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.

Category: <span>News</span>

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.

You need to be quick to invest in a CapitalStackers scheme these days. Investors’ hunger for the property lending platform’s deals gets ever sharper as the uncertain economic climate makes other options less attractive. The opportunity for individuals to invest directly in well run, risk assessed property deals regularly results in keen competition whenever CapitalStackers publishes a deal, but last weekend the fever reached new heights.

A call to raise £425,000 for a scheme of 52 one-bed and 3 two-bed apartments in Scarborough sold out in under 2 minutes.

Then, half an hour later, a Build-to-Rent scheme in Dagenham (of 34 one-bed and 29 two-bed flats) raised £500,000 in less than a minute.

Many of those responding to the call already have rewarding experience of the platform, which to date has repaid £13.5 million to small investors (with zero losses) at an average return of 12.15% pa.

In total, CapitalStackers has enabled over £100 million funding through its customary combination of bank and P2P investment, and seen those banks repaid £31.3 million leaving them with £60 million still at work in the construction industry. This unique bank partnership strategy gives CapitalStackers’ investors the assurance that all funding is in place to complete the construction before any cash changes hands and work starts – avoiding the risk of having to seek future investment to see a project through to fruition.

The Scarborough project is structured in two layers and will return 14.37% pa to investors at a Loan-to-Value (LTV) of 74.5%, and 10.75% pa at a LTV of 69.7%, in December 2022. The borrower’s cash equity is £855,000 and Hampshire Trust Bank are funding the remaining £3,481,000, with the completed scheme valued by Eddisons at £5,657,000.

The Dagenham scheme is a single layer deal paying 12.13% pa on a LTV of 72.8% and due to repay in June 2023. The borrower is injecting their equity in the site of £3.5m and a construction facility of £13,245,000 is being provided by Castle Trust Bank against Savills’ Gross Development Value of £19.5 million.

CapitalStackers’ Managing Director Steve Robson said, “Our experienced investors are well aware that well-managed and well-priced risk – with suitable protections in place – is still a useful weapon in the investment armoury during these uncertain times. We had every confidence that our members would raise the capital needed – but the speed and enthusiasm of the response surprised us yet again”.

He added, “Appetite has always exceeded demand for our deals and people want us to publish a lot more – but the key to their appeal is their quality; and that’s something we will always strive to maintain. That’s because we have a duty to all our investors to take good care of their capital. And, of course, it’s fantastic for developers to raise much needed funding so quickly”.

Borrower News Deals Investor News 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.

Blog Borrower News Deals Investor News 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.

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.

Blog Borrower News Deals Investor News 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sign up here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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CapitalStackers 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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CapitalStackers 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.