CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

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Raising £540,000 for a development of 9 detached executive homes in North Yorkshire has taken CapitalStackers’ deals past the milestone of £150 million raised in total for building projects – whilst maintaining its loss-free record. Bank finance accounted for £124 million with CapitalStackers’ investors contributing £28 million.

The Glam Living development in Church Fenton is typical of CapitalStackers’ unique contribution to property development – comprising a blend of P2P and bank finance that allows small investors to get involved in the kind of property development funding that used to be the exclusive province of banks, and enables banks to fund projects that would otherwise be beyond their scope.

It therefore revolves around strong, trusted working relationships between CapitalStackers and the banks – both rely on the other to make good deals happen, and they support and work with each other throughout. Glam Living specialises in developing in popular rural Yorkshire locations where there is a shortage of supply of elegant, bespoke houses in the £500K to £1m price range. The company is characteristic of the platform’s borrower profile – run by experienced developers who produce well-designed, well thought out housing schemes that withstand rigorous risk modelling.

Steve Robson, MD of CapitalStackers, said, “This milestone is particularly pleasing given it’s been achieved through very strong relationships with our senior funding partners and especially our investors, to whom I would like to pass on our sincere thanks.”

Of the £150 million total, nearly £43 million has already been repaid to banks and over £15.7 million to small investors (at an average return of 12.91%). The remaining £12m is still earning for investors in construction projects across the UK. The lowest return received by CapitalStackers investors has been 6.9% and the highest 24.97% – with zero losses.

So as CapitalStackers prepares to launch its brand new website, with 190 active investors and some 300 waiting in the wings, it’s worth reflecting that none of this success is by accident. The zero loss record – even throughout the current cocktail of global crises – is a living reflection of the core directors’ experience as property lenders with top-drawer banking pedigrees.

The directors have adhered throughout to their key principle of never allowing a trowel to be lifted or a penny to be drawn down until all the funding is in place – when many competitors fell by the wayside because they were unable to find fresh investment in times of crisis.

So while the pandemic (and ensuing supply shortages) may have caused understandable delays and hiccups, ongoing funding has not been a barrier to completion for CapitalStackers projects. In a world where uncertainty is now the only certainty, the CapitalStackers team have long been experts at pricing-in and preparing for risk. And it’s a testament to their steady hand on the tiller that not a single deal entered the red zone during lockdown.

It’s also a demonstration of the proficiency of the wider team, with whom CapitalStackers has built enviable working relationships – not least Manchester solicitors, Taylors, who have worked closely with the Directors for 8 years and have professionally scrutinised every single CapitalStackers deal.

Taylors’ Matthew Catterall commented, “Having worked with Steve and the team at CapitalStackers since 2014, we have built a fantastic working relationship that is based on a deep understanding of the CapitalStackers business, allowing us to anticipate their needs and deliver streamlined, effective advice.

“Huge congratulations to Steve and the rest of the team on reaching this milestone, which demonstrates just how great the CapitalStackers product and team are.”

Such strong, loyal relationships are the mortar that binds this wider team – the banks, surveyors, solicitors and accountants who work with CapitalStackers – allowing them to provide this unique service. The homes it has funded would never have been built if it weren’t for the platform and its investors. And as others pull out of the P2P sector, CapitalStackers simply plants its feet and takes a firmer stance – at a time of national housing shortage. They form a robust and invaluable pillar to support our UK housebuilding industry.

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

Back in December 2020, we highlighted the highly immoral practice [1] of housebuilders selling to new homeowners, but retaining the freeholds and selling them on to third parties who then charged a (seemingly innocuous) ground rent that doubled every ten years, building up over the years to terrifying amounts. At the time, we made it clear that while CapitalStackers is 100% pro-developer, we wanted no part of this pernicious practice, and would not lend to any developer factoring this into their business plans. 

Bear in mind that the people forced to pay these extortionate ground rents weren’t renters – they were people who had bought their own homes (usually taking on a big mortgage to do so), had not entered into any voluntary agreement with the companies charging them, but were (and still, for the most part, are) obliged to either pay the fees or hand over the keys. 

And not content to fleece innocent homeowners one way, they often proceed to turn them upside down and shake out their fillings – charging them fees for such ‘liberties’ as subletting, or making improvements to their own homes. Even householders who had fully paid off their mortgages faced the prospect of paying tens of thousands of pounds a year to these property parasites. 

At the time, this appalling practice was the subject of a long and bloody campaign by the National Leasehold Campaign (NLC) [2] and The Guardian, amongst others, and with Government legislation on the horizon, the game looked to be up. As Katie Kendrick of the NLC said, “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”.  

So pernicious was the scandal that it prompted Michael Gove, Secretary of State for Communities and Local Government [3] (with the added responsibility of Housing in England [4]) to announce a Government crackdown [5]: “Enough is enough. These practices are unjust, unnecessary and need to stop,” adding that the methods used were “an unjustifiable way to print money”. 

Which uncharacteristically unminced words led those in the know to expect the capping or abolition of ground rents altogether. A government with a substantial majority, and 4 years remaining in office ought to be able to wave through a popular, vote-winning policy. The writing seemed very much on the wall. 

Thus, with their foot on the throat of these firms, we fully expected the Government to turn up the hose.  

So what happened? 

Dear reader, they bottled it. 

The Leasehold Reform (Ground Rent) Act [6] comes into force at the end of this month, limiting such fees to ‘a peppercorn rent’ on all new leases of over 21 years – enforced by penalties ranging from £500 to £30,000 per lease. The publicity trumpets “an end to ground rents for new, qualifying long residential leasehold properties in England and Wales”, calling it “part of the most significant changes to property law in a generation”. 

And yes. Going forward, it will be. 

But unfortunately – and hugely disappointingly for millions of existing leaseholders – the Act is not retrospective. It doesn’t prevent Landlords holding current freeholds from continuing to fleece their Lessees. Owners of leasehold flats are still fair game to be mugged for service charges and other fees. The Government suggests that this is addressed by their wider leasehold reform scheme (of which the Act is only one part) and have promised a second bill to take care of existing ground rents – but given that no date has been set for this and an amendment to the current bill which would have taken care of them was heavily defeated, this looks like an empty promise. Particularly after the legislation was trumpeted in advance in such strong language.

The Shadow Cabinet (who supported the need for reforms) immediately spotted the omission, with Lisa Nandy demanding, “Where is it? He says legislation will be forthcoming in this parliamentary session, but it was not in the Queen’s Speech. There are five Bills from the Department for Levelling Up, Housing and Communities in the Queen’s Speech; surely time can be found to ensure that we deal with this problem once and for all.”

“How can we accept that these rip-off companies, on behalf of owners who we often do not know and do not have the right to find out about, are allowed to tell people whether they can change the doorbell on their own home or make minor changes that would make a big difference to their lives? How on earth is it right that we are siding with those rip-off management companies and opaque owners over people who live in their own homes, have a stake in this country and their communities, and deserve the right to something better?”

As Katie Kendrick summarises:

“While we welcome the Government’s commitment to this cause, they crucially haven’t delivered on the timing. The leasehold reform programme is a two part process and we were led to believe that Part 2 would be following hot on the heels of Part 1.

“I have every confidence from my conversations with Ministers that reforms will happen, but the devil will be in the detail of what those reforms will look like and we are yet to see any action that will help existing leaseholders.  I am in no doubt those that make huge profits from the existing exploitative system of leasehold will be lobbying government voraciously to water down the reforms.”

“So in the meantime we’ve just created an even worse 2-tier system, with thousands of homes remaining unsaleable.”

“Which means these leaseholders who have been desperately waiting and waiting for support – in fighting practices the Government openly admits are unjust and indefensible – are still being failed, and there’s only one parliamentary session before the next general election. We have waited long enough, we need urgent legislation to help the existing leaseholders trapped in limbo.”

So in short, the Government’s half-cocked blunderbuss leaves most of the target untouched.

For one thing, the ground rent issue is deterring banks and building societies from lending on these homes [7], which is why many have become unsaleable. And since the estimated 4.6 million leasehold dwellings in England [8] amount to 19% of the English housing stock, and 68% of these are flats, this is a big blockage in the housing market – and could cause huge knock-on effects in the faltering wider economy. Has the Government considered this? And when they finally realise, will it be too late?

The bill also excludes business leases, statutory lease extensions of houses and flats, community housing leases and home finance plan leases. And it sets different rules for other categories of leases. For some reason, the provisions won’t apply to retirement properties until 1 April 2023 and in the case of voluntary lease extensions they only apply after the term expires, even where there is a “deemed surrender and regrant due to a change in the demise of the lease.”

The logic behind these minor distinctions is baffling, but has the whiff of vested interest groups about it. It’s like passing a law against street robbery, and saying if that goes well, they’ll consider making highway robbery, burglary, looting and grand larceny illegal as well…at some point in the future.

The vaunted ‘wider reforms’ also have a touch of the velvet glove about them. Rather than simply pass a law making it illegal to retain freeholds or sell them on, the Government has simply unleashed the Competition and Markets Authority (CMA) to put the frighteners on them in a protracted mopping-up operation [9]. In September 2020, the CMA launched enforcement action against four housing developers – Countryside and Taylor Wimpey for using possibly unfair contract terms, and Barratt Developments and Persimmon Homes over the possible mis-selling of leasehold homes. 

While this has already seen 15 associated companies voluntarily release over 3,400 leaseholders from their onerous terms, it feels like an unnecessarily slow cure for the agony of millions of innocent homeowners. A bit like stopping a dog attack by writing to the dog owner and sending them a voucher to buy a muzzle.

Andrea Coscelli, Chief Executive of the CMA, put a positive spin on it, but you can tell he isn’t holding his breath: 

“We welcome the commitment from these businesses to do what is right by their leaseholders by removing these terms, and we will hold them to it. 

“While this is a huge step forward, our work here isn’t done. We will continue to work hard to free leaseholders from these problematic terms and will now be putting other housing developers under the microscope.” 

The ongoing operation will see the CMA continuing to investigate two investment groups – Brigante Properties and Abacus Land/Adriatic Land. Both have agreed to cut the doubling ground rent terms from leases they bought from Countryside, but the CMA wants them to do the same for leases they bought from Taylor Wimpey.  

And it assures us that we can expect further updates “in due course”, although it’s at pains to point out that none of these companies has breached the law. But of course, their legality has not been in question – only their morality. 

So, brick by painful brick, leaseholders are being released from ground rent jail. Countryside, Taylor Wimpey and Aviva have already undertaken to remove these terms. Barratt is still under investigation and can be expected to follow suit, and where the big boys lead, the rest will surely have to follow.  

But after all the bold, tub-thumping words, this bill is a huge letdown for those who’d pinned their hopes and their futures on it.

Lisa Nandy, however, is not giving up: “Surely, in the midst of a cost of living crisis, it is a no-brainer to crack down on unfair fees and contract terms by publishing a reference list of reasonable charges, by requiring transparency on service charges, and by giving leaseholders the right to challenge rip-off fees and conditions or poor performance from service companies”. So it’s not an issue that will go away quietly. And if the NLC and the Opposition don’t have teeth enough, that logjam in the housing market could come back to bite the Government, and by then the legislation needed to free it will have to be dynamite.

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

As we reported in September [1], the property market continued to boom despite the direst predictions of experts. But given recent global events, is there reason for pundits to predict a crash?

In our last blog on this subject seven months ago, we largely came to the conclusion that things would, largely, turn out as they have so far. That is, no spectacular stampede to exit the house market and that, having sifted thoroughly through a wide range of historical metrics and commentaries on your behalf, we remained unruffled in the face of the economic headwinds.

Despite alarm bells ringing from many quarters, the nation was steadily experiencing the most unlikely property boom in history, thanks mainly to low interest rates, the Stamp Duty holiday and changing work habits. According to the Halifax Price Index [2], in the two years since lockdown began in March 2020…

Average property prices rose


And the average house price rose from £239,176 to  


Although, as we pointed out last time, nobody buys an average house in an average area – so we need to look at how those figures break down into house types and regions.

Well for one thing, it’s clear that the ‘race for space’ continued right through that 2 year period, so bigger houses gained popularity. The prices of flats, according to Halifax, increased by a mere 10.6% or £15,404 since March 2020, compared to the average price of a detached property, which jumped 21.3% or £77,717 over the same term.

And while Halifax (along with Nationwide) is considered one of the most reliable indices of house prices, they’re weighted by transaction volume (which can skew our view of prices because houses sell at varying values) and are based on a small volume of sales, so we should also ground these respected figures against Land Registry data (based on actual transactions), which has the ONS stamp of approval:

…but while we’re splitting the data out, the good news for our investors is that price growth has been significantly higher for new build properties:

However, the race for space didn’t mean buyers deserted London altogether. Halifax [2] says prices in the capital are up by 5.9% year-on-year, with an average price of £534,977. But whereas Wales was until recently the strongest performer in annual growth terms, it’s finally been overtaken by the South West – now up 14.6%, its highest annual growth rate since September 2004, at a record regional average price of £298,162. Homes in the Principality are still pushing record levels, though – at an average of £211,942.

Scotland also hit a new record of £194,621 – although the growth rate is now slowing, at 8.2% from 9.3% last month. The South East continued to boom, with growth of 11.6% and an average price of £385,790.

But of course, before March this year, all we had to worry about was a global pandemic, supply shortages and some after effects of Brexit.

Since then, you wisely point out, the world has revolved again. On the one hand, the threat of the pandemic has broadly receded (in England, at least), and on the other, the global fuel crisis has thrown the damp cloak of inflation over the world’s economies.

At which point, we ran out of hands as Mr. Putin rolled up in his tank, with his ruinous attitude to real estate.

So we felt it was time to sift the tea leaves again and give you our revised opinion, if any, and those of the Doomsters and Gloomsters who coloured our last blog (there were precious few Boomsters). What are their thoughts now?

First up, Savills (whom you may remember predicted a 10% price drop in 2021), are a little more circumspect than they were then. In January, they posted a blog [3] explaining away their former pessimism thus:

“…at the beginning of the pandemic, we were looking at how housing markets had reacted to previous recessions. That was until it became clear that the experience of lockdown was causing a behavioural change in terms of what people wanted from their home which, together with the substantial support the Government provided to the economy, sparked an unexpected mini boom in the housing market.”

As a result of this, they were reasonably chipper going into 2021, predicting five year growth to 2025 of  21.1% [4] and this continued to the summer:

“at the half year point we upgraded our house price forecasts from +4.0 per cent to +9.0 per cent for 2021.”

However, by November, their 5 year prediction had chilled to 13.1%:

Still, in February 2022, despite the rumble of guns from the East, they reported that lack of stock meant demand showed no signs of abating [5], although they showed some concern that the rise in living costs would squeeze the spending power of upsizers in high value areas, with the shadowy observation that “realistic pricing” may become more important. However, they felt the ‘Race for Space’ would “remain a core component of the market going forward”.

Frances Clacy, Research Analyst at Savills, commented:

“The imbalance of supply and demand, coupled with existing high levels of property wealth, will continue to fuel price growth in the coming months, despite the recent rate rises.

“However, some cohorts are feeling the squeeze on finances more than others as high levels of price growth has eroded affordability in some areas, particularly in high value locations.”

We feel bound to point out, however, that all the above prophecies were aired before the Ukraine war really kicked off, and before the massive fuel hikes, labour shortages and rising interest rates. We’re not holding our breath for a new update any time soon, given the volatility of world affairs.

Gloomster No.2 was Knight Frank, who in 2020 predicted a 7% drop, but who also managed a little smile as the improbable boom continued. Their Head of Residential Research, Tom Bill, recently agreed with Savills that “the strength of demand remains unwavering for now[6], the number of new UK prospective buyers in November and December 2021 being “63% higher than the average between 2015 and 2019”. Nevertheless, Tom was also unable to resist pointing a trembling finger at the clouds on the horizon, predicting that borrowing costs may put a “dab on the brakes” (but no more) later in the year. However, the main difference between early 2020 and now, he maintains, is inflation – predicted to breach 7% this year. This will both put a direct drag on house prices and increase pressure on the Bank of England to raise interest rates.

The mood of the financial markets bears this out, agrees Tom’s managing partner, Simon Gammon, with the 2 year Swap Rate (a leading indicator for mortgage rates) flipping above the five and ten year rates for the first time in living memory [7].

What this tells us, Gammon says, is that “there is more risk on a two year horizon than there is on a five or ten year one, meaning the market thinks the next two years will be very unpredictable”. But he points out that what’s different now to any other time in history, is that “wages are out of control, interest rates are vulnerable, (and) inflation is soaring to levels which are unique to Covid 19.” Hmmm.

But overall, the mood at Knight Frank is relatively sporty, the return of air travel providing a puff of wind beneath the market’s wings. On balance, then, they predict that housing will “somewhat counter intuitively for the second year running, have a strong 12 months”.

Lloyds Banking Group (who originally predicted a 5-10% drop), have also warmed up considerably in their outlook. Mortgage Director Andrew Asaam said in January [8]:

”Throughout the pandemic a combination of rising inflation and historically low interest rates meant that many first time buyers were forced to save for higher house deposits than they may have bargained for.

“The good news looking into 2022, though, is that 95% mortgages are once again available to first time buyers. And despite higher inflation and an increase in interest rates, average rates on those mortgages hit a record low in 2021, and continues to remain at low levels”.

He also pointed out that the combined fertiliser of furlough payments and lockdown saving had helped people grow their deposits anyway. So all in all, Mr. Asaam expects the rise to continue, but to flatten out to around 1% this year, although he iced his words with the rider that this would depend on “a number of factors”.

This mild optimism, of course, is tempered by Lloyds’ announcement on 27th April that while borrowers’ arrears are still below pre-pandemic levels, it was braced for a rise in defaults as the cost of living crisis bites [9].

Nationwide, meanwhile, reported that prices continued to accelerate from 12.6% in February to 14.6% in March [10]. Their Chief Economist, Robert Gardner, commented in March that he was surprised the market kept its momentum “given the mounting pressure on household budgets and the steady rise in borrowing costs”, but it had done so thanks to a combination of robust demand, limited stock, unemployment at 3.9% and accelerating wage growth.

He further commented that mortgage approvals stayed at nearly 10% above pre-pandemic levels in February – around 71,000. This may also, he said, be partly down to lockdown savings enabling people to save more easily for deposits. He estimated that…

“households accrued an extra c£190bn of deposits over and above the pre-pandemic trend since early 2020, due to the impact of Covid on spending patterns. This is equivalent to around £6,500 per household, although it is important to note that these savings were not evenly spread, with older, wealthier households accruing more of the increase”.

However, Gardner agreed with his peers that “the housing market is likely to slow in the quarters ahead”.

Well, if you keep making a prediction often enough, it’s got to come true eventually, eh, Bob?

Elsewhere, predictions vary, but are similarly modest. Zoopla’s runes point to 3% growth this year [11], while Tim Bannister, Director of Property Data at Rightmove, expects a slowdown in the second half of 2022, as “base rate rises, higher inflation and higher taxes begin to weigh more heavily on buyer sentiment.” He predicts prices will rise 5% in 2022, with steadier 3% growth in London [12].

But looking at the Land Registry’s latest regional figures the slowdown is already dramatic in most parts of the UK except London.

To remind you, this was the June table we showed you last time:

In February, the picture looked like this:

As you can see, the South West and the Northern regions are currently still beating the national average, but London is outstripping them all, despite the predicted Covid escape to the country.

This relative buoyancy in the capital prompted estate agent Chestertons to urge London buyers to be prepared to act fast [13]. Their market analysis for January pointed to “51 per cent more buyers entering the market and 35 per cent more property viewings compared to January last year”. This coincided with 8% fewer homes on the market compared with January 2021, triggering bidding wars. Homeowners responded by digging their heels in, with 44% unwilling to drop their asking prices.

Chesterton’s Chief Executive, Guy Gittins, commented:

“Last year, we saw many house hunters feeling left in limbo as the impact of the pandemic created a strong sense of economic uncertainty. Since then, buyer confidence has clearly returned and there has been a drastic increase in demand for houses and apartments alike.

“To see new buyer enquiries of this scale at the beginning of the year is truly remarkable and a strong indication for the market to remain buoyant for at least the first half of 2022.”

So what forces could weaken house prices in 2022?

University of Reading’s Professor Geoff Meen, whom we quoted last time as saying the market is vulnerable to a shock at any time, has offered no new portents between the ‘end’ of the pandemic and the start of the war. Another of his observations at the time, however, was the effect of real income on house prices:

As an approximation, a 1% reduction in real income has historically led to about a 2% reduction in house prices. So if incomes had fallen at the same rate as GDP (the orange line below), we may have experienced a double digit fall in prices [14].”

Of course, they didn’t – but it’s possible we might we see a version of this effect later next year if the Office for Budget Responsibility (OBR) is correct. They predicted that real household disposable incomes per person will fall by 2.2% in 2022-23 as earnings fail to keep pace with soaring inflation [15], bringing about the biggest fall in living standards in any single financial year since ONS records began in 1956-57.

The Bank of England increased Base Rate to 0.5% in February, as inflation reached a 30 year high of 5.5% – and was at the time forecast to pass the 7% mark by June. It has now just increased Base Rate to 1.0% (the highest rate since the financial crash), which should dampen housing demand.

So, too, might the rise in building costs – reducing appetite for ‘doer-ups’ – and fuel prices, which may slow down the Race for Space, as the thought of heating bigger homes and commuting longer distances drives them to batten down the hatches.

Price growth would also be slowed by an increase in housing stock. Values have been shored up by what Property Mark tells us is the lowest ever supply of houses on record [16].

However, they recorded an 80% increase in housing stock in January, which could have a dragging effect on values [17].

We might also expect a boost in housing supply from landlords exiting the buy-to-let market, as they’re squeezed out by increased regulation and tax hikes. A recent survey found that 20% of landlords are planning to sell their property [18]. With an estimated 4.5 million privately rented properties in the UK, this could make quite a difference to the market.

So what do we think at CapitalStackers Towers? Well, irrespective of what everyone else is saying, we are bound to say that we are seeing some delays and cost escalations. The supply chain is certainly not fully healed following the pandemic (and even showing signs of stress from the Ukraine fallout). Even with the best borrowers and construction teams in the world – all it takes is for a site to run out of bricks (as one of CapitalStackers’ sites did recently) to bring things to a halt.

And of course, we’re keeping a weather eye on the UK Consumer Confidence Index – currently at its lowest for 14 years [19]. That’s always been our weathervane for sales.

Sean O’Grady in the Independent [20], concurs:

“consumer confidence is closely associated with movements in house prices, and on that basis, and the basis of the trends in wages and interest rates we’re likely to experience in the coming months – a housing crash is pretty much an inevitability.”

…as does Matthew Fish at Harrisons Estate Agents in Bolton, who said:

“With less money in people’s pockets, people’s inclination to spend the money they do have could also be curtailed” [21].

Then again, for those who remember his namesake Michael’s 1987 hurricane prediction, how worried should we be?

Is it time to worry about affordability?

Possibly – particularly at the bottom end of the market, where more buyers are sensitive to cost of living rises.

Sales of cheaper homes have plummeted as rocketing costs cut demand on the lower rungs of the housing ladder, precipitating a fall in sales of less expensive homes [22].

Simon Rubinsohn, Chief Economist at the Royal Institution of Chartered Surveyors said:

“A larger share of the burden of the cost of living crisis will be on people with lower incomes. It will affect the ability of many renters to get on the housing ladder. Their ability to save will be constrained at a time when interest rates are going up [23].”

However, again we feel the need to temper the hysteria with a little perspective. Granted, affordability is now worse than a couple of years ago, but not even as bad as it’s been in the last 10-15 years – and it’s nowhere near the apogee that precipitated the 2007-8 crash.

Away from the lower rungs, there remains considerable variation in affordability across different occupational cohorts.

Andrew Wishart of Capital Economics, who predicted that prices would rise last year (although only half as high as they did), uses mortgage rates as a predictor. The feeling in his water is that prices will drop by 5% over 2023-24 [24], because the cost of borrowing will squeeze people’s ability to make ever higher bids.

However, Mr Wishart said: “We are not expecting a repeat of either 2008 or 1990, when house prices fell by about 20pc. First, while the house price to earnings ratio is roughly the same now as in 2007 we do not anticipate a return to pre-financial crisis mortgage rates of 6pc, so the cost of mortgage repayments will remain much less of a burden.

“Second, strong pay growth means a modest fall in prices will be enough to return the house price to earnings ratio to a more sustainable level.”

Again, we should beware being drawn into predicting on the basis of averages. For instance, common sense might suggest that people in better paid professions can more easily afford the average house – but better paid people tend not to buy the average house, and so their ability to afford the kind of houses they want – or to match their peers – can still be an overstretch.

However, that still doesn’t point to a price crash. Another key difference between 2008 and 2022 is that nowadays, relatively fewer properties are on high loan to value ratios than in the past [25]:

LTV RatioQ2 20072021

Moreover, more homes are now mortgage free than in past property booms – the number of properties held with no mortgage overtook the number of homes with a mortgage for the first time in 2013-14.

This means there will be fewer distressed sellers than in the past, even if interest rates do rise appreciably. On the other hand, a third of homes are now owned by investors rather than owner occupiers – and the regulatory and taxation environment for them is becoming increasingly hostile.

The credit crunch in 2008 pretty much cut off the supply of 95% mortgages, save for those to first time buyers under government incentive schemes backed with taxpayers’ money. As they became more available (following their recent reintroduction by a few operators), the rates remained low throughout 2021.

Still – the pressure is mounting on mortgage payers. Nationwide reports in its affordability survey that the cost of a typical mortgage as a share of take home pay is now above its long term average in the majority of UK regions. Pre-pandemic, this was only the case in London. If rates for new mortgages were to rise, this would squeeze affordability further for prospective first time buyers.

But recent price patterns show that a rebalancing is starting to happen – most of the regions that saw the strongest growth are those where affordability remains at or better than the long term average. Despite the sharp rise in swap rates, mortgage rates have stayed close to all time lows.

This suggests that, providing the economy doesn’t falter significantly (which, of course, is by no means a given), the impact of a modest rise in interest rates for existing borrowers is likely to be low, given that only 20% of outstanding mortgages are on variable rates. Higher interest rates are likely at worst, then, to moderate growth in the housing market, and soothe price pressures across the economy more generally.

As we said in the last white paper, one near certainty house owners can rely on is that the Government will act fast to prop up the property market at the first sign of a collapse, just as Rishi Sunak did by introducing a stamp duty holiday in the early months of the pandemic.

Already the Bank of England has proposed relaxing the ‘stress tests’ that banks are expected to apply when deciding on mortgage applications – meaning borrowers could find themselves able to take out larger mortgages, and this could buoy up house prices if hearts start to flutter.

And even as we prepare to publish, the predictions are still coming thick and fast. The race to be first to predict a crash is in earnest. In a long and widely-researched article in the Telegraph on 8th May, [26] young Tim Wallace (whose career started a couple of years after the 2008 crash) refers to many of the same sources that we do – including Andrew Wishart’s assertion that he doesn’t expect a crash. He also makes the point, as we have, that most homeowners don’t have a mortgage and most of those who do have fixed rates. And that debt interest now constitutes only 3.3% of household incomes today, compared with over 12% in the 1990s. He points to the comparative strength of the economy and the stringency of current stress testing. And yet he somehow manages to wind himself up to the conclusion that an “almighty” crash will almost certainly come (although he uses the word “eventually” twice in his final paragraphs. A crash will come, he concludes, just because.

He revisits the horror stories of 1989-93 and the late 2000s, citing those 19-20% tumbles without referring back to the germane economic differences between those times and now. Yes, mortgage rates will rise, but they’re a long way from being anything like those that expedited those crashes.

So could we see a housing equivalent of a stock market crash?

From the evidence to hand today, we think it’s unlikely. For one thing, it takes much longer and costs much more to sell a property than sell a bunch of shares, which means we’re unlikely to see panic grip the property market in the way it often does (and is doing now) in stock markets. When people invest in property it’s usually with the intention of staying in for the long haul. So we can usually expect landlords to bear quite a lot of pain before they’re pushed to sell. All of which makes a housing crash less likely than a stock market crash.

By the same token, house prices rarely rise with quite the enthusiasm of a surging stock market.

All of which leads us to a tentative conclusion – conditional upon what Harold Macmillan might have called ‘events, dear boy’. Statistics printed today can be rendered meaningless tomorrow by events.

For now, conditions don’t point to any further big rises in the housing market, and stagnation is looking more likely. The war and continuing pandemic-related supply chain problems in China are making big waves and are likely to do so for some time to come. This means the recent stellar performance of the market is almost certainly not going to continue and will be replaced by only modest growth – or even a modest fall.

In short, if we were to use a C-word, the portents point to ‘Correction’ rather than ‘Crash’. But however the future unfolds, the good news for us and for you, our investors, is that we’re not selling houses – we’re lending money against them. And someone else is taking the equity risk.

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

There is an unwritten law that the larger the scale on which a Government tries to help, the more the Law of Unintended Consequences comes into play.

For example – in recent months, we’ve seen the unintended consequences of the Energy Price Cap. The intention, of course, was to keep energy affordable for all. The effect it had was akin to what happens when one puts one’s thumb over a hosepipe. The pressure builds and builds until everyone gets soaked.

A similar failure of good intentions was when the Government tried to encourage more people to use their newly-built roads in the 1960s by slashing the railway infrastructure. Over the ensuing decades, car use boomed. But by the 1990s, the roads were so congested, people were crying out for more trains, but the lines were long gone.

Which brings us to the variety of state-backed lending schemes introduced at the beginning of the Covid Crisis.

We had the Coronavirus Business Interruption Loan Scheme (CBILS) –  where the Government authorised certain lenders to advance up to £5m to SMEs via term loans, overdrafts, invoice finance or asset finance; we had the Bounce Back Loan Scheme (BBLS) – where SMEs could apply for between £2,000 and £50,000, pay no fees or interest for 12 months, and then a maximum of 2.5% p.a. thereafter; the Recovery Loan Scheme (RLS), where businesses of any size could borrow up to £10 million at an average of 6.16% for 3 years; and the Future Fund, in which innovative companies could get government support of £125,000 to £5m, if that funding was matched by private investors. There was also CBILS big brother, the Coronavirus Large Business Interruption Loan Scheme (CLBILS) which facilitated lending up to £200m, but this entirely excluded P2P platforms.

Each was designed to put a much-needed jab into the arm of the economy, at a time of unparalleled instability. And each (except CLBILS), was to combine the mustered might of both traditional lenders and institutional investors (via the P2P industry) to support suffering businesses.

And what, you may ask, could be wrong with that?

Of course, in the plus column, they enabled homes to continue being built, hence great news for house buyers. And it was also great news for borrowers. But at what cost to the nation? And what are the unintended consequences?

Well, imagine you set up… oh, I don’t know… a nice upmarket wine bar. Being a responsible entrepreneur, you adhered to the requisite laws – those both of the land, and of common sense. You sold only quality produce, to protect your consumers, and you set the bar sensibly high, keeping out the young and inexperienced, the misguided and the riff raff, to protect them from themselves.

Then let’s imagine the Government sets up another wine bar next door. It substantially undercuts you – selling products much cheaper than you possibly can; it drastically lowers the bar, makes the doormen radically less strict and suspends the consequences of selling inferior products.

The need for such an outlet is of course questionable. The risks to both clientele and established businesses predictable.

But this is pretty much the situation faced by the property P2P industry and the small private lenders who depend on them to make their money work. Of course, CBILS was not originally destined for property developers, but eventually morphed into a very attractive stimulus for them. So the property-based crowdfunding platforms set up their stall however many years ago supposing that their main competition would be other P2P platforms, or at least other forms of alternative finance. Imagine their surprise when they woke up one morning in 2020 to realise they were now competing against the Government.

Now it has to be said that some P2P platforms benefited from the schemes. But this was Unintended Consequence Number One: an unnaturally-skewed marketplace, tilting the field away from the small investor. Platforms offering CBILS, were only permitted to use funds supplied by institutions, not “retail” (private) investors. This meant that platforms who wished to remain loyal to their small investors were excluded.

Next, Unintended Consequence Number Two was elicited by the Recovery Loan Scheme.

Allowing developers to borrow at an average of 6.16% – with Mr. Sunak kindly paying the valuation fees, legal fees and arrangement fees – meant developers could delay sales exits. In short, they could sit on finished developments with no pressure to sell, thanks to all that cheap money. So it artificially propped up house prices at a time when sales weren’t exactly an issue, because at the same time, the Government was subsidising Stamp Duty.

This was Iteration 1 of the Recovery Loan Scheme. Iteration 2 leads us further down the slippery slope to Unintended Consequence Number Three: the Government guaranteeing 80% of loans (now 70% since the start of this year) encouraged the banks to lend more than they otherwise might – allowing gearing to increase to an extent that erased the need for mezzanine finance. And artificially cutting out a service which was built precisely to plug that specific finance gap, by temporarily closing the gap.

Basically, if a developer could borrow 70% of value at lower cost than if they were borrowing 65%, he might as well just tip in a bit more equity and save the cost of mezzanine finance.

Once again, the need for this stimulus was questionable. It’s not as if mezz finance wasn’t available. It was then and still is now – for those very same deals. So while this was a windfall for both the senior lender and the developer, it unquestionably pushed small investors away from a valuable source of income, and made redundant the funding pipeline that developers had hitherto grown to rely on.

What’s more, where banks typically take a 20% personal guarantee, the Government now provides a 70% guarantee before the 20% kicks in. So if the loan is £10m, the government is underwriting £7m and if there’s a shortfall, the borrower covers a further £2m. And whilst there is no evidence of underwriting standards being relaxed on the back of this, those banks offering these loans are almost certainly not going to be making any provisions.

Of course, compassion demands that we say it has compensated developers for extra building costs – every site has suffered labour shortages, delays and rising costs – but again, this was an unintended outcome of the stimulus.

Bounce Back Loans might have been more attractive to lenders. While minimal due diligence was required, the Government backed them with a 100% guarantee, so the lender wouldn’t lose any money in the event of a default. However, only one P2P platform – Funding Circle – was approved to offer the BBLS, after they struck up a partnership with Starling Bank.

But all this, of course, ignores the elephant in the windpipe of the recovery: the Not-In-Any-Way-Unforeseen, but unfortunately Unintended Consequence Number Four: what happens when a substantial number of these loans default (as we’re now beginning to see)?

Inflation, labour shortages and supply chain issues are widely expected to build up the pressure. We’re also starting to see the first evidence of widespread fraudulent applications. The Treasury Minister Lord Agnew resigned in January over the £4.3 billion of Covid loans written off so far [1].

Of course, the real tragedy of all this was that support for residential development was so unnecessary. There was never any shortage of funding in this sector. Alternative funders and platforms like CapitalStackers have been providing it all through the pandemic, except on those deals where they were displaced by government cash.

There is also evidence that the Levelling Up Home Building Fund – designed, in the Government’s own words, “to support small and medium homebuilders that are struggling to access development finance from the private market” has been taking business from banks on deals that they were fully prepared to fund.

However, there is some good news for the private investor. The last of this artificial support which has unfairly pushed opportunities away from you – the Recovery Loan Scheme – will have ended by June. From that point, the natural order will be restored. Good, sound building schemes will once again be funded by a combination of sensible banks, P2P and the developers themselves.

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

The eager clamour from experts and economists to forecast the bursting of the UK property “bubble” is becoming ever more shrill. The reasons they give are varied, but largely boil down to:

  • the drop in economic output (which has historically correlated with a property dip);
  • the switching off of stamp duty relief;
  • the end of furlough payments, and;
  • a sharp recent rise in property values.

Now, it’s often said (only partly in jest) that economists “predicted nine of the last five recessions” – and the harsh reality of being a pundit is that if you want to get into print, you’ve got more chance of grabbing the headlines by predicting a disaster than you have by saying “things will just carry on just swimmingly, thank you”.

So one can understand the motivation for pundits to um-err on the gloomy side.

And of course, the shrillness has intensified since many of those asked for predictions last year faceplanted into the egg box and are still wiping the yolk off their faces.

Having seen market growth of almost 25% over a five year period whose turbulent events have included three new prime ministers, two elections, the chaos of Brexit and a pandemic, experts with particularly eggy features include Savills (who predicted a 10% drop in house prices this year), Knight Frank (a 7% drop), Lloyds Banking Group (a 5-10% drop), and Cassandra herself – the Old Lady of Threadneedle Street – predicting a terrifying 16% nosedive!

So the sheer indignation of seeing the housing market blasting out of lockdown with a rocket up its jacksie caused the pundits to respond by screeching that this unpredicted growth actually proved them more right. The fragile housing market, they mansplain, is now clearly overheating and about to go pop. Houses, they say, are reaching unaffordable levels and closing off the crucial funnel-feed from first time buyers. Geoff Meen, Professor Emeritus in Economics, University of Reading, insisted the market is vulnerable to a shock at any time. [1]

So how much truth is in these sentiments?

On the surface…

On the face of it, the figures do suggest things are getting a little warm. The ONS reported a year-on-year increase of 13.2% for UK average house prices in June 2021 – the highest annual growth rate since 2007 – to £266,000 [2]:

Halifax similarly reported a 2.4% increase in the quarter to July 2021, pointing to a record average house price of £261,221, and a 16.7% annual increase in house prices in Wales alone [3], followed by another monthly rise in August, to £262,954 [4], although it did acknowledge a slowing in the rate of growth.

Along with other expert commentaries, Santander’s 2019 First Time Buyer Study compared the average house price to the average net incomes of 25-34 year olds [5]. And they weren’t alone in this blunder. As so often with matters like this, the reality may be more complex than the experts would have us believe.

Averages are not probabilities

For one thing, the above forecasts are based on averages. Which is no basis for anything. Averages disguise spreads – that is, they take a whole world of varied and valuable information and roll it up into a fairly valueless number.

For another thing, “average” first time buyers don’t buy houses at the national average price. If they’re on a lower income than the mean, they naturally buy cheaper houses or flats, in less fashionable areas. And according to HM Land Registry [6], they’re making a good fist of it. The average price of a flat in June 2021 was £221,211, and the average first time buyer was spending £222,712 (Table 1). What’s more, despite overall home ownership being at its lowest level since the early 1980s [7], appetite from first time buyers remains strong. Santander’s First Time Buyer Study [8] also revealed that 9 out of 10 young adults aspired to own their own home. As a top life goal, that makes home ownership twice as popular as having children or getting fit.

And despite being suppressed by lockdowns in the early part of 2020, the number of first time buyer transactions in the second half of 2020 was only 2% down year-on-year.

What’s more, when you break the June national average down by region (according to the Government’s latest figures), you can see differing levels of enthusiasm in different parts of the country:

So, beneath the screaming headlines about “average prices” and “average buyers” lies a delicately detailed watercolour of the true picture. House prices are rising at different rates, in different regions, and are bought by a variety of people from varied backgrounds, motivated by a kaleidoscope of sometimes conflicting factors. But this is difficult to squeeze into a headline.

Moreover, the figures to which the commentators refer to are all based on wildly differing criteria and methodologies. It’s important to remember that house price indices are not straightforward – with varying delays in reporting data. Zoopla, for instance, measures the changes by listed prices, not sold prices. What a seller wants for their home is not always the same as what the house sells for. 

And while ONS data is generally a solid bedrock on which to base analysis, their housing reports are delayed due to the lag in Land Registry sales registrations. And, the most respected indices – Halifax and Nationwide – are weighted by transaction volume. This can skew our view of prices because houses sell at varying values.

Of course, not everyone is trying to scare us with generalities. Some commentators on the ground are more precise in their pronouncements.

Cory Askew, of Chestertons estate agents, puts revitalised demand for flats in central London down to “predominantly first time buyers who are feeling a lot more secure in their job prospects.” And David Millar, of Bairstow Eves estate agents in Leytonstone, Waltham Forest, adds “(This) area used to be all buy-to-let years ago, but now 90pc of my buyers are first timers.”[9]

The kernel of truth

So where are prices cooling off? Recent reports suggested that larger houses in selected parts of Greater London and the South of England – traditionally the engine room of national house price growth – had suffered from the growing appetite for larger, rural homes, along with recent surcharges on stamp duty for non-UK residents and possibly concerns about the long term effects of Brexit among a more remain biased populace. The property website Zoopla said central London prices had been trailing the rest of the country for 8 months [10].

David Millar explains how the market split, “The tapering of the stamp duty holiday at the end of June has meant the market for £700,000 to £800,000 houses has calmed down, but the demand from younger couples buying £400,000 to £500,000 flats shows no signs of slowing”.

However, at the very top end of the market, there are reports that buyers from the Middle East, encouraged by the easing of Covid restrictions, are again viewing properties in the £10 million plus bracket [11].

So unsurprisingly, these reports of rising prices have given rise to dour predictions about an affordability gap. However, these tend to be based on the traditional price vs earnings ratio, which has steadily climbed again after a post 2007 dip (Chart 2).

If the headlines are to be believed, how are people still affording to buy houses?

While average London houses cost 11 times the average London wage, this figure is undoubtedly skewed by outliers. In the same way that Bill Gates could walk into a crowded football stadium and raise the average wealth of everyone in it to over $1 million, so properties in Mayfair, Highgate and Belgravia selling for tens of millions obscure the fact that you can still buy a property in London for £100,000 [12]. And yet still the pundits plug the averages to scare us.

The reported growth averages have been skewed by yo-yo performance in lower value areas with lower sales volumes (Table 3), or niche segments. We can see that the double figure surge in Wales [13], for instance, is predicated upon a tiny fraction of England’s sales – so we can naturally expect wilder price fluctuations on a smaller data set. And a post Covid yearning for more space [14],fuelled by lockdown savings among the better off, can explain the lift in interest for larger, higher value houses. So rolling these outliers into an overall market prediction is likely to be misleading.

And if we focus on the picture region by region (Chart 3), in those areas where earnings are lower, prices are lower. In the Midlands, North West and Wales, prices average 5.5-6 times average earnings – which very likely means it’s still possible to buy a house at a highly mortgageable 2-3x salary.

Then again, the broad brushstrokes of national averages blur the issue. When we examine regional variations, the picture starts to clear.

But of course, price isn’t the only factor to consider when we’re discussing affordability. While house prices are among the highest they’ve been for 120 years relative to earnings [15], this ratio tells us little about whether people can afford to buy them. After all, how many people buy in cash?

On the other hand, when we look at the cost of borrowing that money, we begin to understand why prices have continued to rise despite other pressures (Chart 4).

People’s willingness to pay the price of a house depends not on the headline price, but on the monthly repayments. And at the moment, these are still relatively comfortable.

Surely the end of the stamp duty holiday has triggered a slowdown?

Well, not according to Resolution Foundation. The independent think tank’s study reported in August 2021 that prices rose more in areas that least benefited from the tax cuts [16].

The expectation was that the parts of England whose average house prices were close to the maximum benefit figure would have risen most if the tax holiday was the primary driver for the uplift. But the study was surprised to find that a) there was no correlation between areas with the highest gains and house price increases, and b) house prices rose highest in the areas with the least to gain.

So it’s possible that bigger, more global forces are driving house prices higher. The UK housing boom is currently being reflected in almost every major economy in the world [17] – not just in Britain. The combination of low interest rates, lockdown induced savings and evolving homebuyer appetites seems to have fuelled the greatest worldwide house price boom for the past two decades.

This view is supported by anecdotal evidence that the housing market has held steady despite the pulling of the stamp duty rug [18].

London estate agent Jeremy Leaf, formerly of the Royal Institution of Chartered Surveyors, said, “the predicted price correction immediately after [the withdrawal of the stamp duty holiday] failed to materialise”. Chris Hare, a senior economist at HSBC, agreed. While there was of course a rush to complete transactions before the stamp duty holiday before the stamp duty holiday ended, this was “certainly not pushing the UK housing market into a slump”.

And Cory Askew, of Chestertons concurs: “The absolute peak of demand was at the end of March when the stamp duty holiday was extended.

“Then there was a steady decline in inquiries through April, May and June – levels were much lower than in 2020, but higher than in 2019. It is a normalised market.” [19]

A normalised market, then. Not a crash.

These are soothing, perhaps sensible words. Rather than expecting bust to follow boom, perhaps we should see the rampant figures in context and rather than scaremonger about bust following boom, ask ourselves, “Is it a boom? Or are we seeing a lot of localised wildfires?”

Of course, the dark forces that could trigger a crash are never far away. But the question is, do they currently have the power to do so?

So are interest rates the secret trapdoor that could bring down the market?

Well they could be…and let’s face it, raising them significantly could trigger a slide in prices and be the fastest way for the Government to keep its pledge to solve the affordable housing problem across the country [20].

But in truth, any government would do anything in its power to stop this happening. They know it would be a political and personal disaster.

The last time we saw a sustained drop in house prices was the 12.3% fall from the September 1989 peak – and they didn’t return to their previous level for over eight years.

The superficial reason given (see below) was ‘overheating’ in the UK, fuelled by a rush to buy before the MIRAS tax relief scheme for couples was withdrawn by the government. It was a very British market crash.

Which is why, despite the pledges, all Governments have conspired for decades to support or inflate house prices.

After all, no government wants to be left holding the housing bubble when the music stops, so they tend to shovel cash into the jukebox whenever it seems to be slowing down.

In other words, the standard solution to making housing affordable is to prop up prices and simply give people a leg up to meet them.

For instance, the New Labour government responded to the 2008 crash by launching the Mortgage Rescue Scheme (MRS) to support mortgagees who couldn’t sell or keep up their repayments. They bolstered this with Homeowners Mortgage Support (HMS), whereby the state would underwrite up to 80% of the losses of a banks who looked the other way when homeowners couldn’t pay. Then in 2009-10, the same government diverted £1 billion from their regional economic programmes to prop up the housing market.

Successive governments followed with modest policies like HomeBuy Direct and HRS, paving the way for ‘Help to Buy’, which sprung a huge number of people – 280,000 households – onto the housing market by 2020. And in 2021 Boris planned to bounce the housing market still higher by lending up to £25 billion directly to home buyers over a two year period.

However, even before they began to spend that £25 billion, prices shot up even faster than they had before – dragging sales up to nearly 140,000 a month by late spring 2021.

Whether or not these measures have been successful it’s evident that this Government – along with most governments across the world – is pulling all the levers it can to avoid another crash.

Aditya Bhave, economist at Bank of America, said policymakers around the world were “now acutely aware of the risks around housing policy”. In contrast to 2008, that “meaningfully reduces the chances of an adverse outcome”, he added.

The independent housing analyst, Neal Hudson concurs: “We are stuck where we are – with house price inflation. The clear message that I took away from the Budget last month was that this is a government which recognises that maintaining house prices where they are or higher is important to them politically and economically because so much of our economy is now based around the lending which is secured against house prices.” The market behaviour we’re seeing now is “exactly what you would expect in a financialised housing market where mortgage rates are very low”. [21]

And of course, while the Government has learned lessons, so have the banks. The key differentiating factor between the situation now and that of 2008 is that central banks now carry a lot of scar tissue from the last property crash and are now much more vigilant.

And unlike the period leading up to 2008, the flames are not being fanned by sub prime debt.

Deniz Igan, deputy chief of the IMF’s macro financial research division, opines, “Mortgage growth was driven largely by people with strong financial positions, and across most advanced countries households were less indebted than before the financial crisis, suggesting a lower risk that the situation would follow the same path with a wave of defaults and fire sales”.

So if mortgage rates are kept under control, a crash can be avoided?

Not so fast. We haven’t heard all the witnesses yet.

While all the experts were getting their predictions wrong last time, the author and economist Fred Harrison was one of the few who correctly predicted a 10% rise in UK house prices over the UK Pandemic.

And he has a theory.

Whether there is any credence to it, we’ll let you be the judge.

In his 1983 book, The Power in the Land, Harrison correctly forecast the property price peak in 1989 and the recession that followed it.

His prophetically titled 2005 book Boom Bust: House Prices, Banking and the Depression of 2010 then successfully forecast the 2007 peak and the ensuing slump. He suggests the market will continue to boom and then crash in 2026.

Harrison also claims he already predicted the 2008 crash at least a decade before, having identified an 18 year business cycle from trends in the city of Chicago.

All the factors we’ve discussed, according to Fred, are like waves on the shore. Disruptive, but not in themselves enough to change the course of a vessel.

But what we haven’t discussed is the tidal effect of the Land Price Cycle.

The what?

‘It rested on a theory about the land market, which operated on a 14 year cycle,’ he said. ‘I checked the theory against US wide evidence for the 19th century and cross checked the theory against the diverse cultural and geographic evidence from Japan and Australia over the 20th century.

‘And I identified the cycle as operating within the UK for at least 300 years.’

The cycle, said Fred, roughly comprises two main phases, divided by the mid cycle downturn.

After a crash, the market takes about four years to gain enough confidence to start climbing again.

There then ensues the recovery phase – six or seven years of moderate growth.

Next comes the mid cycle dip, perhaps a one or two year downturn, before a final boom phase, typically lasting another six or seven years and where prices generally rocket more than at any other point in the cycle.

‘There are ups and downs within each of the two halves,’ he goes on, ‘but the trend is inexorably upwards towards the final peak.’

So while the low interest rates, the stamp duty holiday, the 95% mortgages, the rehash of the Help to Buy scheme and the exodus to the country in the wake of the pandemic all potentially have a powerful inflationary effect on the market, the significant undertow, insists Harrison, is the finite supply of land.

This is then fuelled by human nature, sentiment and speculation to turbo charge prices.

The population and the economy continue to grow…without the land supply to satisfy demand, property prices rise, while banks have little choice but to lend more against accelerating asset values to fuel the spiral.

More people resort to property as a financial safe haven and prices are further bloated by the appeal of capital gains, prices soar above what they otherwise would be until the bubble bursts.

Harrison’s 18 year property forecast is that Britain is right at the beginning of the final boom phase, with the next crash on schedule not next year, but in 2026.

But you’ll notice above that Fred is vague enough about timescales to avoid being pinned down to anything less than five years in terms of accuracy. So it’s less of a cycle and more of a wheel of fortune.  

To put Fred’s theory into perspective, below are the house prices since 1845 (Chart 6). As you can see, the “cycle” appeared to have a “flat” until the 1860s and then rocketed as we all know.

But in order to maintain this zero house price inflation required factors that would hardly be replicable today. For one thing, the Victorians and Edwardians more than doubled the UK housing stock between 1851 and 1911 – from 3.8 million houses to 8.9 million – and almost halved the size of the houses. [22]

To repeat the feat today would involve building 28 million houses half as big as those currently being built – and considering the current trend is for more space, not less, this might not make them very saleable.

So will Fred Harrison’s theory be proved right? Who can tell? Every day the world turns is a revolution. Other long term effects may yet come into play. Because while the pandemic will change the way we live, work and interact as a society, it looks unlikely to suppress the good old British trust in bricks and mortar.

And as things settle down, we may either see a reverse of the exodus from London – or a crystallising of its effect, with new technology facilitating networks of rural homeworkers.

Then again, we may see a remarkable new phase of inheritance fuelled growth. Until now, this hasn’t really figured in market modelling, because inheritances have been so much smaller.

But when we consider that people born in the 1960s – many yet to inherit – will be the indirect beneficiaries of an average 343% price rise since 1996 [23], we can see a potential game changer on the horizon.

Bearing in mind that the effects of this unprecedentedly huge cash injection will neither be uniform, nor restricted to any particular place or time, but spread out over decades and potentially filtering into every corner of the UK, who can begin to imagine its effect as a mood enhancer on whatever the prevailing passions are in future eras? How, for instance, might it sway the WFH/Office saga? Might it combine with HS2 to inflate house prices in the North? Or even shift focus to Northern France?

So those who turned to this column for answers and concrete predictions…come on. Do you think we’re that daft?

Prophecies, like the promises of a faithless lover, may as well be written in wind and running water – as the last 18 months has shown. The property world is currently in a giant tombola spun by unpredictable long and short term forces. One can plot the variables and model best and worst case scenarios. In April, Neal Hudson was adamant that high house prices were here to stay. By the beginning of September, he wasn’t so sure: “There is still a lot of economic stress that could impact things,” he stresses. “The end of furlough could have an effect and so there remains a great deal of uncertainty.” That is, prices might still fall, or at least flatten their growth curve. In short – something might still cause prices to fall, or at least stall. [24]

The latest Halifax figures showed house price growth eased from 7.6% to 7.1% in July. [25] The number of property purchases dropped in July when stamp duty ended in England and Northern Ireland.

But by other metrics, the expiry of the tax break has so far failed to trigger the predicted collapse.

Russell Galley, managing director of Halifax, comments, “We believe structural factors have driven record levels of buyer activity – such as the demand for more space amid greater home working,”

“These trends look set to persist and the price gains made since the start of the pandemic are unlikely to be reversed once the remaining tax break comes to an end later this month.”

But when all’s said and done, does it really matter? For the vast majority of homeowners, undulations in value are of little concern when the underlying trend is inexorably up.

After all, the only real group who might suffer from a drop are the minority looking to downsize in the near future, or the unfortunate souls in negative equity facing repossession. We can only hope that the downturn of this economic cycle is not so severe on these individuals.

However, most people buy houses for the long term, which has so far been kind to all of us.

And of course, the likelihood is that if you’re reading this, you’re even higher up the food chain. You’re more likely to be reasonably well heeled and looking to invest spare cash, rather than counting the pennies into your gas meter. So if you’re buying to let, the vagaries of house valuations should have limited effect on you.

More so if you’re putting your cash to work through CapitalStackers, since your exposure to the ups and downs of the property market will be heavily cushioned. Since we only lend a maximum of 75% of value, the brunt of your volatility risk will of course be absorbed by the developer’s own equity – giving you at least a 25% cushion against the worst happening.

To put that in context, let’s consider how the market came off its 1989 and 2007 peaks:

So given that the biggest ever drop in UK housing history was somewhat less than 20% (albeit induced by a unique and spectacular concatenation of circumstances), we’ll leave you to draw your own conclusions….

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

Shouldn’t the FCA proposals to ban promotion of P2P property development lending differentiate between pooled and direct lending? What will happen if they don’t?

The FCA has come in for a good deal of criticism recently, and as a result has promised to raise its game – restructuring its organisation, improving training and establishing a “programme of change that transforms the way we handle and prioritise information and intelligence”.

The fallout over the Lendy administration – where the owners drifted from being gilt-edged pawnbrokers putting boats in hock, into the world of property development which they clearly didn’t understand, achieved FCA approval status in July 2018 “following a detailed end to end assessment of its business and operating model”, collapsed just 10 months later and saw the directors’ personal funds frozen following allegations that they siphoned money out of the company into accounts in the Marshall Islands – will no doubt have focused their minds on the need to review and tighten regulations, as of course will the reviews into the collapses of London Capital & Finance and The Connaught Fund (neither of which were P2P platforms, by the way). 

So the FCA will be aware of a lot of eyes on this next wave of regulations as it rolls out. And one of the first proposals to be aired is a call for a ban on promotion across all property development lending in the P2P sector.

Of course, we applaud and welcome measures to protect investors and weed out the dirty players in the P2P sector. In all financial services, regulation and scrutiny are crucial to keep the bad actors out and to build on the work of the conscientious ones so that everyone plays a part in creating a culture of best practice. Roger Gewolb of the Campaign for Fair Finance has rightly called for more scrutiny. “There have been too many crashes and too much money lost,” he said, and we agree. Even one crash is one too many.

But the first rule of throwing out bathwater is surely to check for babies first. And to respond to a few crooks that have fallen through the cracks in the FCA’s processes by treating the entire sector as potential crooks feels like quite a violent reaction. A total ban on promoting legal business services – the majority of which are run by conscientious, experienced lenders – would unnecessarily hobble them to the point that most could not go on. Certainly not in their present shape.

We’ve already discussed in this blog the reputational damage caused to our sector by a handful of bad operators. And it’s clearly wrong for so many to be judged on the basis of so few.

To those who use it (or should we say need it?), P2P property development lending is an intricate knot that requires careful unravelling to save what’s valuable and discard what’s not – in the FCA’s own words, “use of data and intelligence” – rather than putting everyone to the sword.

So we would hope the FCA’s new training programme will include modules on how to differentiate and discriminate. How to build a programme of smarter regulation that will enable the industry to grow legitimately and support both investors and SME developers – both of which have come to depend heavily on P2P in the last 10 years.

We need sharp, discerning rules that encourage good practice and make bad practice impossible. Rules that recognise the difference, for instance, between:

  1. Pooled lending – where all loans are basically chucked into a bucket and investor money is chucked in after it, relying on new investors to buy out existing investors if they wish to exit because the cash will be forever rolled into the next deal; and,
  2. Direct lending – where an investor lends to a single borrower for a specific building project which they can scrutinise for its individual merits, review the detailed due diligence and risk modelling and get repaid when that project completes.

As it stands, the proposed ban makes no distinction. Direct P2P development lending is spoken of in the same breath as mini-bonds when the two products actually bear little resemblance.

And yet we believe investors would welcome legislation that makes this crucial distinction. Regulations that protect them from the incompetent, the inexperienced, the self-serving and the criminal – but also allow them the freedom to seek higher returns than are available from mainstream interest rates, on portions of their portfolios where they are happy to accept higher risk, and where they have sufficient specific information to be able to properly assess that risk, make their own decision and set their reward accordingly. 

There’s certainly a requirement to ban platforms from promoting to any investor without a high level of transparency and total honesty – especially small retail investors. Nobody wants to see them lose money they can’t afford due to risks they don’t understand – although if the risks and repayment horizon are made as clear as they should be, this ought not to be a problem – especially if their exposure has been limited, as is the case following the 2019 rule changes.

So while the FCA’s scrutiny of property development P2P is understandable, lazy media reporting and adverse pundit publicity aimed at the industry is not. Even mainstream investments can trap investors, as victims of Neil Woodford and, more recently, Aviva found.

But should we be regulating to prevent platformsfrom promoting secured lending opportunities to Sophisticated and High Net Worth Investors, where risks have been made transparent and they will be fairly compensated for the risks they choose to take?

Is it not sufficient to make it clear how and when an investor can get repaid rather than shut them out altogether?

Should not smart regulation of P2P involve forcing ALL platforms to make all risks clear to all investors, all relevant information fully transparent (as the good ones already do) and in particular whether or not an investor is dependent upon the platform bringing in new investors down the line to maintain future liquidity? For the record, at CapitalStackers we ensure that all the funding needed to complete and exit a project is in place before a penny is drawn down. In the absence of a functioning secondary market, to get their money back, our investors only need wait for the project they are funding to come to fruition – and that is typically no more than 2 years, well inside the 5+ year terms referred to in the context of mini-bonds, ‘High Risk Investments’ and ‘Speculative Illiquid Securities’ (to use FCA parlance). And as a number of our investors have found out, even during the pandemic, they could liquidate investments within periods measured in days, not weeks or months.

Investors (from the most sophisticated to the most vulnerable) are free to invest in the stock market, where there is every chance they might make a poor decision and lose money. They’re free to take a punt on murky, poorly run companies. And yet we never consider regulating the stock exchange.  

So has the FCA considered all the implications of policing what individual investors can or can’t do – i.e. policing the product as opposed to policing conduct? They’re certainly open to canvassing your views on the matter.

A spokesman for the FCA said: “We have not suggested a ban for most types of peer-to-peer agreements but are seeking views on whether there are certain types of high risk P2P agreements that should not be mass marketed to retail investors”. By ‘certain types’, they mean property development loans.

“Where we have suggested a ban, we need to balance the benefits of stopping consumers investing in inappropriate products with the impact on firms. We are seeking views on how we get this balance right.”

So what now faces you as Sophisticated or High Net Worth investors is both an opportunity and a threat. The threat is that P2P property development lending is very much in the FCA’s sights and could end up being closed off as an investment vehicle as we go back to you only being able to invest in property through institutional funds (in which case think low yields and high costs). Developers would be forced into the institutionally backed debt fund market, removing an extremely important funding plank that’s been in place for some 10 years. The opportunity is for you to try and influence the outcome. Do you feel the FCA is right to impose these protections upon you or would you rather the choice remained yours? Your views will be considered by them until 1st July this year, so we would really welcome your input before that deadline. This link will take you to the FCA’s website. There’s a link at the top of the page to the FCA’s discussion paper and at the foot of the page is an invitation to “Respond to the consultation”.

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CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

“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.

Blog Investor News

CapitalStackers Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

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 Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

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 Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.

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 Limited is authorised and regulated by the Financial Conduct Authority (FRN 722549). Registered in England (Co. No. 7361691). Investment through CapitalStackers involves lending to property developers and investors. Your capital is at risk. Investments through this and other crowdfunding platforms are not covered by the Financial Services Compensation Scheme. Unless otherwise stated, returns quoted are annualised and gross of tax.