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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And we’re the same.

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

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

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

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

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

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

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

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