

They don’t have it as easy as you think.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

Of course nobody saw this COVID-19 situation coming. We certainly didn’t, and it would be pretty despicable to claim we did. However, that’s not what this is about.

What it’s about is the fact that, as a platform, we’ve always taken our duty to our investors seriously. Not just to roll up the cash for them in the good times, but to keep doing so in the bad times. Even when the less circumspect were pulling out.

To do that, you don’t need a crystal ball. Nor do you need a clear vision of what might happen. But what you do need is a clear vision of what you’d do in case anything bad happens.

That’s why the directors of CapitalStackers – seasoned property lenders through more upticks and downturns than any journalist would care to remember – used their hard-fought experience to build as much certainty as possible into their business model from the outset.

Specifically, they always ensured that every penny of the capital required to finish any of our borrowers’ developments was screwed down before the first trowel was lifted.

In other words – our investors are never asked to part with a single penny until the entire project is fully funded – end to end.

Along with the developer, we’ll fund the site acquisition (and sometimes some early stage building work).

From that point on, all the money required to pay the contractor – through to the laying of the last roofing slate and final lick of paint – is in place before the first bag of nails is ordered. These funds usually come from a bank (which we often help organise through our own contacts).

In brutal terms – this means that the development is never dependent on us hunting around for new investors to meet future construction costs. Even when the world is facing unheard of uncertainties, the contractors on all our sites are still certain they’re going to get paid, whether they’re just knocking in the last nails or just turning the first sod.

All of the sites we’re funding are still working (albeit slightly hamstrung by their supply chain). Of course, some of them may be forced to down tools for a while, but we’ve already gone in and remodelled the deals to take this eventuality into account.

Some of our sites are nearing completion – and here again, we’ve already planned for the potential of sales being delayed before we even heard of COVID-19. Experience told us to plan for the worst happening, and so if it doesn’t everyone still wins.

As it happens, this actually isn’t turning out as badly as one might expect. Of our new developments up for sale, the proportion of buyers who’ve pulled out is extremely low (we’ve had just one – and this is a buyer who is unable to progress the sale of their current home due to the lockdown). Most buyers are still buying, and at the price agreed beforehand – so there’s actually been no drop in value.

This is the story across every site we’re dealing with, and purchasers are ready to go when the lockdown lifts.

Unfortunately, even though we’ve warned repeatedly about it, the necessity of fully funding projects from the outset is still pretty much ignored across the rest of the industry.

Many projects funded by other lenders (some of them well-known names) will be finding themselves in difficulties because those responsible simply trusted in the Finance Fairy – believing, as many do, that new investors could always be found to keep topping up their buckets.

However, while many senior lenders are now substantially lowering the LTV ratios at which they’re prepared to lend to the point they might as well not be there at all, the banks we deal with remain active and still have an appetite for new deals.

And we’re the same.

Ironically, and despite us tightening our criteria in response to the climate, the situation is actually increasing our own pipeline – because it’s where the strength of our model shines through. It might make it a little slower to get our deals up and running in the first place, but it’s actually what keeps us strong at times when other lenders are forced to fall away.

Deals are now being brought to us that have fallen out of bed elsewhere – due to senior or junior lenders pulling out. And it’s not because of the risk – it’s because the platforms are struggling to fund their own loan book.  Their blind faith that the money tap would keep dripping has left them high and dry.

So although only a lunatic would say they were happy with the state of the world right now, at least we can say we’re fairly happy with what we’ve done to prepare our investors for it.

Of course, we sincerely wish our brothers in the P2P market well, and hope they do come through it unscathed. At the very least, if they do have funding shortfalls, we hope the Government can step in to plug any gaps, given that it will be secured on the properties being built, and redeemed on the sale of them.

And far from revel in our current USP, we nurse a fervent hope that, having come through this and out the other side, our P2P brethren will adopt the practice of ensuring that all building finances are locked down from the outset.

The construction industry and the housing market are too important to the UK economy for them not to learn this lesson.

It’s incumbent on all of us to keep it going.

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CapitalStackers is authorised and regulated by the FCA. Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other peer to peer lending platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.
Call us on: Office: 0161 979 0812 | Steve: 07774 718947 | Sylvia: 07464 806477

The FT is happily settling into its role as our nation’s most eager Prophet of Doom, rolling over and admitting defeat on behalf of us all before the first real punch has been thrown.

In this article on 8th April, James Pickford quotes property lender Octane Capital’s Chief Exec, Jonathan Samuels, who wails “To even be talking about bricks and mortar in the current climate feels absurd”.

Richard Donnell, research director at property website Zoopla, also runs in to aim his Nike Air Max at the market’s head, predicting a far steeper decline than 2008, and a very slow return to normality due to the length of the homebuying process and a survey of the Royal Institute of Chartered Surveyors showed 82% are expecting house prices to fall.

The article ends with the prognosis that, even if the crisis is over by the summer, it could take till the New Year for the majority of buyers to get their confidence back.

Which is quite a bold prediction. After such a dramatic experience, who can predict how people will feel? It’s just as likely that after months of staring at the same four walls, people will be desperate to move and we could see a berserkers’ property boom for the rest of 2020. After all, look at the effect of the Christmas break on marriages.

Certainly, other property experts aren’t as keen to ring the bell on the market as the FT.

The real estate giants, JLL advise against betting on any definite outcomes, denigrating the “infodemic”, which it defines as “an overabundance of information – some accurate and some not – that makes it hard for people to find trustworthy sources and reliable guidance when they need it,” and counselling that, “in such a fluid situation, the facts and consequences are changing quickly”.

However, they suggest that the current “consensus forecast is for a sharp shock to the global economy in the first half of 2020 (including a 5-10% drop in values) followed by a bounce back – reminiscent of the recovery after the SARS outbreak in 2003”.

The JLL advice to the industry is to step up our preparedness for a number of scenarios, model business continuity plans, protect and diversify supply chains, “increase hygiene and cleaning measures on site …and also bring in more outdoor air in buildings…to help dilute airborne contaminants’.

But usefully, it analyses the impact by sector – recognising that painting everything black with a broad brush is not helping any of us. The travel and hospitality industry, for instance, will see areas that depend on international tourism (e.g. Edinburgh. York) and those seen as epicentres of the outbreak (London) hit in the short term and possibly suffering long term effects. However, it suggests an increase in domestic visitors and staycations will cause a rapid bounce back in the rest of the sector.

In retail, cashflow and changing consumer behaviour will lead to a slowdown in store openings, but the need to rethink and localise supply chains could lead to more demand for logistics and storage space across the UK.

The same may be true in the industrial and white collar sectors, with buildings becoming taller but smaller in footprint, and with less demand for parking land. However, they don’t see the fast tracked adoption of homeworking affecting demand for office space in the long term.

In the residential sector, it sees no threat to multifamily developments as an asset class, a drop in demand for student accommodation due to the decline in foreign students (particularly from Asia), a reduction in private investor appetite for flexible, short term co-living accommodation and a tougher investment market in the senior/healthcare sector due to increased protection protocols.

The prophets at Knight Frank have little time for Doomsters and Gloomsters, predicting that property prices fall by no more than 3% across the country and 2% in London. They’re also dauntlessly forecasting no price drop at all for prime central London properties and a strong revival in the New Year, based on the judgement that lockdown restrictions will be eased from July onwards. Their Global Head of Research, Liam Bailey, said “The housing market was in a strong position in January and February. A sharp uptick in sales and price growth was seen across the UK, with even the prime central London market seeing a reversal of a five-year long price decline.”

However, Mr Bailey voiced concern that even his predicted 18% rise in buying activity next year may not be enough to make up for the enforced pause in house sales this year and called on the Government to stimulate the market with a cut in stamp duty.

Over at Savills, they share JLL’s chariness about predicting the length, depth and shape of the downturn, and suggest the current rate of shutdown amounts to 79% of this year’s housing delivery. However, they’re confident that once the lockdown ends, if pent up demand doesn’t drive a fast bounce back, then “the Government’s focus will turn to measures that support the speed of recovery in all affected parts of the economy, including housebuilding”.

Lucian Cook, Head of Residential Research at Savills, says: “Assuming long-term damage to the economy is contained, we expect the five-year outlook for prices to remain similar to our November 2019 forecasts but with a different distribution of growth year to year”.

Which, in our view, is all the more reason to keep construction going – as long as the materials pipeline can be maintained. Savills points out a very real prospect of planning permissions and Help-To-Buy schemes expiring and, if they can’t be kept busy, workers (both skilled and unskilled) leaving the industry forever.

On the plus side, they predict rich pickings for cash-rich developers thanks to less fighting over sites, which may help offset the reduced valuations. Like JLL, Savills predicts “falls of 5 to 10%, returning to stronger growth in the medium term”.

But most importantly, they outline the importance of maintaining the flow of consents coming through the planning system, suggesting that if this is focused on, then local authorities could actually exit this period of shutdown with improved five year housing land supply (5YHLS) positions”.

If, on the other hand, sites are closed for a number of months, many local authorities could fail the Housing Delivery Test (which requires them to deliver 75% of housing targets).

Closer to home, Ed Hartshorne of the York estate agency, Blenkin & Co. was even more chipper, saying: “The number of sales will inevitably plummet over the next few months but suppressed demand may keep a hold on values.

“I think the housing market will respond energetically to the economic bounce when it does come, leaping into action and spurred on by an eager and cooperative market of buyers and sellers. We have already signed up clients eager to launch 20-odd houses just as soon as normality returns”.

Yorkshire based property consultant Alex Goldstein assures us that “demand and new supply will be strong post lockdown. We now have the lowest base interest rate in our history. This will filter through to the lenders, which will make money even cheaper to borrow. Prices will hold steady for now and we will see a gradual increase over the next few years as demand continues to outperform supply”.

He further predicts that the change in working practices, brought on by coronavirus, will lead to more people moving to Yorkshire. “Employers have now experienced how staff can work from home and I think that employees will push for this lifestyle choice. As we are already seeing, this will lead to more people leaving London and the Home Counties for God’s Own County”.

However, once Yorkshire is full, we confidently predict a trickle down effect to lesser counties.

So all in all, the outlook seems to be a little more rosy than the FT wants us to believe. As bad as it gets, the COVID-19 crisis is unlikely to make a significant dent in the demand for housing, and the construction pause won’t have helped the supply position. And since even longer term low interest rates can only add more fuel to the fire, all we can say to the nation’s developers is, “Keep building, Guys! Britain needs you!”

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