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Is Your Property Developer Partner Borrowing Ethically?

Fri, 29 Nov 2024 08:23:11 GMT

What To Watch Out For...

I have previously spoken about knowing, liking and trusting your property developer which are the key pillars to all successful partnerships. But today I am going to dig deeper and explore the ethical side of borrowing, so get buckled up!

You’re all set to lend to a property developer on their latest project, picturing that sweet interest rolling in. But before you get too excited, there’s one vital question to ask yourself: “ Is my developer borrowing ethically?” We’re not just talking about just timely repayments either, ethical borrowing is about so much more. Will they be transparent, offer security, act fairly and will they respect everyone in the process, including you? With this in mind, let’s dig into three key areas you need to have on your radar that will keep your investment safe and your conscience clear.

1. Transparency: Are They Keeping You in the Loop?

In any great partnership, communication is key. Whether you’re dealing with your life partner, best mate, or of course your property developer; clear and open dialogue and asking the right questions is essential. This is to ensure that you know where your money is going, how it’s being used, and that you’re never left in the dark.

What to Watch For...

Clear plans and timelines

Ethical developers should have a structured plan that shows how your investment will be used and when you can expect returns. If timelines keep changing or remain vague, consider it a warning sign.

Regular updates

A trustworthy developer won’t go radio silent after receiving your funds. They’ll keep you informed of progress, sharing both the good and the bad and what to expect if things change.

Financial transparency

They should provide financial reports that outline where funds are allocated. If they’re not sharing details or are vague about allocations, dig deeper.

Ethical developers make sure you’re informed every step of the way because that’s how trust is built. You wouldn’t lend a mate a grand without knowing why, so why part with hundreds of thousands if not millions without crystal clear communication?

2. Security: Is Your Investment Protected?

Trust is essential, but trust backed by security is even better. Ethical developers should have safeguards to protect your investment, ensuring that if things go off track, you’re not left in a vulnerable position. It’s about having a solid backup plan.

What to Watch For...

Multiple Exit Plans

Your developer should be able to explain an array of outcomes should the project not go to plan and have means of returning your money back to you should it go wrong. If there isn’t many paths then this should be considered higher risk!

Asset-backed security

It is common practice for your loan where possible to be secured against real, valuable assets like property, land or the business. This ensures that if the developer can’t repay, you still have a way to recover.

Personal guarantees

If you are not happy with the level of security offered, you could also look to get a personal guarantee from the developer. Ethical developers tend to sign these more easily as a way of commitment show paying you back is a priority. A personal guarantee doesn’t always need to be signed but consider it if the developer is not putting any collateral in for themselves giving extra peace of mind.

A developer borrowing ethically will prioritise the security of your investment and ensure the risks are mitigated. They won’t leave you hanging if the project faces setbacks.

3. Fairness: Is the Deal Balanced?

Here’s the big one often not quite balanced in your favour—fairness! Both you and the developer are here to make money, but ethical borrowing means the terms and conditions benefit everyone involved, not just the developer. The rewards and risks should be shared fairly.

What to Watch For...

Reasonable returns

If returns seem too high to be true, they probably are. Ethical developers won’t lure you in with inflated promises; they’ll offer reasonable, achievable returns.

Risk-sharing

If your developer partner is ethical, they won’t place all the risk on you. Fair deals ensure both parties have a stake in the outcome.

Fairness is about more than just financial terms. Ethical developers also consider the environmental impact, local community welfare, and fair treatment of workers. If you get the sense they are cutting corners in the search for a quick buck and not thinking about the long game, then chances are, they probably are and not borrowing from you ethically.

So Watch Out, But Don’t Freak Out

Ethical borrowing boils down to these three principles—transparency, security, and fairness. When lending to a developer, you want to feel confident that your money is being used honestly and that everyone’s best interests are considered.

Sure, there are risks involved with any investment, but by asking the right questions and knowing what to look for, you can ensure you’re working with a developer who isn’t just borrowing to build properties but is doing it the right way. You want to sleep easy at night, knowing your money is safe, the deal is fair, and the project is contributing positively to the community and environment.

So, before you dive into your next property investment, ask yourself: Is my developer borrowing ethically? If the answer is yes, congratulations! You’ve likely found a solid, sustainable, and fair investment opportunity. If not, keep looking. Your money deserves better.

Happy investing!

By Max Rayner

CREDITS

Max Rayner is the Director of Stuart Clinton Property, focusing on housing the UK’s most vulnerable people.

Stuart Clinton Property develop award winning Care Homes and Supported Living schemes across the UK working closely with high net-worths wanting to make a difference.

https://stuartclintonproperty.co.uk

https://www.thesupportedlivingplatform.co.uk

Impact Investing And The UK Property Sector

Fri, 08 Nov 2024 12:17:41 GMT

Choosing Investments That Align With Your Values

Choosing investments that align with your values

A quick Google search will show that ethical and purpose-driven property investing is growing in popularity.

Whether funding projects that help underrepresented communities or supporting eco-conscious housing developments, impact investing is a fresh strategy for modern investors.

In fact, the UK property sector is leading the way, with housing accounting for 13% of the nation’s impact investment portfolio [1].

More than ever, there’s an interest in aligning investments with personal values; “Increasingly, investors are defining long-term value as not only realising attractive returns but also generating a positive social or environmental impact.[2]”

But how does this translate for property investors?

Impact investing can be passive or proactive. Whether intentionally seeking opportunities that offer growth adjunct to fulfilling ESG principles, or whether you choose a particular property strategy that is more impactful or purposeful, for example typically a social housing model could be seen as the ethical choice, and there are strong returns to be made.

And these days the property sector is leveling up, with more transparency on operations and greater emphasis on mission statements and company vision, which means that choosing an ethical investment is becoming easier.

For property investors, this creates an exciting opportunity to tap into a market that not only offers solid returns but also addresses some of society’s most pressing issues.

Impact investing has far-reaching effects.

The UK impact investment market has grown to £76.8 billion in assets, with 88% of investors hitting their impact goals. Housing remains one of the top sectors, offering real potential for both social and financial returns [1].

When we consider our options and carry out rigorous due diligence on a company, organisation or individual, and then make a choice to invest, the positive knock-on effect that can trigger shouldn’t be underestimated.

From revitalising communities to offering affordable housing, investments in housing are driving real change [1].

Investors are evolving

Gen Z and millennials are presenting a new, vibrant cohort of investors and developers, with a strong drive to align values with their financial goals.

These groups are not just looking for financial gains; they want to know their investments are contributing to meaningful societal change. Social housing models, supported living contracts, eco-friendly buildings and affordable rent are all options that focus on improving communities. Business structure, such as evidently diverse teams, charitable partnerships and environmental initiatives are all affecting factors for investors when decision making.

The UK housing crisis: An opportunity for impact investors

The government is more targeted now too, with environmental and community impact featuring much higher up the agenda. And with this central support comes a wider validation in making ethical choices.

Your investment choice has the potential to allow a feeling of personal contribution to a greater cause. The UK’s ongoing housing crisis presents a unique opportunity for impact investors to step in and make a difference. By focusing on underfunded areas such as social housing, supported living, or eco-friendly developments, investors can directly contribute to solving some of the country’s most critical issues—while still achieving financial success. As the government increasingly prioritises sustainable and socially responsible solutions, the alignment between policy and impact investor goals has never been stronger.

Final thought

Impact investing in the UK property sector is more than just a trend—it’s a movement toward a more responsible, sustainable, and community-focused future. Whether a seasoned investor or new to the sector, there’s an opportunity to combine purpose with profit, and it’s now more accessible than ever. By carefully considering your investment choices and the impact it can have, there are creative ways of securing strong returns while also playing a part in creating long-lasting change. Look for investments with a focus on transparency, ethics, and community benefit, and your property investing choices can become a force for good in society, and it reflects well in your portfolio.

References

[1] The UK impact investing market: Size, scope and potential (2024 Edition)

[2] Impact Investing: Aligning Your Portfolio with Purpose (2024)

Nicky Diver-Clarke is a writer, marketer and ethical property investor. Passionate about aligning investments with social impact and personal values. She leverages data, trends, and her experience as a strategist to identify property investment opportunities that offer both positive social impact and financial returns.

CREDITS

Nicky Diver-Clarke is a writer, marketer and ethical property investor. Passionate about aligning investments with social impact and personal values.

She leverages data, trends, and her experience as a strategist to identify property investment opportunities that offer both positive social impact and financial returns.

THE POWER OF THE FUNDING STACK

Mon, 04 Nov 2024 11:11:19 GMT

How Investors Are Maximizing Property Investment Returns

When it comes to investing, having flexible ways to fund new opportunities is key to success. If we

specifically consider property investment, one particular strategy that investors are snapping up is by

endorsing the use of a funding stack.

A funding stack - also known as the capital stack - is a financial structure that describes the layers of

funding used to finance investments, and most commonly; property development.

Consider a funding stack like a layered cake. Each layer represents a unique funding source,

individually contributing to a specific role, priority and level of risk. The purpose of a funding stack is

to help investors and developers make the most of their capital, whilst also reducing financial

commitments by diversifying risk.

Funding stacks can be complex, so understanding the intricacies of these structures is crucial for

investors. In this article, Marc Champ, Managing Director at Wharf Financial, describes the different

lending options available in the funding stack, and the advantages and disadvantages worth

considering.

Funding Stack: Equity and Debt

Before diving into the pros and cons, it’s important to understand how a funding stack works.

A typical stack has three layers; senior debt, mezzanine debt and equity, with equity at the top of

the stack followed by debt solutions. As investors with capital to deploy, how you’ll approach the

hierarchy of funding will depend upon its structure and your potential risk vs ROI.

By way of example, angels wanting to lend may provide funding (the debt) to a developer looking to

refurbish a derelict property. The developer will front the initial equity before looking for investment

to fund the rest of the project. Once the project is complete, the developer will most likely refinance

or sell the property for an increased value before repaying the angels’ capital and investment

returns.

Following an assessment of the opportunity, investors can decide how risky the investment is. If a

low loan-to-value loan is required (for example £100,000 against £1,000,000 i.e 10%) the

opportunity is deemed fairly low risk. However, if it is more risky, for example an 85% LTV

investment, you can either encourage the property developer to increase their equity - subsequently

reducing your loan amount - or reduce your exposure by bringing in other investors on an second

charge or mezzanine debt basis.

Equity investment is always at the top of the stack, followed by mezzanine or second charge finance

if required, then senior debt lending at the bottom. Debts are repaid from the bottom up.

Types of Finance In The Property Funding Stack

Equity Investment

In property development, equity is often provided by the developer(s) and forms the most flexible

part of the funding stack – much like a deposit. Typically, equity is raised via the developer’s own

funds or by attracting joint venture partners. It does not incur interest costs, but it does reduce the

overall ownership stake, sharing both the risks and returns of the investment.

Senior Debt

Senior debt loans typically make up the largest portion of the funding stack and use the property

itself as security. That’s why it gives investors priority in claiming the property if the borrower

defaults. This type of debt is considered the most cost-effective option due to its low-risk nature;

making it attractive for investors looking to explore buy-to-let, development or commercial

property.

Types of senior debt finance include:

Development finance
Refurbishment finance
Commercial mortgages
Mezzanine Finance

Mezzanine finance is a hybrid finance solution, often used to plug the gap between the senior debt

and equity. It holds a riskier position, therefore carries higher interest rates but enables equity

investors to access more capital with limited upfront funds.

For development projects where additional capital is needed beyond what a senior loan provides,

mezzanine finance is a popular solution.

Second Charge Loans

A second charge loan is another type of finance that sits behind the first charge. This type of loan

can be effective for short-term needs or value-add projects, but as they’re subordinated to senior

debt, have higher interest rates and carry more risk.

By combining these types of investment loans, property developers and angel investors can create

an optimised funding stack by balancing cost, flexibility, risk and projected ROI.

Risks Considerations of A Funding Stack

A funding stack is an essential tool for investors looking to diversify funds and maximize returns

when investing in property. However, while the funding stack can enhance financial flexibility and

reduce personal capital outlay, it also comes with distinct risks that investors should understand and

manage carefully. Here are four considerations for angels to consider.

1. Priority and Security Risks for Second Charge and Mezzanine Funders

In a funding stack where debts are prioritised by seniority, senior debt investors holds the most

important position as these funders will be repaid first if defaulting occurs. The other forms of debt,

like mezzanine finance and second charge loans, come after senior debt in terms of repayment

priority. As such, these types of debts bear risk for the funders, that’s why they come with higher

interest rates attached to them.

2. Economic Volatility & Market Risks

For investors deploying debt finance, economic volatility and market changes may cause the

borrower to suffer from cash flow management issues. Should this occur, borrower’s may struggle to

meet repayment obligations, subsequently impacting your investment and potential returns.

3. Over-Leveraging & Negative Equity

One of the biggest concerns of using a layered funding stack is over-leveraging. While leveraging

different types of debt can enable a borrower to control a larger asset base with less personal

capital, it also increases exposure to negative equity.

This presents a significant issue for investors. If we were to face a market downturn whereby

property values decline, an over-leveraged property stack could increase the borrower’s

vulnerability to negative equity, subsequently jeopardising investor funds. If the property is worth

less than the outstanding debt, it may become more difficult to sell or refinance. Having a situation

of negative equity can be challenging, especially when a borrower is compelled to sell assets because

of financial constraints.

4. Reduced Control and Authority Dilution

By becoming a debt investor, all partners usually agree to split profits and this can result in dilution

of returns. Furthermore, investors may not have a say in decision making which potentially limits

authority over the project. Such situations may lead to conflict if there are differences in project

strategies or financial objectives. Investment arrangements may also incorporate terms that give

precedence to preferred equity payouts, therefore influencing the profits available to other parties

involved.

Managing Property Funding Stacks

For angels considering investment in property, it is typically considered a robust investment and can

be highly lucrative if successful. By diversifying funds across different projects with multiple funding

stacks, angels have found this to be a popular way of leveraging multiple funding sources to

maximize returns.

To reduce the chances of encountering challenges, investors should not only be aware of the

possible risks, but also perform thorough research on the borrower, property, security and project

by carrying out sensitive due diligence and practical cash flow estimates.

Collaborating with expert property finance advisers who can assist in developing a strong financing

strategy is also key to success. By collaborating with market experts, the immediate financial need

can be identified with future investment objectives carefully considered, ensuring viable investment

plans are created for success. Reach out today to the team at Wharf Financial for more information.

By Marc Champ

CREDITS

Marc Champ is the The Property Finance Broker who sources the most competitive finance for property investors and developers.

With a comprehensive UNDERSTANDING of my clients’ lending requirements, I provide modern financial SOLUTIONS underpinned by an exquisite level of service.

My philosophy is to tailor financial packages to exceed the expectations of my clients. I help property investors & developers grow with quick, cost effective and professionally delivered financial solutions.

Propemomix Sunday Supplement 20 Oct 24

Sun, 20 Oct 2024 12:53:51 GMT

“Clowns to the left of me, Jokers to the right, Here I am stuck in the middle with you” - Song by Stealers Wheel

So - the deals kept rolling in this week as the property traders and professionals I speak to on a daily basis kept commenting that they hadn’t seen it this busy for many a long year - with this many realistic vendors. It’s hard to keep up. Very enjoyable stuff. Ever more properties secured as budget fears reach fever pitch, before someone let the cat out of the bag that I’ve mentioned a few times in recent weeks and months - CGT isn’t really going up much, it seems now. Not moving on property, we are “leak-assured”. The best bet would be the “special” (or discriminatory) rate on property will be the new rate on CGT for next tax year. 18% lower, 24% higher, moving from 10% and 20% on shares.

The speculation in the FT and other worthwhile periodicals is also that BADR - Business Asset Disposal Relief - the old money Entrepreneurs’ relief - is being got rid of. 10% on the first £1m, a lifetime allowance. Likely to be a very limited incentive for startups anyway, so I guess RR feels as though they are just giving money away - and being honest, she’s probably right.

To be honest - the panickers aren’t listening, and still looking to cash up because they just don’t trust a Labour chancellor just yet. Will they AFTER October 30th? Who knows.

The primary challenge still remains in filtering through the vast number of opportunities that are out there this week/at the moment - this is the skill that pays the bills. If it isn’t urgent, it’s shelved until October 31st. There will then of course be a new swathe of activity, probably mostly limited-company focused, before April 5th (if my speculation on the date of change is correct - there are multiple choices actually, including April 5th 2026 - which would be quite canny).

Nice problems to have, let’s face it. It’s an absolutely amazing real-time example of living that Warren Buffett phrase I used a few weeks back. Be fearful when others are greedy and be greedy ONLY when others are fearful.

For the deep dive I want to get across a few of the real-time reports that I don’t cover with regularity - just to check in on exactly what the budget is doing to the rest of the economy. I’ve got a couple of tax thoughts as well, regarding what might change - not a huge amount, because I don’t see it as something worth spending too much time worrying about.

Over to the staple diet, then.

Chris Watkin asked himself that question once again - What is currently happening in the UK Property Market?

A reminder. Chris is a stats guru who analyses the UK portal data which is aggregated for him by TwentyEA. It is a much better and more in depth writeup than Rightmove or Zoopla provide with their own data and goes into some proper detail - and can be invaluable as an “early warning” of a whole variety of things that might (and will) go on in the market in the future. Real-time trumps the snail's pace at which bigger data, and especially Government, moves.

Listings remain very healthy (too healthy if you are trying to sell, to be honest). It certainly is keeping market pricing honest though. Listings are still 7.6% higher than pre-pandemic levels, but luckily gross sales are 7.8% higher than pre-pandemic levels!

September’s SSTC figures have also been analysed by Chris now as well. September has been called a bumper month by both Nationwide and Halifax - in fact, Chris sees SSTC prices as about equivalent to July’s (before an inevitable, very small, dip in August). This plays out at the land registry in about 5 months’ time - but it indicates stable house prices for the moment (which makes sense as rates are just holding up, rather than really progressing downwards - as you’ll know if you read regularly, the pressure on the gilt yields has been upwards in the past few weeks, not downwards).

The fall-throughs are sticking at about 1 in 4 sales at the moment, which is very much in line with the 7-year average. Reductions are also holding up - well above the long term average, 14% was reduced in September versus the long-term average of 10.6%. This is symptomatic of so many listings, of course. You need to stand out to sell, and you need to get to a realistic sales price to sell.

Total properties SSTC so far in 2024 exceeds any pre-pandemic year from 2017-19, and is under 50k sales behind 2022 now - with us knowing that 2022’s figures REALLY dropped off from here (because of……oh, it’s every week isn’t it).

Resi stock on the market reached 724,312 by the end of September - the biggest by some way, at what’s usually close to the peak of the stock for each year. In the “lean stock” years of 2021 and 2022, this number was 438,005 and 506,614 respectively; the more stable market numbers vary between about 600k and just under 700k, so there is not an absolute glut on the market, but it is an 8+ year high and so needs to be recognised as such.

Pipelines (sale agreed stock) look very healthy (although of course some of this is because they are slower than they used to be) at 502,994 around the country - compared to 375k or thereabouts in each one of 2017-18-19. The metric “Pipeline/total stock” tells us quite a bit about market heat, if I put that together (so this is stock that is sale agreed, to be clear, divided by (total stock sale agreed plus total stock on the market yet to be agreed)):

Sept 2017: 38.2

Sept 2018: 35.8

Sept 2019: 36.2

Sept 2020: 41.4

Sept 2021: 55.7

Sept 2022: 50.5

Sept 2023: 38.3

Sept 2024: 40.1

I feel this should have a name like the “Lawrence Thermometer” but that sounds rubbish, so if any keen readers or listeners fancy making a suggestion, please leave me a comment! It was looking quite close to body temperature for a while but the pandemic sure did bring along a heavy case of the ‘flu!

The higher the number, the hotter the temperature in the market by implication. Interesting to see though on this measure that Sept 2023 looked hotter than Sept 2019, even though prices were wobbling a little (2019 was pretty flat, too, though).

Enough statistical innovation - we will press on with the macro, but safe to say - if you are looking to sell, this market looks OK, but I’d get anything on PRONTO, because even though November looks like it might be OK this year, we all know December is a waste of time for selling (and a fabulous, fabulous month to buy in on the other side of that coin).

Macro time then - that meaty third week of the month. Unemployment and the Labour Market. Inflation (you know we aren’t avoiding that one). Private Rent and House Prices report by the ONS has to be covered. That leaves room only for my pet obsession, the gilts and swaps yields of the 5-year duration.

Unemployment - a surprise downside print of 4%, where the consensus was 4.1% (to remain the same). The consensus isn’t worth a lot in the Labour Market figures, because the commentators seem to just guess “same as last month” every time, unless something major has happened. Generally speaking that isn’t a bad guess, though.

As you know, that’s normally where the commentary stops in the “economics entertainment industry” media. We go a bit further.

When I was at the Property Investor Show appearing on an expert panel a couple of weeks back (they must have been short of experts, eh?) that was chaired by Russell Quirk, property commentator extraordinaire, I pedantically corrected him when he said unemployment was 4% and thus employment was 96%. This wasn’t just to be a pain (that’s a bonus), but because we have a significant inactivity problem in the UK post-covid compared to where we were. Internationally we actually stack up OK, but nonetheless there’s no reason not to be striving to get back to where we were.

Employment is actually now at 75% which leaves 21% for inactivity. You’d think. However - I’ve pointed this out before - unemployment doesn’t have an upper age cap on it, so if you are seeking a job at 65+, you are still classed as unemployed. Employment - and inactivity - is capped at pre-65th birthday, so inactivity is ACTUALLY 21.8%. This is down 0.3% on the quarter - good news - but still adrift of our low pre-pandemic, which should be our target at the very least. Inactivity is still up 130 basis points or 1.3% higher in nominal terms than it was in Dec 2019-Feb 2020, when it was 20.5%

The employment rate is up 0.6% quarter on quarter, which is a big win and this cements what I was saying some months back about it looking like we’d found the bottom in our unemployment figures and weren’t going to go back above 4.5% unemployment. Good news.

Vacancies are also always interesting, and the drop to 841k vacancies in September was the 27th consecutive drop but STILL remains above pre-covid levels.

Earnings also fall out of this data set. 4.9% was the “real” figure - not including bonuses - so under the psychologically important 5%, but still high enough to mean more price rises next year to keep up with wage demands.

The headline figure was 3.8% (including bonus) - still distorted because of negotiated bonuses paid to public sector workers as “one-offs” for pandemic service over the summer months in 2023. The figure used for the pensions triple lock for next year is 4% - matching neither of these figures - and don’t ask me why. The triple lock is laughable, ridiculous, and unsustainable - but politically VERY difficult to get rid of.

Annual pay growth adjusted by CPIH (inflation including housing costs) was 1.9% in real terms. A really healthy number when it sits around the 2% level.

31k working days were lost thanks to labour disputes, which are still ongoing and will be ongoing as the unions try their luck with their well-funded allies in power. Having seen what looked like a rollover after a long, arduous and costly battle with the previous mob, there will be upset in this camp next year, I predict.

Onto inflation then, the mastermind specialist subject of Propenomix. The 1.7% caught me by surprise, this week, on CPI - I thought we would just tuck under 2% and hit 1.9% because of the base effects of September 2023 dropping out, plus the drop in the oil price. There was a little more than expected, on the downside, which is nice. One of the biggest, if not the biggest, downside misses for years.

There’s that HUGE psychology of course of CPI printing below 2%, and not only did it beat 2% it beat it by some way. This prompted (of course) a million posts about cutting interest rates, but also many claims that “inflation is over”. I think - rather than letting one month get us carried away - we should take a closer look, don’t you?

Oil - as an aside - was only down about 7% in September, in $ prices. However, Sterling also strengthened against the dollar so we had a double bubble on “petrodollar” products. (Sterling opened the month getting $1.313 to the £, and closed at $1.34). Both of those have unwound (oil a bit, Sterling a lot - now back down to $1.303) so this has the indications of a somewhat “lucky” month.

So. CPI at 1.7%. Fantastic. CPIH (including housing) - 2.6%, a lot higher, but still down from the 3.1% print the month before, and that’s something to be grateful for. The month-to-months were also very flat, which is useful.

Now Core CPIH was still up 4% (down from 4.3% in August), and CPIH services still ploughed on at 5.6% (still far, far too high). Core CPI was up 3.2% and again was well under consensus which predicted 3.4%. RPI also really dropped - for those relying on it for leases - to 2.7% down from 3.5%, so that’s welcome respite for the tenants I am sure.

I like to keep abreast of OOH - the owner-occupier housing cost inflation rate. The best proxy for the cost of keeping a roof over our heads. We STILL don’t seem to have hit the top here with that index printing SEVEN POINT TWO percent this month. I have to shout, because NO-ONE talks about this metric, and they really should. The pressure on households at the base level of the pyramid in Maslow’s hierarchy of needs is significant, and ongoing, and yet to peak it seems.

It’s by far the biggest contributor in percentage terms, and also it takes a good slice of a household’s disposable income of course.

So - and of course you will decide for yourselves - is inflation REALLY licked just now because of a “perfect storm” of a month as far as oil prices and sterling go? Or - with a 10% rise in energy prices from 1st October having already kicked in, a weaker pound and an oil price possibly on the up again - will we reverse a fair bit of that in October’s figures? I think we might…….

So - staying with the ONS, we move on to the Private Rent and House Prices report. This is September’s rental market and August’s sales market, just to confuse us all further.

Rents stayed at an 8.4% increase year on year for September, same as August’s number. Remember - the ONS uses a sample of 500k+ rents in order to track this, NOT just tracking what new rentals are going up on the portals at - so this data is much more accurate. The high was in March at 9.2%.

We now hit an average rent in England of £1,336. Northern Ireland led the pack on percentage increases though, with rents up 9.5% (that’s to July, rather than September).

London rent inflation was at 9.8%, and rent inflation was “lowest” in the South West and also Yorkshire/Humber (still at 6.3% year-on-year).

The ONS based on land registry transactions sees prices up 2.8% year-on-year (to August) - up from 1.8% from last month’s figure, so a big jump. The actual month-on-month figure was a massive 1.5%. That broader 2.8% figure breaks back to 2.3% England, 3.5% Wales, and 5.4% Scotland. This is the 6th consecutive month with an increase after 8 consecutive months with decreases.

The North West is still winning on prices, and London and the South East have woken up a bit as well. The Midlands remain around the middle, with the South West (and the East) lagging. When it comes to rents, the Midlands are just above average, with London and the North West leading the charge, but things are quite clustered and are between “a lot” and “an awful lot” in percentage terms. I’ve used the regional breakdown as this week’s image because it gives you a really good visual of where rent might be overpriced and not have that much affordability headroom any more.

I’ve said a number of times recently but AFFORDABILITY IS THE ONLY FACTOR THAT WILL KEEP A LID ON RENTS. In a market like this, anyway.

We round off the macro, as always, with the yields. We had a “down week” which is what you would expect when you miss inflation consensus by 0.2% to the downside. The market opened at 4.077% and was happily testing 4.1% and above before that gap down on Wednesday morning which was a 0.1% drop overnight. The week closed at 3.921%, below that psychological threshold but still plenty expensive enough, in my view.

The impact on the base rate - almost certain now that there will be a 0.25% cut at the start of November’s meeting. There is speculation about 0.5%, and also a back-to-back cut in December - I still don’t agree with either of those as the likeliest outcomes. Does this mean a guaranteed drop in the bond yields of the same amount? Absolutely not - but still I would expect it to move downwards 0.1-0.15% in that week (a couple of weeks’ time)

Thursday’s 5-year gilt close was 3.959% and the swap closed at 3.669% still preserving this massive 0.3% discount. Target mortgage pricing 5.7% with investment grade yields at 8.14%+ on buy to let properties.

Deep Dive business then, in that case. Firstly - a shoutout to a few of the reports I read but don’t mention much in the Supplement. The IPA Bellwether report - regarding marketing. (The Institute of Practitioners in Advertising, if you were wondering. No beer involved, craft or otherwise). Guess what….

Total budgets have failed to grow for the first time in 14 quarters. The blame is with…..the budget! Video is still expanding though. Industry-wide sentiment is eroding with downbeat financial prospects, when we look company-specific.

Nothing we didn’t already know, but the reason it is called the Bellwether report is because of its ability to spot recessions coming - because, you might be familiar with the phrase, “marketing is the first thing to go”.

The net balance in Q2 on spends was +15.9% - moving to 0.0% in Q3 (average over the past 13 quarters was +8.8%). PR and events were still growing as they become more of a battleground, it seems. The sentiment in the industry is the worst since the closing quarter of 2022 when (oh, it’s just every time, isn’t it!).

The thoughts from the commentators is that this is a temporary trend not a permanent one, as it is just more budget hesitancy.

Perhaps the Natwest Regional Growth Tracker - another useful publication - will tell a different story? Oh no. No it won’t. “Autumn Budget Dominates Outlook”.

What did we learn then? Northern Ireland is still roaring forward with its post-Brexit strategic advantages. Wales is contracting (on a business activity). The print though - as a whole - similar to the way the PMIs work - was 52.6 for the UK. More tales of stability but budget fears.

Finally on the report roundup - the REC/KPMG report on jobs. A more real-time (and more trustworthy, frankly) snapshot than the ONS Labour market survey. The ONS figures are OK given the lag, but do tend to change fairly significantly as more data comes in. This works better as an early-warning system.

The report tells a tale of a continually softening labour market. Lowest increase in permanent salaries since February 2021. Rises in candidate availability. However from the recruiter perspective, woes as companies permanent staff appointments continue to decline.

The contraction in vacancies was the steepest since March. Surprise surprise though: “The slowing of hiring activity is to be expected as businesses apply the brakes on recruitment ahead of the budget, and wait for clarity on future taxation, business and economic policy”.

The change in employment laws also has businesses really worried. “This is a sign of a job market waiting for a signal” - very well put, I thought.

Perhaps the (incredibly badly timed, do better next year folks) International Investment Summit helped? We had promises to reduce red tape (alongside a change and increase in workers’ rights - go figure). £63bn of announcements (up from £28bn last time out for the other guys) - points scored.

£20bn from Macquarie (the Australian Group) is all about electric vehicle charging. I know many will struggle to get excited about that as they consider range anxiety, the real environmental impact, and the reduced incentives to drive EVs over petrol cars, although the second hand ones are now trading cheap enough, happily. You’ll recognise Macquarie, perhaps, from such successes as “Thames Water” when they lifted many billions, quite skilfully, asset-stripping, debt-fireballing and not investing in it, but made a few quid.

The project also includes offshore wind (fine when it works), battery storage (needed for volatile generation methods), better digital infrastructure (can’t be bad), some new home developments in Edinburgh and Birmingham (watch this space), and supporting the first UK reservoir in 30 years.

There was also a breakdown of the Government’s industrial strategy green paper - I’ve not had time to go through it yet, and am yet to be convinced it will add value to the majority reading and listening - I’ll report back on that one.

There’s still plenty of well-meaning but badly misguided idiots protesting about future nuclear power plants, which is exceedingly wrong-headed and a 40+ year mistake that needs reversing FAST.

10% of the £63bn was about Data Centres - and there are some big projects around, plenty of construction to be done, and some ongoing jobs on the back of them. I thought that was all pretty heartening to see, although the energy requirements are a concern for locals (genuinely so - these are hungry, hungry beasts).

£1.1bn into a Stansted expansion which is long overdue. Here are the four principles laid out by the business secretary:

1) Building long-term stability

2) renewing its commitment to free and fair trade

3) cutting costs for investors

4) working in partnership with business and trade unions

1 - I could believe that. 2 - what will it actually MEAN though, because there’s a problem on the EU front there that you might have noticed. 3 - really, because it looks like employment is getting more expensive including extra national insurance? 4 - easy to say, difficult to do. Good luck there.

Most of the rest of the £60bn was frankly recycled announcements (Amazon are investing £8bn but that was announced last month). That always happens in these scenarios though - nothing different from any other government. Overall it felt as if the biggest players in the world were at the table to do business but did they get what they wanted and needed? We will find out. There was also a leak via LBC that HS2 WOULD get to Euston and WOULD also continue to Crewe - but we await anything official on that front. Post-budget you’d imagine, and could still be scrapped.

The noises that come out of anywhere near 11 Downing Street suggest that there are so many options, that keep getting truncated, that Rachel Reeves has been considering. Couldn’t really do what she wanted on pensions, because it would hurt the public sector. CGT LOOKS set to remain for property and increase on share sales and all other capital gains - perhaps to the same “special” property rate as discussed.

Will the pre-election promises be broken already? I really don’t think so. As a reminder, the ridiculous promise was no rise in Income Tax, VAT, NI for workers, or Corporation Tax. About 80% of the tax take, then. Genius.

There’s been a lot of speculation about land tax reform - council tax, or more radical solutions. I don’t see radical coming here, at this time. Could be wrong - everyone still remembers the Poll Tax riots and the end of Margaret Thatcher too clearly.

The likely routes look - at this time - to be - employers NI up (earns £8.5bn per % increase - massive). Changing inheritance tax, including reliefs on certain things such as investing in shares on the struggling AIM market, which can cut your “ticking clock” from 7 years for full relief down to just 2. Business asset disposal relief might well go to raise £1.5bn. Extra council tax bands (which really won’t be controversial at all) could raise £3bn-ish. Raise inheritance tax on trusts is worth half a billion and feels quite “Labour”. Stamp duty COULD be raised on second home purchases more in line with Wales (4%) and Scotland (6%) - I wouldn’t think it would go above 4% but there has been precisely zero mention of this, but I don’t know why. I am half expecting it!

Extending the fiscal drag looks like a complete banker. Reeves could raise another £7bn here - in theory - simply by freezing the income tax thresholds (and other tax thresholds) beyond the end of the 2027-28 tax year which Rishi Sunak had already taken advantage of. As inflation calms this will do less, but still £7bn of paper money will work very nicely for that black hole.

There’s also a lot of speculation that has kicked back off around the £19bn of cuts that were already baked in. There’s been leaks around cuts to the benefits system worth billions - which are badly needed on non-means tested benefits. There’s chat of austerity - because that size of cut would be right up there with George Osborne’s most swingeing.

There’s going to have to be some serious incongruence - as there already appears to be - between the environment for growth and just doing a better job than the last lot.

What I do know is that this is the best environment for buying investment property I’ve seen for many years. I hope you are using it to your full advantage, and we might get an extension which will be less “fever pitch” but still look like disposal depending on what clues RR leaves in her speech for future years.

By Adam Lawrence

CREDITS

Written by Adam Lawrence , founder of Propenomix - the weekly anticipated property and economics Sunday Supplement newsletter on LinkedIn.

Adam’s corporate career was in Wealth Management for boutique investment firms in Switzerland including a role as a cross-business consultant for one of the UK’s top 10 lenders. He also ran a betting syndicate for 5 years between 2006 and 2010.

Adam’s property career started in earnest in 2011 and since then he has been involved in over 700 UK properties with 90% of them retained.

Subscribe for free to Adam's Propenomix weekly Sunday Supplement.

Not All Property Developers Are The Same

Tue, 01 Oct 2024 13:29:58 GMT

Can They Make Your Money Work?

Not everyone is the same. This simple yet profound statement applies to all industries, but none more so than the property sector, where the investment landscape is one of the most fragmented industries I’ve known. Property investment, as accessible as it may seem, comes with a range of risks and complexities. The phrase “Anyone can be a property developer” floats around with surprising ease. The truth is, while anyone with the funds can indeed buy a property, not everyone can execute the entire development process successfully, much less guarantee a return on investment.

With little regulation in place, the barriers to entry in the property development world are low. This lack of oversight means that the person sitting next to you could very well be a property investor. But the critical question is... are they qualified to take your money and provide you with a guaranteed return, with the interest agreed upon, and on time? The unfortunate answer is that most aren’t. True, anyone can call themselves a property developer, but only a handful have the experience, foresight, and skillset to successfully complete projects and return investor funds with a profit.

The Challenges Of The Property Development Sector

Let’s be frank: not everyone can make money in property development. It’s not simply about buying a run down property and sprucing it up. To make a project profitable, the process often involves an intricate dance of market knowledge, financing and refinancing, compliance and planning, budgeting, time management and negotiation. Most property developers are really good at only some aspects, almost never are they good at all of it, which is why you're never really working with just one person. You must consider the capability of all partners and services involved before you decide to park your money with them, even for just a short period. What you often find are developers who overpromise but underdeliver, some end up losing money for themselves and for their investors.

Not every project yields a profit, and it’s rare that a developer can guarantee they will pay you back in full, on time, with interest. This risk inherent in the industry can make navigating the property sector challenging for high net worth and sophisticated investors looking for a stable return. As an investor, you need to understand that while the allure of property is strong, the devil is in the details. With the current fragmented market, the differentiator often boils down to the individual developer and their abilities.

The Differences Among Developers

From the outset, every property developer might appear to be the same. Most property developers didn’t start their careers in property. It’s a field where backgrounds vary significantly - I have met developers move into the property profession from backgrounds in finance, law, construction, architecture, while others may come from seemingly unrelated fields like, catering, retail, education and even farming.

The key point is that these backgrounds create varied skills and capabilities. Many developers bring invaluable transferable skills from previous careers that serve them well in property, whether it’s strategic thinking, project management, or negotiation skills. Others have managed to thrive because they’ve somehow managed to stick at it for long enough to gain valuable learnings through sweat and scars. They have the bruises and experience that come from projects that went sideways, and that learning has turned them into seasoned developers who can spot trouble before it arises.

Then, there are those who have invested heavily in marketing to create an impressive façade of success, even if the track record in reality doesn’t match up. Conversely, some developers have a track record of completing successful projects but are not good at telling their story because they don’t have experience in marketing or simply don’t understand how to communicate their achievements effectively. It leaves investors like you trying to differentiate between the marketers and the craftsmen - the developers who talk the talk versus those who can walk the walk.

Identifying The Right Property Developers

So, how do you tell the good from the bad? How do you identify a developer who is worth lending your money to for a fixed return?

Track Record

One of the most critical factors is the developer’s track record, although be weary that past performance does not necessarily promise future success! You need a developer who can demonstrate a history of completed projects. Projects rarely are delivered on time and within budget - it is how they navigated the problems and still paid back what they owed that matters most. The ability to replicate success across different types of developments and in various economic conditions is also a good indicator.

Financial Stability

Excellent developers should have a clear understanding of financial planning and risk management. They should be able to show you their plan for financing the project, as well as contingency plans if things don’t go as expected.

Communication And Transparency

Transparent communication is non-negotiable. Developers should be willing to share their progress, answer questions, and be upfront about potential risks and issues. Avoid developers who are evasive or who fail to provide clear, concrete information. Trustworthy developers will provide detailed reports, updates, and realistic timelines.

Market Knowledge

Property development isn’t just about buildings and interiors, it’s about creating something that will be in demand. The right developer should have a deep understanding of the local market, including current trends, potential opportunities, and threats. Their projects should be located where the demand will be, not just where properties are cheapest to add value where they will not be valued.

Professional Relationships

An excellent developer often has strong relationships with reliable contractors, architects, and local planning authorities. These relationships help streamline processes and mitigate risks. If a developer has a trusted network of professional partners, they’re more likely to deliver a successful project.

The Compatibility Factor

Let’s not underestimate personality and compatibility in this equation. Investing in property development is a mid to long-term relationship. You’ll want to work with a developer whose approach aligns with your own investment philosophy. Some developers are aggressive, looking for the highest returns with higher risks, while others are more conservative, focusing on steady, predictable gains. Compatibility between your risk tolerance and the developer’s strategy is crucial for a successful partnership.

There are developers out there worth proactively seeking and backing, but the process requires time, effort, and due diligence. The question becomes - is it worth the hunt? The answer is often yes, under the right circumstances and given that the returns from successful property developments can far exceed those from more traditional forms of investment.

The Viable Strategy Of Private Lending

Private borrowing, often referred to as building a property portfolio using “other people’s money”, is not just a buzzword. It is a viable, tangible strategy that can generate fixed returns for the conscious investors. However, it’s also one that needs to be navigated with care. It’s critical to know exactly who you’re lending to, their track record, and their ability to execute a project effectively. Some developers have genuinely learned how to make this work for everyone involved - themselves, their contractors, and their lenders.

The goal here is to find the developers who have the ability, experience, and honesty to make their projects succeed using your money. They have a proper appreciation of the funds entrusted to them and manage them as prudently as their own. These developers are committed to building not just properties but long-lasting relationships with investors like you.

Are You Ready to Back the Best?

The property development world may be full of players, some good, many not so good, but the trick lies in finding the right people to back. Excellent developers are not in abundance, and identifying them takes both skill and patience. But for those willing to do the work, there are opportunities out there that can offer not just a fixed return but a rewarding partnership.

Watch this space. If you’re prepared to go on this journey, you may meet the developers I believe are truly worth your backing in the Angels Network , all for very good reasons, albeit some for different reasons depending on your risk appetite. Whether you are a seasoned investor or exploring the property sector for the first time, remember this: not everyone is the same. And finding the few who stand above the rest can make all the difference.

By Helen Turner

CREDITS

Written by Helen Turner, founder of PropertyAngels.Life - an initiative to accelerate the supply of adequate rental stock for the UK property market by helping high net worth individuals (HNWI) & sophisticated investors to find private lending and property investing confidence faster.

Go to the ABOUT page to read more on the initiative.

Private Lending Fuelling The BRRR (Buy, Refurbish, Refinance, Rent) HMO Industry

Sun, 29 Sep 2024 16:16:58 GMT

Synopsis From Thousands Of Appraisals

I have valued thousands of HMOs over the years. I mean thousands, too. What has been great about having this volume is that when I try to collate data or look at trends and cycles, there is a large sample pool to analyse. This allows me to get a really clear picture of not just what makes HMOs valuable or saleable, but also why landlords are choosing to sell in the first place.

The Results Make For Really Interesting Reading

Unlike any other property type, HMOs are notoriously transient. People tend to keep their homes for longer, and landlords hold onto their BTLs or commercial properties for longer, but there are some recurring issues within HMO ownership that trigger premature sales. I’ve been fascinated by this over many years.

So, What Factors Are At Play That Make HMOs Such A Transient Property Class?

First of all, it’s the fact that they are widely missold. “Quit your JOB with a high-yielding, hands-free investment,” “Cash-flowing, armchair investment,” or “Fully managed deal with guaranteed net returns.” The property education world has a lot to answer for here—the ‘get rich quick’ brigade that exploits the benefits that an HMO can provide over a BTL, for example, without really delving into the increased risks and the extra energy and time required to manage a well-functioning HMO asset.

It Doesn’t Sell Courses When Your Strapline Is, “Gain Better Returns By Working Harder.”

Some new HMO owners have found out the hard way that they couldn’t simply develop an HMO hundreds of miles away from where they live and expect a completely easy ride. This triggers some premature sales.

I also frequently spot ongoing management issues, tax changes, saturation concerns, ‘HMO fatigue,’ or a lack of lender support (down valuations, basically) as key factors that trigger premature HMO sales, and I could write extensively about any one of these with many case studies.

However, what I’m going to focus on here is perhaps the most common of them all: ‘JV (Joint Venture) Partner’ disagreements, splits, friction, or disasters. Business partner fallouts. Fixed-return lending mishaps and disasters.

'A huge portion of the HMO industry is propped up by ‘private lending’ or people rushing into JVs together, which, when it succeeds, can be the blueprint for creating many successful boutique HMOs and long-term business relationships. The issue is that the opposite is just as common.'

When most of the HMO advice on social media centres around creating highly leveraged BRRR properties using “none of your own money,” it’s no surprise that disasters are as common as successes. So, from my experience, what are the problems that lead to these disasters, and how can they be mitigated?

Would you rush into business with someone if they offered you a chance to buy a corner shop, a finance business, or a building contractor without any value add other than the money you’d be bringing to the table? No, you wouldn’t. You’d make damn sure that you did extensive due diligence on the proposal, reviewing the robust business accounts and future plans. If you didn’t fully understand it or feel completely confident, you probably wouldn’t invest.

When it comes to HMOs, however, private lenders (often extremely inexperienced) are somehow flocking to plough their hard-earned cash into BRRR HMO deals, often supporting inexperienced or not-so-liquid developers. In some cases, I use the word ‘developer’ very loosely.

Regardless of the relationship you have with the person asking for your money, and irrespective of the intentions and trustworthiness of the borrower, HMOs have pitfalls that even the most experienced can fall foul of. This bites hard if you didn’t expect it, there is no plan ‘B,’ or you need your cash back on time, as promised.

Simply Performing Due Diligence On The Individual Or Company And Trusting The Numbers Highlighted In Their Glossy ‘Investment Pack’ Isn’t Enough.

Ensuring that there are PGs in place, charges against assets, and proper, robust contracts securing your position isn’t enough either. If the numbers don’t stack, there’ll be no profits, and no profits could mean you don’t get your money back.

I’ve seen my fair share of investment packs, and they’re all brilliantly well-prepared. They include so much detail about the local area, the HMO market, and how this particular HMO development will be the best out there, with the highest rents, an amazing refinance, and a dream for all involved. The issue is, many are overly optimistic, completed naively, and rely solely on a grotesque refinance for you to get your money paid back.

It’s risky to borrow such huge sums of money when the pathway to paying it back is fraught with inconsistencies that are commonplace in the HMO planning, licensing, development, and refinancing landscape. None of these variables provide consistency, so how can the borrower be so confident?

A Little Over-Optimism In Each Area Can Be Catastrophic:

Underestimating the timeframes
Planning delays
Build delays
How that affects the cost of finance
Lowballing the build costs and contingency
Over-egging the expected rent roll
Predicting too high of a commercial refinance
Budgeting for a 10% yield and getting an 11% yield, for example

If issues like these arise, at best, the developer (borrower) can draw upon other assets and successful deals to cover the losses on any one deal. At worst, a developer may be tempted to bring in ‘new money’ constantly and effectively create a Ponzi scheme. We see it far too often.

Financial issues create cracks in relationships, and, getting back to the original point, when there are fast-tracked business relationships without concrete foundations, these cracks result in irreparable friction and damage. This leads to many more premature HMO sales.

If you want to support a brilliant HMO developer in their journey (I hate using that word!) and be one of the private investors who gets paid on time, it is crucial to think about each ‘deal’ and not just how well the borrower sells themself. Most developers are a couple of bad deals away from financial ruin, so your PGs, contracts, and charges mean nothing.

The Questions I'd Like To See Asked More:

Does the borrower know enough about the local HMO market?
Have they been in the industry long enough to go full cycle on several 3-5 year refinances?
Do they manage successfully in the local area?
Does the ‘deal’ stack? Are the room rates sustainable?
What happens if there’s a down-valuation or a reduction in lender support?
Does the borrower have potential delays covered, a large contingency, and a trusted local team with a track record of performing?

Do your own research on the local HMO market, the sold comparisons, the rents, and the viability of

what you’re being asked to invest in.

By Richard Nicholls

CREDITS

Richard Nicholls has been at the forefront of the HMO valuation and sales sector for many years and has worked with hundreds of landlords and thousands of HMOs across the UK.

He’s not just trying to ‘sell HMOs’ but create consistency and quality within the space and to provide knowledge and advice to HMO landlords and investors. In 2024 alone, Richard has visited and appraised over 400 HMOs.

Investing For Wealth Preservation And Growth

Tue, 24 Sep 2024 10:25:57 GMT

A Guide for High Net Worth Individuals

The responsibility of managing wealth effectively becomes more crucial for high net worth individuals (HNWIs), as maintaining and growing larger sums requires strategic thinking. Unlike the average debt consumer, HNWIs should seek to balance between preserving their wealth, growing it over time, and managing the risks that come with different investment choices. In today’s financial landscape, successful wealth management revolves around understanding risk appetite, diversifying portfolios, and exploring unique investment opportunities. Private lending to property developers is one of many ways to diversify your investment portfolio.

In the UK, high net worth individuals are typically defined as those holding significant financial assets valued at over £1 million, excluding their primary residence. This definition is commonly used by wealth management firms, financial institutions, and tax authorities when assessing the financial status and investment needs of individuals.

However, as of 17th May 2024, the rules for an individual choosing to self-certify to be classified as high net worth for exemption from the normal financial promotions restrictions deemed by the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, were reverted after raising the bar earlier on in the year.

By self-certifying, you can declare on signed documentation that your circumstances meet at least one of two conditions to be treated as a high net worth individual, essentially declaring that you can afford the potential risks associated with certain investment opportunities that are promoted to you. The conditions are if you have in the last financial year:

received an annual income of £100,000 or more, which does NOT include any one-off pension withdrawals, and or,
had net assets of £250,000 or more which do NOT include: your home (primary residence), any loan secured on it or any equity released from it; your pension (or any pension withdrawals) or any rights under insurance contracts. Net assets are total assets minus any debts you owe.

Self-certification as a high net worth individual means that you can receive financial promotions where the contents may not comply with rules made by the Financial Conduct Authority (FCA). You are also declaring that if you choose to enter any investment arrangements, that you understand that you can expect no protection from the FCA, the Financial Ombudsman Service or the Financial Services Compensation Scheme.

It is then your responsibility to seek advice from someone who specialise in advising on investments if and where you feel necessary because frankly, no investment activity is 100% safe and you could lose some or all of the money you invest.

This article explores the key aspects of diversifying an investment portfolio and how HNWIs can utilise them to strengthen their overall wealth management strategies.

Real Wealth: The Importance of Investing For Wealth Maintenance And Growth

Wealth preservation is the primary goal for many HNWIs. However, maintaining wealth isn’t simply about keeping it intact - it involves protecting its real value against inflation, currency fluctuations, and economic downturns. To this end, investing plays a critical role.

Inflation, for example, can silently erode wealth over time, diminishing purchasing power. If your assets are not growing at a rate that outpaces inflation, the real value of your wealth diminishes. Investing in diversified assets that yield returns greater than inflation helps protect and even grow wealth over the long term. Additionally, market fluctuations and interest rate changes also require strategic investing to safeguard wealth and maintain liquidity.

The second objective for many HNWIs is growing their wealth over time. This involves making calculated investments that provide returns higher than safer alternatives like cash savings or bonds. While riskier, investing in equities, private equity, or alternative investments has the potential for significantly higher returns. Successful HNWIs actively pursue wealth growth while simultaneously mitigating risks.

Self-Assessing Your Risk Appetite

Before diving into any investments, it’s essential for HNWIs to assess their risk appetite, which refers to the amount of risk you are comfortable with taking on while investing. Understanding your risk profile helps determine the appropriate asset allocation and investment strategies for you individually.

Questions To Help Self-Assess Your Risk Appetite:

What are your financial goals? Are you looking to maintain your current lifestyle, leave a legacy, or grow your wealth significantly? Defining clear goals will help guide your investment strategy and keep a balance between the amount of returns you will need regular access to and investments you can keep in place for longer periods of time. A middle ground example would be to invest in asset backed property developments, where you can negotiate monthly, quarterly or annual interest payments.
What is your time horizon? Investors with longer time horizons, for example younger investors can generally afford to take on more risk, as they have more time to recover from short-term market volatility. Conversely, if you are older, or need liquidity or access to your investments in the short term, you might want to adopt a more conservative approach.
How much volatility can you tolerate? High returns often come with high volatility. For example, investing in tech start-ups are seen high risk for the potentially high returns which can be as much as 100 x, depending on the business model. Assess how much fluctuation in your investment portfolio you are comfortable with, especially during market downturns.
Do you have emergency funds? Having a liquid emergency fund separate from your investments can help you ride out market fluctuations without the need to sell investments at an inopportune time, especially if they are tied to specific terms. This helps reduce the psychological pressure to avoid risk altogether.
What is your past experience with investing? Your level of comfort with different types of investments and your understanding of them can significantly affect your risk tolerance. Many investors backing property projects for example, are satisfied with knowing and trusting the people who are borrowing their money, however, it is important to understand their strategies, and delving into the numbers to ensure you also buy into their approach to successfully deliver, can help reassure you that the project is likely to benefit all parties, making the whole operation more viable.

By answering these questions, you can better understand your risk appetite and craft an investment strategy that aligns with both your financial goals and comfort level with risk.

The Importance Of Diversifying An Investment Portfolio

One of the most fundamental principles in wealth management is diversification. Diversifying your investment portfolio spreads your risk across different asset classes, sectors, and geographies, reducing your overall exposure to any single investment. The old adage "don’t put all your eggs in one basket" applies here.

Benefits of Diversification:

Risk Mitigation: If one asset class or sector performs poorly, gains in other investments can offset losses. For example, if the stock market drops, your investments in bonds or real estate may not be affected as severely.

Improved Risk-Adjusted Returns: A diversified portfolio can achieve a higher return for the same amount of risk, or reduce risk for the same level of expected returns. This is achieved by combining assets with different risk and return profiles.
Inflation Protection: Certain asset classes, like real estate or commodities, tend to perform well in inflationary environments, providing a hedge against the erosion of wealth. Meanwhile, stocks and bonds offer growth potential and income, respectively.

How to Diversify:

Geographic Diversification: Spread investments across different countries and regions to avoid concentration risk from local economic conditions. While the UK market may be favorable, investing internationally can enhance returns and reduce country-specific risks.
Sector Diversification: Instead of investing solely in one sector, such as technology or real estate, spread investments across various industries to mitigate sector-specific downturns.
Asset Class Diversification: Invest in a mix of equities, bonds, real estate, private equity, and alternative investments such as commodities or cryptocurrencies. Each asset class behaves differently under various economic conditions. Even in the case of investing with property developers, its also sensible to invest in more than one company to spread the risks.

By diversifying, HNWIs can reduce risks, improve returns, and ensure that their wealth is more resilient in the face of market volatility and economic shifts.

Exploring Private Lending to Property Developers: A Unique Opportunity

One of the unique investment opportunities for HNWIs is private lending to property developers. In the UK, demand for rental accommodation continues to outstrip supply. This shortage of suitable rental homes presents a major opportunity for property developers to fill the gap, but many struggle to secure traditional financing through banks at a sustainable level, particularly during fast growth phases in their businesses, and when they are wanting to keep their leverage low by retaining a good portion of their own money in the game. Here, HNWIs can step in as private lenders, providing capital to developers in exchange for competitive returns.

The Current Rental Market in the UK

The UK rental market is currently experiencing a housing shortage, particularly in major cities like London, Manchester, and Birmingham. Rising property prices, the increasing population, an aging demographic, and economic factors are contributing to a growing demand for rental accommodation, particularly affordable homes. However, property developers often face barriers to accessing funding for new projects, as lending standards have tightened in recent years, particularly in the wake of the COVID-19 pandemic.

How Private Lending Works

Private lending involves providing personal or business loans directly to property developers or developer-limited companies to fund their projects. These loans are usually short-term (12-36 months) and secured against the property being developed. In return for providing the loan, private lenders receive interest payments, typically at a rate higher than what traditional fixed-income investments, such as bonds, offer.

Benefits for HNWIs

Attractive Returns: The interest rates on private loans to property developers tend to be higher than traditional fixed-income investments. Typical returns range from 6% to 12% per year, depending on the project's risk profile and the developer's track record.
Asset-Backed Security : Since the loan is often secured against the property, there is a layer of protection for the investor. If the developer defaults on the loan, the lender can recover their investment by taking ownership of the property.
Contributing to Social Good: By providing capital to developers, HNWIs are helping to address the housing shortage in the UK, particularly in the affordable rental market. This creates social impact by contributing to the supply of much-needed housing, especially for middle and lower-income renters.

Key Risks to Consider

Developer Default: If the developer fails to complete the project or runs into financial difficulties, there is a risk of not receiving full repayment or any repayment on your loan. Conduct thorough due diligence on the developer’s track record, financial health, and the viability of the project.
Market Conditions: Despite UK property showing a track record for being one of the most stable markets, it can still be volatile, and changes in property values can affect the viability of a development. A downturn in property prices, increasing cost of materials and trades work, can reduce the profitability of the project, which could impact loan repayment.
Illiquidity: Private loans to property developers are not as liquid as stocks or bonds, meaning you may not be able to easily sell or exit the investment before the loan term ends.

Conclusion

For HNWIs, preserving and growing wealth requires strategic investing, a clear understanding of one’s risk appetite, and a well-diversified portfolio. Additionally, exploring alternative investments like private lending to property developers can provide attractive returns while contributing to the social good of addressing housing shortages in the UK. By considering risk, reward, and the overall market landscape, HNWIs can make informed decisions that help them maintain and grow their wealth over time.

By Helen turner

CREDITS

Go to the ABOUT page to read more on the initiative.

A Guide To Legal Charges, Security, And Step-In Rights In Private Lending

Fri, 20 Sep 2024 11:27:31 GMT

Property Law Protecting Your Investment

In property law, securing loans through legal charges over a property is a common practice. The distinctions between a first legal charge and a second legal charge are significant, particularly concerning priority, rights, and associated risks. Additionally, the concepts of negative pledges, step-in rights, and the appointment of Law of Property Act (LPA) receivers add layers of complexity to these financial arrangements.

This article explores these elements to provide a comprehensive understanding of property charges and their implications for borrowers and lenders.

First Legal Charge

A first legal charge, or first mortgage, is the primary security interest in a property, typically held by the main lender who can be a private institution like a bank or another business providing a loan note, or a person lending private capital. The first charge provides the initial financing for the property purchase. Key aspects of a first legal charge include:

Priority And Rights

Priority: The first legal charge takes precedence over all other charges or claims against the property. In the event of a sale or foreclosure, the holder of the first charge is entitled to be paid first from the proceeds.
Rights: The lender with a first legal charge has substantial rights, including the ability to repossess and sell the property if the borrower defaults on the loan. This ensures a higher level of security for the private lender.

Risk And Interest Rates

Risk: Because the first legal charge holder has the primary claim on the property, the associated risk is lower compared to subsequent charges.
LTV: If the loan value ratio to the value of the property is high the lender is still exposed to a significant amount of risk if the borrower defaults or there is an issue with the property or project that the charge is secured against.
Interest Rates: Loans secured by a first legal charge usually come with lower interest rates, reflecting the reduced risk for the lender.

Second Legal Charge

A second legal charge, or second mortgage, is a subordinate security interest taken out on a property that already has a first legal charge secured against it. This charge is used to secure additional borrowing. Characteristics of a second legal charge include:

Priority And Rights

Priority: A second legal charge ranks below the first legal charge. If the property is sold, the proceeds will first satisfy the debt owed under the first legal charge. Only after the first charge is fully settled will the second charge holder receive any remaining funds.
Rights: The rights of the second charge holder are more limited. They can repossess and sell the property if the borrower defaults, but their ability to recover the debt is contingent on the amount left after satisfying the first charge.

Risk And Interest Rates

Risk: The risk for lenders holding a second legal charge is higher because their ability to recoup the loan depends on the property's value exceeding the amount owed under the first charge.
Interest Rates: Due to the increased risk, second mortgages generally carry higher interest rates compared to first mortgages.

Negative Pledges

A negative pledge is a clause in a loan agreement that restricts the borrower from creating any additional security interests over the property without the lender's consent. This concept is particularly relevant in the context of second legal charges:

Protection for Lenders: A negative pledge protects the interests of the first charge holder by preventing the borrower from diminishing the value of the collateral through subsequent charges.
Borrower Restrictions: For borrowers, agreeing to a negative pledge means they cannot take on additional secured debt without renegotiating terms with the existing lender, potentially limiting their financial flexibility.

Step-in Rights

Step-in rights allow a lender to "step in" and take over the management or operation of a project or property if the borrower defaults or fails to meet certain obligations. These rights are crucial in complex financing arrangements, especially for high-value properties or projects:

Risk Mitigation: For lenders, step-in rights serve as a risk mitigation tool. If the borrower defaults, the lender can ensure that the property or project continues to generate revenue or maintains its value.
Borrower Implications: Borrowers must be aware that step-in rights can lead to the lender taking control of their property or project, potentially disrupting their plans or operations.

Appointment Of LPA Receivers

Under the Law of Property Act 1925, an LPA receiver (usually licenced insolvency practitioners) can be appointed by a lender holding a legal charge to manage and realise the property. This mechanism is particularly important for lenders as it offers an efficient way to recover debts:

Lender Benefits: Appointing an LPA receiver allows the lender to quickly take control of the property, manage it, and sell it if necessary to recover the outstanding debt. This process is generally quicker and less costly than going through a court process.
Borrower Consequences: For borrowers, the appointment of an LPA receiver means losing control over the property, as the receiver has the authority to collect rents, sell the property, and take other actions to satisfy the debt.

Legal Implications For Borrowers And Lenders

Borrowers

For borrowers, understanding these concepts is vital. A first legal charge provides primary financing with favourable terms but may come with restrictions such as negative pledges. Taking on a second legal charge offers access to additional funds but at higher costs and risks, and may require navigating the constraints imposed by the first charge holder. Awareness of the potential for LPA receivership and step-in rights is also crucial, as these can significantly impact their control over the property.

Lenders

Lenders must carefully assess the risks associated with both types of charges. A first legal charge offers more security and rights, often involving a thorough appraisal of the borrower’s creditworthiness and the property's value. Second charge lenders face higher risks and must compensate with higher interest rates. Negative pledges and step-in rights provide additional layers of protection, ensuring that the lender’s interests are safeguarded in case of borrower default. The ability to appoint LPA receivers is a critical tool for lenders to recover debts efficiently.

Conclusion

The distinctions between a first legal charge and a second legal charge over a property are fundamental in property law, influencing the rights, priorities, and risks for both borrowers and lenders. A first legal charge offers primary security and lower risk, making it more favourable in terms of interest rates and recovery rights. Conversely, a second legal charge entails higher risk and cost due to its subordinate status. Negative pledges, step-in rights, and the ability to appoint LPA receivers add further complexity, offering lenders additional security but imposing more restrictions on borrowers. Both borrowers and lenders must navigate these differences carefully to make informed financial and legal decisions.

By Gerard Davis

CREDITS

Written by Gerard Davis - LLB Solicitor and Business Development Manager at Talbots Law. Gerard is also Director of McCutchion Davis Properties Limited.

HMO Investment: Creating a Rolls-Royce of a Partnership

Thu, 19 Sep 2024 12:51:59 GMT

The Questions A Hands-Free Investor Should Ask

Investing in Houses in Multiple Occupation (HMOs) as a hands-free investor can be a smart way to generate passive income without getting involved in the project management of the refurb and the ongoing day-to-day management of the property. There are pros and cons to investing in property this way, and pitfalls for the unwary!

When I started to develop HMOs I needed the cash that a third party could provide in order to grow my portfolio. I was actively buying and developing HMOs but actively using my own money too. I had no previous experience of raising funds but over time I learnt about the different ways to raise and use investor finance and I began to understand what questions an investor typically asked. Later, I myself started to fund other people’s projects and saw the process from the other side of the fence, which gave me even more insight.

It helped me become more savvy about what I needed to communicate to a potential investor, and to understand the questions that I could be asked. I realised that too many people rush into investing without doing their due diligence and preparation which is a huge risk. The process of asking enough questions of your potential partner at the start will allow you to decide whether this is a good ‘match’ in terms of a business partnership. By learning how to do this, it enabled me to develop a lucrative portfolio of property that both myself and my investor benefitted from.

In this article I’ll share some tips for you if you are an investor looking to invest in HMOs without doing all the hard work yourself.

Define Your Objectives

The first step to is decide what is it that you are looking to achieve with your investment.

These could include:

Better returns than you are currently achieving
Leverage of another asset
Long term growth strategy in capital assets
Pension pot
Ongoing monthly cashflow
Knowledge and experience about HMOs
Sharing risks with another person in property development
Sharing the journey of building a portfolio with another motivated individual

Your strategy will be linked to your goals, and therefore clarifying these from the start is key to a successful path ahead. Your level of involvement in the process also needs to be considered as some strategies will require a more active approach than others.

There are many ways in which investors can work with those on the coal face of HMOs. These include:

A personal loan to an individual with a fixed return over a set period of time.
A 50/50 Joint Venture (JV) partnership within a limited company or SPV (special purpose vehicle). Each partner holds 50% of the share capital within the limited company so all assets and liabilities are shared - as are the risks and the rewards. Consideration needs to be given to the treatment of equity introduced and withdrawn, and the roles and responsibilities of partners.
An inter-company contractual partnership where two limited companies (or individuals for that matter) contract with each other to provide mutually beneficial services.
An LLP partnership which is less formalised than a Limited company.
Investing by way of a crowdfunding platform which gives you opportunity to invest in specific projects short-term.
Investing in a REIT (Real Estate Investment Trust).
Using a pension pot - normally a SSAS due to its nature and flexibility - to lend to others for their development and receiving a fixed cash return on the money lent.

When working with a third party provider, it’s critical from the start that you determine your preferred outcome. Not only will this help you to sift the wheat from the chaff when it comes to potential investment opportunities, it will also identify who are the right people to partner with.

Let’s imagine that you have a pot of money from a profitable business venture sitting in the bank. Right now you’re getting 4% interest at most. You know that the money is also being eaten up through inflation. It’s time to take action and step out of your comfort zone. You’ve heard about the great returns and cashflow that HMOs provide, and you know you have enough cash to do a few projects and build a sizeable portfolio. Where do you start? Who should you talk to? Who can you trust?

Networking and introductions are the best way to meet the right people to work with. Property networking meetings are typically full of developers or property investors looking to raise money! These kinds of informal settings allow you to chat with a variety of people and see who you naturally connect with. Stay in touch and check out their social media profiles and website to understand what experience and level of knowledge they have.

You might find there are a couple of people you want to follow up with and there’s nothing better than a coffee and a chat for this. At this meeting you might still want to keep your cards close to your chest in terms of what you have and how much you’re looking to invest, but this is a good chance to begin to explore options. If you feel that the meeting shows potential, then the next step is to consider to what degree you have a good match in terms of goals and values.

Due Diligence

When exploring a new business partnership, the level of due diligence you apply will depend on a number of factors such as:

What length of time will you be in partnership together - is this a lifelong marriage or will you exit at a definite stage and date?
What experience does your potential partner have in the field of HMOs? What previous projects have they done, and what were the successful and not so successful results?
Who else have they partnered with and what do those others say about them?
To what extent is your potential partner mindful of the rules and regulations around borrowing money for investing in ‘risky instruments’ and how do they manage these rules?
How do they currently run and oversee the financial side of their property business? Do they have regular management accounts? What kinds of profits are they making?
To what degree do you share the same values about business?
What business partnerships have they had in the past which went wrong. What happened and why? What did they learn?

Too often, investors tend to jump straight into the potential results that they might gain, without exploring the ‘what if’s’ of the partnership. Yet these questions are critical to ensure you can create a healthy and mutually beneficial relationship.

In addition, I would expect to be asked some questions too.

The Financial Conduct Authority released a document in 2013 (13/3) which outlined their rules for ensuring that ordinary ‘retail’ investors were not scammed by investing in risky investments - and anything which is not FCA regulated is deemed risky - this includes property. The rules meant that anyone who is looking to raise finance from a third party who is as yet not known to them, needs to check out that the person is a sophisticated or High Net Worth investor. These restrictions were introduced to protect people from losing all their money in schemes which promised the earth - but as a result this needs to be taken seriously by property developers looking to raise money. Therefore your potential partner should be asking questions of you too to determine whether the structure you propose protects you both and meets the FCA regulations.

Once this initial due diligence is completed, I always start with an informal Heads of Terms document which begins the process of outlining a more formal proposal and agreement. From here it is then fairly clear what kind of structure to adopt.

The kinds of areas to cover in a Heads of Terms agreement include:

Project Scope : The type and number of HMO properties to be developed or acquired.
Investment Goals : Expected returns, timelines, and exit strategies.
Roles and Responsibilities : Clearly defining each partner’s role especially in a JV (Joint Venture) scenario.
Property Acquisition : Who will be identifying and purchasing suitable HMO properties? How will the properties be owned and paid for?
Renovation and Development : Who is responsible for project management and who is responsible for financial management.
Tenant Management : How will the HMO be managed once completed?
Equity Shares (if relevant) : How will these be treated? Proportional to each partner’s capital contribution or paid according to the performance of the HMO? How will original equity introduced be repaid?
FCA regulations : how is the partnership ensuring these are reflected in the treatment of equity, risks and rewards?

You should also think about your exit strategy and discuss what this looks like to each of you.

Options might include:

Property Sale : Selling the HMO properties and distributing the proceeds.
Buyout : One partner buying out the others’ shares. Or the introduction of another investor into the business.
Refinancing : Refinancing the property to release equity and distribute profits.
Sale of the business

Creating a profitable, legal and compliant JV where you benefit from the tremendous opportunities offered by HMOs begins with good foundations. If you can adopt these methods and find the right partner with whom to invest, you never know you might be the Rolls to their Royce.

By Wendy Whittaker-Large.

Since 2012 Wendy has grown a multimillion pound property portfolio using other people’s money, mainly focusing on HMOs. She is an Amazon bestselling author, having written two books about investing in HMOs, and has been featured in the Sunday Telegraph, on BBC 1 and Channel 5. She regularly appears on the property speaking circuit across the UK.

Read more about Wendy in the Credits below.

CREDITS

Wendy Whittaker-Large is the founder of Best Nest - an award winning property development and lettings business, and HMO Success – her specialist HMO training and mentoring company.

She is the chair of the HMO Council Tax Reform Group who successfully overturned the single banding of HMO rooms for council tax in 2023, creating a historic win for the industry.

Advice From An Angel Investor

Wed, 18 Sep 2024 10:17:18 GMT

How To Avoid Sharks And Find Good People To Work With

Coming from a background in investment banking, the idea of raising money and investing in assets wasn’t a foreign concept to me. If anything, it gave me an advantage when I entered the property industry. One that has allowed me to invest in others and make a profit from deals, without having hands-on involvement in them. Because, I’ll be honest, despite being involved in more than 40 deals, I’m under no illusion that I’d be terrible at running my own projects.

My experience of investing in others and my content around creating risk frameworks, landed me a position as the first female angel on Sky TV’s Property Elevator show and secured me a spot on the popular investment show Venture Visionaries. Now, I’m involved in a range of big projects across Europe.

But, despite my years of experience in the industry and an extensive background in investment, I’m still shocked by the flippancy in which people treat borrowing money, or, if you want to use a term I REALLY hate, OPM (using ‘other people’s money’).

I’ve lost money by investing in others and I’ve seen countless others fall victim themselves. While seeing hundreds of thousands of pounds lost, I have also witnessed something far more devastating: The loss of faith in humanity when someone is swindled or let down by a charlatan, or by someone who was overconfident in their abilities.

In this article, I want to show you how to avoid sharks, what you should look for before investing in, or joint venturing with someone and share some tips on what angels look for in people and projects, that will help you become more investable when you come to raise finance yourself.

It’s Not A Fiver You Found On The Floor

I was an investment banker before the financial crash in 2008. It was a gruelling job, where 15-hour workdays were the standard and I had to literally run to and from the loo, to minimise time away from my desk!

Investment banking is a high-pressure job where you’re dealing with money. Lots of money. It can involve mergers and acquisitions, cross-border trade and the raising of capital. It’s high-pressured, so high pressure that it led me to develop severe burnout and eventually leave the sector altogether.

Why is it like this? Because you’re dealing with other people’s money and that’s serious. So, you can imagine my shock when I entered the property industry (a side investment that ran alongside my career at first) and saw the way that other people’s money was talked about.

I’m starting the article with this point because, if you have any hope of wanting to raise finance, then you need to treat other people’s money like it’s sacred. Not only is it best practice, but holding this mindset will make you far more attractive to angel investors!

On the other hand, if you’re looking to invest in others, then this is one of the key indicators to look out for. Does borrowing money stress the other person? Because it should! It’s wise to invest in people who respect your capital. That’s one of the best pieces of advice I can give you.

‘Other people’s money’ makes it sound like you’ve found a fiver on the floor. If you know anyone who speaks about it with such flippancy, then run a mile before investing in them. I would.

How To Find Out If Someone Is Trustworthy

These days, I focus on short-term lending, like loans and bridging finance. As you can imagine, being known as an angel investor, I get inundated with people looking to borrow money. While it works with some people, I’m not the type to invest in a stranger, who’s decided to rock up in my LinkedIn inbox and send me a message.

Realistically, I want to have a relationship with someone that spans a number of years before I invest in their projects. At a minimum, I want to have watched them and known them for at least a year before I do anything.

The problem is, we’re in an industry where people have a penchant for overpromising and then massively underdelivering. Talk is one thing. Action is another and you can’t always trust what people say.

The only way that you can assess if someone is trustworthy, is by seeing how they act and the longer the timeframe that you analyse that over, the more certain you can be about who they really are. Consistency reveals all and this, combined with talking to people they have worked with in the past, will give you an idea as to whether someone can be trusted, I’m the antithesis of ‘get rich quick’. I believe in getting rich safely and protecting your money in the meantime.

I also get people to do a wealth dynamics test before we work together. Then, I share my profile with them. This way, we both get an idea of how the other person works and we know what to (and what not to) expect from each other.

What I Look For When ‘Watching’ Someone

You see a lot of investors and marketers swearing that the way to raise finance is through social media. To a degree, I disagree.

If I see a ‘too polished’ social media presence, then it makes me wonder who’s going to be running my projects. If it’s a one-man band doing lives and reels every day, then I question how they have time to be on-site and do the important stuff.

Don’t get me wrong, brand building is incredibly important. I only worry when it looks like an entire team or business is focused on this over delivering results.

I believe that running a business and running a project are two totally different things and as a property professional, you need to be good at both.

For example, I knew someone who was brilliant at finding deals, but they were terrible at managing cash flow. You can’t be good at everything and if cash flow isn’t your strength, I’d recommend hiring a chief financial officer (CFO).

I encouraged this person to get a CFO on board, but they were having none of it. Everything came to a head towards Christmas, when they asked me for money to pay their staff. I might be a hard-nosed investor, but even I couldn’t sleep at night knowing their staff wouldn’t be paid.

I transferred the money on the understanding that it be repaid in two weeks. Due to a stroke of luck, the payment was frozen by the bank, because they had given me their spouse’s personal account details! I’ve never been more thankful for a frozen bank account in my life!

Naturally, I hit the roof when I discovered they asked me to transfer the money to a personal account and I refused to send it again. Within just one month, this business went under. Had luck not sided with me that day, my money would have sunk with it, as it did with a lot of other not-so-fortunate investors.

I wish situations like this were uncommon, but they’re not and I’ve seen it happen to me and countless others. It does not just rob you of your capital. It takes your faith in humanity.

It’s a huge leap of faith to invest in someone and I always say you should treat borrowed money like you owe it to the mafia! I want to see people who view it this way. I want to see people who have a track record of working with others and delivering on promises.

What Do I Look For Before Investing In Someone’s Deal?

Contingency is the most important thing in the world to me. I can’t say it enough. Contingency, contingency, contingency!

You need to have a percentage added to your costs for unexpected issues or delays, or things just costing more than you anticipated.

If I’m being generous, I’d say you need to have at least a 10% contingency on top of your predicted costs. I’ve seen people go with 5%, which is laughable. It’s rare for a project to stay on budget, I can only think of one that I’ve personally been involved in.

This can be different if you have a ‘cookie cutter’ approach to your projects, where you have consistently delivered the same thing over and over again. But still, it’s a risk.

Pre-covid you could maybe get away with a lower contingency, but the pandemic showed us all that freak events can soon wipe out even the best laid of plans.

Freak events seem to be happening more and more lately. Are these really freak things that we shouldn’t account for in our costs?

New build developments are the riskiest of all because you don’t know what you’ll find underground. If you find something unexpected and your whole site is on hold for a year while English Heritage and everyone else looks at it, imagine what a year’s worth of finance, on an inactive site, costs? Ouch!

You can’t exactly predict everything that will happen, but a healthy contingency will protect you from the unexpected.

Putting Some Skin In The Game

For me, sticking money into a deal while someone else invests their time does not work. If people have nothing to lose, they can just walk away when things get sticky. I’ve helped so many victims go after people who have taken this approach, walking away when a project got tough, without losing a single penny of their own money. It’s heart-breaking.

How much skin you should put in the game varies from person to person. To one person, £1,000 is an awful lot of money, and to another, it’s only the prospect of losing £10,000, or even £100,000, when they feel uncomfortable.

I don’t want someone to invest their life savings with me. But what I do want is for them to put enough money into a deal that it will hurt them if they lose it. This way, if the going gets tough, they’re incentivised to work with me to get things back on track and not just run for the hills!

My Thoughts On Personal Guarantees

I used to say personal guarantees (PGs) weren’t worth the paper they were written on. That’s because there is no definitive register of them. You don’t know how many PGs someone has outstanding. They could have twenty PGs, to twenty different people, all on the same asset and you could be one of them. If this happens, good luck. I’m all about asset-backed investments. At least that way I have a better chance at recouping my money if a deal goes wrong.

I’ve also seen incidents where the asset is in the spouse’s name, or they file for divorce, so all assets are frozen. At this point, there is no liquid asset you can pursue.

These days, I’m more open to them, but that’s only because I’ve been stung too many times. When investors come to me for advice on asking for a PG from someone, I also ask them If they’d be prepared to make that person homeless, especially if they have a family and children. That’s the cold reality of pursuing a PG and not everyone has it in them. Likewise, if you agree to one, then know that this is potentially what you’re signing up for and not everyone has as much empathy as me in these matters.

Do They Need Experience To Be Investible?

I don’t have time for many property trainers. The ones I really don’t have time for are the ones who tell you to stand up and look around the room because your next joint venture partner might be in there with you.

No, no, no! Would you marry anyone in that room after you’ve only just met them? Probably not!

It’s much wiser to get to know people over a decent period of time before you jump into business with them. With time, it becomes more obvious who they really are. Hopefully, they are who they say they are. But again, consistency will be the secret that reveals all.

Before investing in someone, I look at the team around them. And it’s true, having a strong team does make you more investible. However, I don’t think this can be a complete replacement for personal experience (something I’ll touch on shortly).

Look at it from an angel investor’s perspective. Let’s say I have a choice of four people with whom I can invest: Person A has been developing property for 30 years. Person B I've known for three3 years and person C is well-known and has won numerous awards.

Then there is someone (person D) with no money, credibility or experience. They might have used their credit card to pay for a weekend training course. In my shoes, who do you invest in? Because let’s face it, the last one is unlikely.

Don’t get me wrong, I have invested in someone who was at the very start of their journey, but so was I. I knew their mentor though and he was someone I respected too. I knew that with him onboard, we had someone to help us. It would be expensive and it would be messy, but at least we would learn together.

What If They Don’t Have Credibility (Yet)?

I don’t want you to think that if you don’t have experience, it’s game over. Everyone starts somewhere.

So, what can you do if you’re new, or newish to property investment and want to raise some angel investment for deals? My advice for them is to borrow credibility from other areas of their life.

We all have a track record somewhere, particularly in our careers or established relationships.

Here are a few things I look for in someone’s track record, if they don’t have as much experience in the world of property:

Previous experience running or growing a profitable business.
Long-term harmonious relationships in other areas of your life.
Existing relationships with other credible people, who can personally vouch for you.
A strong professional history.
Working with others in a professional manner.

Learn More About All Things Property, Business And Investing

Outside of being an angel investor, I’m often travelling to and from my home in Malta as I also judge for some pretty cool industry awards, including the HMO Awards & Summit, the Blue Bricks Property Awards, and the Women in Construction Awards , a visionary initiative, spearheaded by none other than Michaela Wain, of The Apprentice fame.

By Helen Chorley

From the author:

"Outside of being an angel investor, I’m also a judge for some pretty cool industry awards, including the HMO Award s, Blue Bricks Property Awards, and the Women in Construction Awards.

If you're interested in learning a bit more about what makes me tick, feel free to check out my website using the links below."

Website: https://www.helenchorley.co.uk

LinkedIn: https://www.linkedin.com/in/helen-chorley/

Instagram: https://www.instagram.com/helenchorleyinvestor

CREDITS

Content supplied by Sam Cooke at Blue Brick magazine . This version contains minor text changes from the original article.

Subscribe to Blue Bricks for £4.99 / month with a 1 month free trial.

Do You Know, Like, And Trust Your Property Investment Partner?

Tue, 17 Sep 2024 18:39:10 GMT

An Angel Investor's Guide to Property Development

You’ve got the cash. Property developers have the projects. But if you’re looking to invest without rolling up your sleeves and getting your hands dirty, you’re probably thinking, “How can I make money in property without breaking a sweat?” Well, the key is choosing the right developer to partner with.

So, before you rush in, let me ask you a few questions: Do you know, like, and trust the developer? Do you know, like, and trust their business? And often overlooked, do you know, like, and trust the deal? If you’re not sure how to answer those questions, buckle up because we’re about to go on a whirlwind journey through the essentials of hands-off property investment and selecting the right developer.

The First Question: Do You Know, Like, and Trust the Developer?

Let’s be honest, this is probably the most important part of the equation. If you wouldn’t trust someone with your dog, why would you trust them with your money? The developer is the person steering the ship, so you need to make sure they’re not going to steer you into an iceberg.

Transparency Is Key

When you’re investing your hard-earned cash, you need to know that the developer is going to be transparent. Ask yourself: Will they keep me in the loop? Will they provide regular updates, or will I be left in the dark until the project’s finished (or worse, sunk)? Transparency isn’t just about sharing positive information; it’s about sharing the good, bad and the ugly in a timely, honest and solution-based manner.

Do They Have Your Best Interests at Heart?

It’s easy for a developer to say they’ve got your back, but actions speak louder than words. Spend some time with them. Go beyond the usual “quick coffee” or zoom meeting. Take them out for a round of golf or a friendly game of padel, for the less adventurous, why not go to your favourite dinner spot? The goal is to spend time together outside of a business setting. This is how you truly get to know someone. Seeing how they act when they’re relaxed can give you an insight into their real character.

Remember, property development is a marathon, not a sprint. You’re going to be involved with this person for a while, so make sure they’re someone you feel comfortable with and someone you actually like. If they treat the staff at the golf club poorly or they’re the type to ghost you after the first big issue arises, then it might be time to rethink your partnership.

The Second Question: Do You Know, Like, and Trust the Business?

Now that you’re confident in the developer, let’s take a look at their business. Are they running a tight ship, or is it a leaky boat held together by rusty nails and wishful thinking?

Track Record Talks

Past performance may not be an absolute guarantee of future success, but it can give you a pretty solid hint. Ask to see their completed projects. Do they make you feel warm inside, or do they look like something you wouldn’t want to touch with a ten-foot pole? Check out the business’s track record. Have they been consistent in delivering quality, or are they known for over promising and under delivering?

Solid Financials Are Sexy

Okay, we’re not talking about taking them on a date, but have you seen their balance sheet and assets & liabilities? You don’t have to be Warren Buffett to know that a solid financial foundation is essential. Is the business swimming in debt, or do they have a healthy mix of assets and manageable liabilities? A well-run business should have financials that give you confidence, not sweaty palms.

The Third Question: Do You Know, Like, and Trust the Deal?

You’ve checked out the developer, given the business the thumbs-up, and now you’re left with the most crucial piece of the puzzle—the deal itself. After all, this is where the money is made (or lost).

Understanding the Numbers

Even if you’re a hands-off investor, it’s still essential to understand the numbers at a high level. Start by asking the developer to walk you through the deal. Do you know the expected return on investment (ROI)? Is the projected profit margin big enough to cover unforeseen costs and still leave you and the developer with a decent slice of the pie?

Remember, it’s not just about you making money, it’s about ensuring that everyone wins. If the developer isn’t making enough profit to keep them motivated, the project might not get the attention it deserves. And let’s face it, no one wants to be stuck in a project that turns into a money pit because the developer’s enthusiasm ran out halfway through.

Risk, Contingencies, and Exit Plans

Let’s talk about the elephant in the room: Risk. No investment is without it, but you need to know what risks you’re facing and what’s in place to mitigate them. Ask the developer about their contingency plans. What happens if the costs overrun? Is there a cushion built into the budget, or are you on the edge of a financial cliff?

What is the exit strategy if things don’t go as planned? A well-prepared developer should have more than just a “cross your fingers and hope for the best” approach. They should be able to present you with multiple exit strategies, each one designed to protect your investment even in a worst-case scenario.

Always Remember: Know, Like, and Trust!

When it comes to angel investing in property development, knowing, liking, and trusting the developer, the business, and the deal are absolutely essential. These aren’t just feel-good words, they’re your guiding principles!

So, here’s the takeaway: Don’t rush in. Take your time to build a relationship with the developer. Dive into their business’s track record. Run the numbers on the deal, and always ask about the risks and contingency plans. If everything checks out, congratulations! You’re well on your way to being a hands-off property investment pro. Just remember, if you can’t answer “yes” to knowing, liking, and trusting any part of this process, you might want to think twice before signing that check.

And hey, if all else fails, at least you’ve spent some quality time on the golf course, right?

By Max Rayner

CREDITS

Max Rayner is the Director of Stuart Clinton Property, focusing on housing the UK’s most vulnerable people.

Stuart Clinton Property develop award winning Care Homes and Supported Living schemes across the UK working closely with high net-worths wanting to make a difference.

https://stuartclintonproperty.co.uk

https://www.thesupportedlivingplatform.co.uk

Anti-Money Laundering In UK Property

Mon, 16 Sep 2024 08:47:24 GMT

What Developers, Investors, And Lenders Need To Know

The UK property market is an attractive investment hub but also a target for money laundering. With rising scrutiny on high-value transactions, it’s essential for property developers, investors, and lenders to stay compliant with anti-money laundering (AML) regulations. Non-compliance can lead to hefty fines, delays, or legal consequences that can threaten a project’s success.

This article explores the relevance of AML compliance, the role of solicitors, and practical steps to protect against money laundering risks.

The Importance of AML Compliance for Property Developers and Investors

UK property has become a focal point for regulatory bodies due to its vulnerability to money laundering. Criminals often use property transactions to "clean" illicit funds, making it critical for developers and investors to ensure their involvement in projects aligns with AML regulations.

For Developers

Raising funds for property projects requires developers to verify that all capital comes from legitimate sources. This includes vetting investors and ensuring the funds entering the project are clean.

For Investors

Investors must provide clear documentation about the source of their funds. This transparency protects them from suspicion of laundering money and helps the entire transaction proceed smoothly.

Non-compliance can lead to significant project disruptions, ranging from financial penalties to delayed approvals, making it vital for developers and investors to understand the gravity of AML obligations.

Key AML Legislation Impacting the Property Sector

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017) form the cornerstone of the UK’s AML framework.

These regulations require developers, lenders, and solicitors to conduct thorough due diligence to prevent property transactions from being used to launder illicit funds. Key obligations include:

Customer Due Diligence (CDD)

Verification of the client’s identity and understanding the business relationship.

Ongoing Monitoring

Continuous checks are required throughout the transaction, ensuring no suspicious activity arises even after funds are transferred.

Suspicious Activity Reporting (SAR)

Solicitors are legally required to report any suspicious activity to the National Crime Agency (NCA) . Failure to do so could result in severe penalties.

The Proceeds of Crime Act 2002 (POCA) is also relevant, as it allows authorities to confiscate any property that is linked to criminal activity. These laws underline the importance of AML compliance throughout the property transaction process.

Why Solicitors Play a Critical Role in AML Compliance

Solicitors play a crucial role in AML compliance, particularly in property transactions. They act as gatekeepers, ensuring that developers, investors, and lenders adhere to the law. By conducting thorough due diligence, solicitors help verify that all funds entering a transaction are legitimate and come from identifiable sources.

Know Your Client (KYC)

Solicitors must verify the identities of all involved parties, such as developers, investors, or lenders. This is done through identification documents and checks on ownership structures.

Source of Funds Verification

Developers and investors must prove that the funds being used in a project come from legitimate sources. Solicitors are responsible for obtaining and reviewing evidence of the source of wealth and ensuring that no illicit money is involved in the transaction.

The Crucial Role of Property Solicitors in AML Compliance

Property solicitors are essential in protecting transactions from the risks of money laundering. They are responsible for verifying client identities and ensuring that the sources of funds are legitimate. Solicitors must complete thorough KYC checks, examine ownership structures, and gather documentation to verify that funds are clean and compliant with the Money Laundering Regulations 2017.

In addition to their initial role, solicitors monitor transactions throughout the process and flag any suspicious activity, reporting it to the National Crime Agency (NCA). They provide expert guidance to clients, helping them navigate AML obligations and avoid potential legal and financial pitfalls. By collaborating with solicitors, developers, investors, and lenders can ensure their property projects proceed without compliance issues.

Risks for Lenders: AML Obligations When Financing Projects

Lenders, including private equity firms, institutional investors, and banks, must also be vigilant about AML compliance. When financing property developments, lenders are responsible for conducting due diligence on both the project and the developer to ensure no illicit funds are involved.

Monitoring Loan Transactions

Even after the initial checks, lenders should implement ongoing monitoring systems to flag any unusual activity, such as suspicious fund transfers or unusual payment patterns.

Verifying Borrowers

Before offering loans, lenders must ensure that the borrowers (developers) are compliant with AML requirements. This involves verifying the borrower’s source of funds and ensuring no potential money laundering risks exist. Failure to meet these obligations could not only result in legal action but also reputational damage that affects future lending opportunities.

Common Red Flags to Watch Out For

Property developers, investors, and lenders must be on the lookout for red flags that could indicate money laundering. Some of these include:

Use of Offshore Companies: Developers or investors using offshore entities may be trying to obscure the true source of funds.
Complex Ownership Structures: Business structures with multiple layers of ownership can often be used to conceal illicit activity.
Large Cash Payments: Property transactions involving significant cash payments should trigger suspicion, as they can be used to mask the origin of funds.
Frequent Ownership Changes: Multiple or unexplained changes in ownership of property can also signal potential money laundering.

When these red flags are detected, solicitors must report them to the relevant authorities, ensuring that the transaction is stopped or re-evaluated.

Consequences of Non-Compliance

Failing to comply with AML regulations can have serious consequences. Developers, investors, and lenders may face substantial fines, delayed projects, or criminal penalties if involved in transactions that fail to meet AML standards. In some cases, non-compliance can even lead to the confiscation of property if it’s proven to be linked to illicit funds.

For example, a high-profile case involving a London development was halted because the developer failed to prove the source of funds, resulting in months of delays and significant financial losses. Such cases highlight the importance of AML due diligence at every stage of a project.

Conclusion: Safeguarding Your Property Project

AML compliance is more than just a legal obligation—it’s essential for the protection of property projects from financial and legal risks. Developers, investors, and lenders must ensure that their transactions are fully transparent and meet AML standards to avoid complications down the road.

By Bushra Mohammed

CREDITS

Bushra Mohammed is an accomplished property solicitor, investor, and developer. She specialises in guiding developers, investors, and lenders through complex deals, offering valuable insights to help mitigate risks. My team and I can guide you through the complexities of AML compliance, ensuring that your projects remain risk-free and legally sound. Contact me today to discuss how we can assist with your next property development or investment, from due diligence to final transaction checks.

www.festec.co.uk

A Better Use For The £1.5 Trillion In UK Savings?

Sun, 15 Sep 2024 15:58:33 GMT

Could High-Net-Worth Savings Help To Close the Rental Housing Deficit?

The UK rental housing market is in a state of crisis, with a growing deficit in the availability of affordable rental homes. We often think of renters as students, young professionals or those who are in a vulnerable financial, mental or physical state, but the general population is renting for longer, and the rental demographic is getting older.

Only last summer, an FCA report published in July 2023 revealed that UK cash savers hold a staggering £1.5 trillion sitting in savings accounts. More recent Bank of England Credit data analysis conducted in January 2024 revealed that as much as £1.1 trillion of that cash is earning savers less than 2%, whilst £250 billion is earning nothing at all.

This sparks an argument for such a large sum of money that is not being circulated back into the economy in some meaningful way, seems unhelpful. Perhaps a portion of this vast pool of money that is earned, accumulated and held by high-net-worth individuals, could be leveraged to help close the rental housing gap?

While mobilising these savings could provide an excellent and viable solution, the challenges and risks involved would be wrong to neglect. Let’s explore further.

Direct Investment In Housing Development

One of the most straightforward ways to close the rental housing deficit is through the direct investment of savings into housing development and refurbishment projects. If even a fraction of the £1.5 trillion could be channelled into the development of new rental stock, it could make a significant impact.

Private individuals, through direct lending to experienced property developers, could potentially earn higher returns than what their savings accounts offer while simultaneously contributing to the housing supply.

The argument here is rooted in the notion that the current typical return on savings is relatively low, especially when inflation is taken into account. By investing in housing and development, savers could potentially achieve better financial outcomes while addressing a critical social issue.

This could be particularly attractive in the context of the ongoing housing crisis, where demand for rental properties far outstrips supply, leading to skyrocketing rents and an affordability crisis. By creating a more favourable environment for private lending, a significant portion of the £1.5 trillion could be unlocked for housing projects, particularly development models which aim to repurpose existing, potentially unused commercial and residential properties, to make them appropriate for a specific rental market, or to cater an increased number of rental units.

The private lending approach could reduce the reliance on traditional bank financing, which has been constrained in recent years due to stricter lending criteria and a focus on more profitable ventures.

Initial Challenges And Barriers

Many potential investors don’t want anything to do with the actual property development process. Besides being updated on the progress and having a level of reassurance that the project will lead to the successful return of their money along with the pre-agreed interest. Without prior knowledge or experience in this field, this can leave people feeling less confident and less likely to explore opportunities. Investing into property with a hands-off approach, meaning that the lender puts in some or all of the money and another party does the work, may not be so straightforward because the money is not simply leveraged against a property’s value, you are also putting your trust into the people who will deliver a project.

So finding the right people to work with is essential for an optimal outcome. However, with the property industry made of a mix of experienced and more established professionals as well as thousands of individuals trying to make a living from property investments, the selection process can be daunting.

Liquidity And Risk Concerns

One of the primary reasons people keep money in savings accounts is liquidity. Savings accounts allow for easy access to funds in case of emergencies or unexpected expenses. Redirecting these savings into housing investments could reduce liquidity and increase financial risk for savers. Investing into the housing sector, whether through direct property purchases or lending to developers, generally comes with a fixed term of 12-24 months, making the cash illiquid for this period, and carrying the risk of illiquidity if the project takes an unforeseen turn. This could be particularly problematic for individuals who might need quick access to their funds.

The UK property market, although looking at the longer historical data, indicates stability and value increases, the more general housing market can be volatile if looking at some shorter periods, so the returns on investment are not guaranteed. Property values can fluctuate, and rental income can be unpredictable, especially in uncertain economic climates. This could lead to potential losses for savers, so they should be prepared for the associated risks.

Regulatory And Structural Barriers

The UK’s financial and housing markets are highly regulated, and any large-scale shift of savings into housing would require significant regulatory changes. For instance, the government would need to ensure that savers are adequately protected and informed about the risks involved. This could involve complex regulatory adjustments, which could be time-consuming and politically challenging.

Moreover, the current structure of the housing market may not be conducive to absorbing such a large influx of capital efficiently. There are already issues with planning permission, construction costs, and availability of land, all of which could limit the effectiveness of increased investment. Simply having more money available does not guarantee that it will lead to more houses being made available, especially if there are bottlenecks in the development process.

Economic Challenges

Despite an increase in property development activity creating more trades and employment opportunities, it takes time to train new skilled workers and an increase in demand for materials could push prices up further.

Conclusion

Individuals who intend on investing their savings with property developers should ensure that they understand and can afford the associated risks of loss. There’s a good argument that private capital being injected into the UK housing market could help close the gap in the adequate supply of rental stock, however it is not a quick fix and a sudden influx of activity could cause wider regulatory and economic challenges.

By Helen Turner

CREDITS

Go to the ABOUT page to read more on the initiative.

Why “Next Level HMOs” Can De-Risk Investment

Sun, 15 Sep 2024 13:48:37 GMT

The World Of HMOs (Houses Of Multiple Occupation) Is Often Misunderstood

There is a plethora of HMO types, from social housing and supported living to boutique and even short-stay properties.

As an HMO developer, investor and landlord for over nine years, I have been involved in a variety of different HMO offerings, and by far the one that works best for me and my associates is the ‘Next Level HMO’, a term I coined to distinguish quality properties from the remaining HMO market.

Before I go into what that comprises, let’s examine the problems in the rental market, and the opportunity within the HMO sector from a macro level.

You Might Ask: Why Even Get Involved In HMOs?

The UK residential rental market has been getting harder in which to operate, with profits shrinking dramatically, leaving little room for investors to maximise returns. In order to do deals that meet the needs of both investor and developer, there must be uplift and high monthly profit. The only strategy that reliably gives us that within a reasonable timeframe, I’ve found, is the HMO.

By renting properties by the room, you can increase profit tenfold, versus an average single buy-to-let property, reassuring investors that the strategy is sound.

There is also huge, growing demand for HMO rooms across the country. Yes, it varies by location, but from a national perspective, here are the fundamentals:

The last published count from the Office of National Statistics (ONS) indicated the mid-year 2022 population numbers should increase by 578,000 people. Given that 4.7% of the population live in HMOs (approx. 2.865 million people), that translates to a need for 27,744 more rooms per year.

The ONS also states that the number of HMOs has declined 9.5% between 2018 and 2024, from 515,904 to 476,076, an average of 6,638 HMOs lost every year. If we assume the average HMO is six bedrooms, that equates to 39,828 – so almost 40,000 rooms/accommodation units lost annually.

That’s a yearly loss of 39,828 rooms combined with an increase in demand of 27,744 rooms, so an additional 67,572 rooms needed – that’s another 11,262 6-bedroom HMOs!

As this demand naturally varies around the country, when you assess an HMO deal, it is imperative to perform your due diligence on the location and analyse the main sources of tenants.

What Exactly Is A Next Level HMO?

In general, HMOs are considered to be a safe investment bet. That said, how can we lower risk further? What type of HMO should we be creating? This is where the Next Level HMO comes into its own.

To classify an HMO development as a potential Next Level, I look for three features that indicate superior quality:

Quality space

Rooms that are of good size, where there is plenty of amenity to future-proof the property. Rules of thumb could be 10m2+ per bedroom, no more than two people sharing a bath/shower room, kitchenettes (with or without fixed cooking facilities) and a relatively large kitchen/dining/ living space. To qualify the communal space in a property as high quality, 3m2+ per person would be a minimum, with 4–5m2 being a significant bonus.

Quality design

Some thought being put into this renovation by someone who has experience in delivering design. I would want to see previous projects by the developer or their team to ensure satisfaction in the desired end result.

Quality service

A sense-check on how the property will be managed at the end, and who provides that service. A standard letting agent is likely not the right agent in this scenario. There are specialist HMO and co-living agents in most towns now, and only a handful of great ones.

When you combine these three elements, you are likely to get:

Much better tenants, those who respect the property, who older (25 years+) with higher earning potential
Tenants who stay much longer, because they love where they live
The high rent that better properties command, which sustains a target % return

To protect and future-proof a Next Level HMO investment, the key factor is to have resilience in your tenant sources and a clear view of who that tenant will be: where they work, what demographic they are, and their earning potential. And you want alternative sources of tenants from different industry sectors available to facilitate multiple ways to ensure rent comes in, without fail, every month.

Next Level HMOs are also generally viewed for their turnover, so their capital value is linked to this. In most areas in the UK, this “investment” valuation will exceed the value of the bricks and mortar. This is not a bad thing, as buyers and lender will take this view as long as there have been substantial works to the property where it no longer resembles a single-family home. More beneficial and valuable is if planning permission is in place, i.e., C4 (small HMO for 3–6 tenants) planning in an Article 4 area, or sui generis (7+ tenants).

In summary, the high-quality, executive, luxury Next Level HMO, provides security as an investment and asset class, provided the fundamentals of location and tenant type are in place. Next Level HMOs are highly lucrative, bringing in higher, more resilient cashflow and more reliable profits. They are also more likely to achieve the capital value increase required to return your initial investment to you when refinancing than any other type of HMO.

If an investment is made and doesn’t go fully to plan, then time can also heal for longer-term returns – by driving the return by being actively on top of rental rates and ongoing expenses, profits will likely increase, especially as interest rates start to decline in the coming years. A great property will lock in and secure those returns.

By Matt Baker

CREDITS

Matt Baker is the Founder of The HMO Platform and CEO at Aura Ventures. He is an award-winning developer, mentor and best-selling author, and has been developing real estate since 2015 and prior to that was a professional musician.

He is the UK's leading expert on HMOs and co-living and has delivered hundreds of rooms across the UK between himself and his clients.

Matt won a lifetime achievement award at The HMO Awards 23/24 as part of the HMO Reform Group, which lobbied for and gained legal change regarding the treatment of rooms in HMOs for council tax purposes.

His mission is to increase the standard of shared accommodation nationally and raise awareness of how HMOs are not the problem, but are a crucial part of the housing solution.

Transition Of Business Wealth Into Private Wealth

Sun, 15 Sep 2024 09:18:06 GMT

Ensuring Continuity For Your Successors

As a business owner, you've spent years, perhaps even decades, building your company from the ground up. Your business isn't just a source of income; it's an integral part of your identity, a testament to your hard work, vision, and leadership.

However, the inevitable truth is that at some point, you will need to transition your business wealth into private wealth. This transition is not just about preserving what you've built but also ensuring that your successors can continue the legacy you've established.

The Importance Of Early Planning

One of the most common mistakes business owners can make is waiting too long to plan the transition of their business wealth and prepare for the next exciting phase of their life. Whether it's due to a focus on day-to-day operations, thinking you have more time to address it in the future, or simply not knowing where to start, procrastination can be costly.

Without a clear plan in place, the future of your business—and the wealth it generates—could be at risk. Issues such as inadequate succession planning, unforeseen tax liabilities, and family disputes can arise if you don't take proactive steps. Early planning gives you the time to consider all the complexities involved, from identifying and preparing your successor or selling and exiting the business to structuring the transition in a tax-efficient manner.

The Risks Of Not Planning Ahead

Failing to address the transition of business wealth into private wealth could lead to several serious consequences:

Loss of Control: Without a well-defined succession plan, the transition of ownership and control can become chaotic. This can lead to power struggles among family members or key employees, potentially destabilising the business.

Increased Tax Liabilities: A lack of strategic planning can result in significant tax implications. For instance, without proper estate planning, your heirs could face a substantial inheritance tax bill, which might force them to sell the business or other assets to pay it.

Business Disruption: The absence of a clear succession plan can disrupt business operations, leading to a loss of clients, suppliers, or employees. This disruption can erode the value of the business you've worked so hard to build.

Family Conflicts: When a business is passed on to the next generation without a clear plan, it can lead to conflicts among heirs. Differing opinions on how the business should be run, or who should be in charge, can create tension and division within the family.

Key Considerations For A Successful Transition

To avoid these pitfalls, it's essential to start planning the transition of your business wealth into private wealth as early as possible. Here are some key considerations to help you get started:

Succession Planning

The first step is to identify a successor. This could be a family member, a key employee, or an external buyer. Once identified, it's important to prepare them for their future role by providing them with the necessary training, mentoring, and experience. A gradual transition of responsibilities can help ensure a smooth handover.

Valuation Of The Business

Understanding the true value of your business is crucial. A professional business valuation will give you a clear picture of what your company is worth, which is essential for tax planning, estate planning, and negotiations with potential buyers.

Tax Planning

Tax efficiency should be a top priority when planning the transition of business wealth. This may involve restructuring the business, setting up a Small Self-Administered Scheme (SSAS) pension, or taking advantage of tax reliefs and allowances. Consulting with a tax adviser who specialises in business transitions can also help you minimise tax liabilities and maximise the wealth you pass on to your heirs.

Estate Planning

A comprehensive estate plan will ensure that your business wealth is transferred to your heirs in a way that aligns with your wishes. This may involve setting up a trust, drafting a will, and considering the use of life insurance to cover any potential tax liabilities. It's also important to consider the use of a Family Investment Company (FIC) or a Small Self-Administered Scheme (SSAS) as vehicles for holding and managing wealth.

Communication With Family Members

Open and honest communication with your family is essential. Discuss your plans with them early on to avoid misunderstandings and conflicts later. Make sure they understand your intentions and the rationale behind your decisions. Involving them in the planning process can also help ensure that your legacy is preserved according to your wishes.

Consideration Of Other Investments

As you transition your business wealth into private wealth, it's important to consider diversification. Investing in a variety of asset classes can help protect and grow your wealth. A well-diversified portfolio can provide a more stable and secure financial future for you and your heirs.

Flexibility And Adaptability

It's crucial to recognise that plans can and will change. As circumstances evolve—whether due to changes in the market, government policy, tax laws, or family dynamics—it's important to continually review and refine your plans. Regularly revisiting your strategy with the help of professionals ensures that your approach remains aligned with your goals and the changing environment.

Legal Considerations

Finally, it's essential to work with legal professionals who specialise in business transitions and estate planning. They can help you navigate the complex legal landscape and ensure that all necessary documents are in place, such as shareholder agreements, buy-sell agreements, and powers of attorney.

Conclusion

Transitioning your business wealth into private wealth is a complex and multifaceted process. However, with early planning and the right strategies in place, you can ensure that the wealth you've built over your lifetime is preserved and passed on according to your wishes.

Remember, the key to a successful transition is to start planning as early as possible. By taking the time to consider your options and seek professional advice, you can avoid the risks of delaying and ensure that your business and personal wealth are well-protected for future generations.

It’s also important to recognise that this is not a one-time process; as circumstances change, your plans may need to be adjusted. Regularly reviewing and refining your strategies will help you stay on track and achieve your long-term goals.

The Empowered Group is an experienced SSAS pension provider and we understand the importance of integrating your business, SSAS pension, and personal goals into a cohesive plan.

Whether you're looking to preserve your wealth, optimise your tax position, or prepare your successors, a well-structured plan can provide you with the peace of mind that your legacy is secure.

By Gareth Alexander

CREDITS

Gareth Alexander is a Director & Co-Founder of GROW Empowered (Part of the Empowered Group) which has been developed to help business owners to understand, define, implement, integrate, and manage all business and personal goals into one integrated solution to achieve their “why”.

property-angels-test-site

Is Your Property Developer Partner Borrowing Ethically?

What To Watch Out For... ﻿

1. Transparency: Are They Keeping You in the Loop?

What to Watch For...

Clear plans and timelines

Regular updates

Financial transparency

2. Security: Is Your Investment Protected?

What to Watch For...

Multiple Exit Plans

Asset-backed security

Personal guarantees

3. Fairness: Is the Deal Balanced?

What to Watch For...

Reasonable returns

Risk-sharing

So Watch Out, But Don’t Freak Out

By Max Rayner

CREDITS

Impact Investing And The UK Property Sector

Choosing Investments That Align With Your Values

Choosing investments that align with your values

But how does this translate for property investors?

Impact investing has far-reaching effects.

The UK housing crisis: An opportunity for impact investors

Final thought

References

CREDITS

THE POWER OF THE FUNDING STACK

How Investors Are Maximizing Property Investment Returns

Funding Stack: Equity and Debt

Types of Finance In The Property Funding Stack

Equity Investment

Senior Debt

Types of senior debt finance include:

Second Charge Loans

Risks Considerations of A Funding Stack

1. Priority and Security Risks for Second Charge and Mezzanine Funders

2. Economic Volatility & Market Risks

3. Over-Leveraging & Negative Equity

4. Reduced Control and Authority Dilution

Managing Property Funding Stacks

By Marc Champ

CREDITS

Propemomix Sunday Supplement 20 Oct 24

“Clowns to the left of me, Jokers to the right, Here I am stuck in the middle with you” - Song by Stealers Wheel

CREDITS

Not All Property Developers Are The Same

Can They Make Your Money Work?

The Challenges Of The Property Development Sector

The Differences Among Developers

Identifying The Right Property Developers

Track Record

Financial Stability

Communication And Transparency

Market Knowledge

Professional Relationships

The Compatibility Factor

The Viable Strategy Of Private Lending

Are You Ready to Back the Best?

By Helen Turner

CREDITS

Private Lending Fuelling The BRRR (Buy, Refurbish, Refinance, Rent) HMO Industry

Synopsis From Thousands Of Appraisals

The Results Make For Really Interesting Reading

So, What Factors Are At Play That Make HMOs Such A Transient Property Class?

It Doesn’t Sell Courses When Your Strapline Is, “Gain Better Returns By Working Harder.”

'A huge portion of the HMO industry is propped up by ‘private lending’ or people rushing into JVs together, which, when it succeeds, can be the blueprint for creating many successful boutique HMOs and long-term business relationships. The issue is that the opposite is just as common.'

Simply Performing Due Diligence On The Individual Or Company And Trusting The Numbers Highlighted In Their Glossy ‘Investment Pack’ Isn’t Enough.

A Little Over-Optimism In Each Area Can Be Catastrophic:

The Questions I'd Like To See Asked More:

By Richard Nicholls

CREDITS

Investing For Wealth Preservation And Growth

A Guide for High Net Worth Individuals

Real Wealth: The Importance of Investing For Wealth Maintenance And Growth

Self-Assessing Your Risk Appetite

Questions To Help Self-Assess Your Risk Appetite:

The Importance Of Diversifying An Investment Portfolio

What To Watch Out For...