I thought the last post very interesting. At the moment I’ve put my toe in the water with property partner with a large part of my traditional approach in a variety of P2Ps. My other question is though about capital growth. Whilst the hpi tells you to expect a growth figure most revaluations and commentators suggest decline in the se and London and the rest of the country likely to follow. I’m attracted by the property ownership model generally but capital decline against income is holding me back from investing much further. Any thoughts? The traditional property backed P2P eg Proplend gives me 7% with a 50% ltv. Should I not stick to that?
Many thanks for your comments and questions. I will do my best to give some thoughts on the points you raise. Firstly on the more technical comparison of our British Pearl offering to that of the Proplend business and then moving into the area of financial modeling, the input of HPI to that process and finally a few thoughts around residential property as we head into 2019.
British Pearl differs to Proplend in several ways which I will summarise here but would be happy to discuss in more detail if you would find that useful.
1. Asset class
British Pearl is initially focused on the residential buy-to-let property market. Proplend is focused on the commercial property market.
My personal opinion is that commercial real estate is a very specialised marketplace. The pricing of property is driven by many factors that extend far beyond any comparison to the valuation of residential housing. Most people are able to relate to understanding, assessing, comparing and the concepts around the valuation of the ‘bricks and mortar’ that we need to live in. Making the step into commercial real estate it something that is not easy and not something that we recommend for individual investors unless they already understand the marketplace or have the time and patience to be able to build that detailed knowledge.
2. Asset management
British Pearl is not a P2P intermediary. Instead, with British Pearl is a regulated Alternative Investment Manager. We source, secure and manage the property on behalf of our customers. The lender is only exposed to the credit/counterparty risk of that vehicle, which is managed by British Pearl, an FCA regulated company operated by property and investment professionals with a successful track record. There is no third party such as a developer on the receiving side of the loan and the loan-providing customer holds a first charge over the property.
With the Proplend commercial loan products, they act as an intermediary between their customers as providers of capital and the counterparty on the other side of the transaction. This means that the investor is exposed to the third party and their associated credit risk.
3. Investment offering
British Pearl is initially offering two core investment opportunities linked to individual residential buy-to-let properties. Firstly investors can own a share in a specific property (in a similar way to that of Property Partner that you currently use - please get in touch if you would like to understand how we differ as a business) and secondly, investors can lend directly with a first charge against a specific property (in the same way that a mortgage provider would lend).
Proplend are purely focused on the lending product with 3 tranches (A, B and C) which are at different levels of seniority in the commercial/bridging loan space.
Note that the investment offerings offer very different risk profiles and as such the interest rates will be different. Commercial property is typically higher risk than residential property and will therefore offer a higher rate of return. Investors need to assess whether that higher rate of return compensates them for the higher level of risk that they are taking.
4. Pre-purchase
British Pearl utilise a separately capitalised underwriting vehicle to pre-purchase all investments which we then offer to our customers. This liquidity and ability to act quickly allows us to access strong capital discounts which we pass on directly to our customers and also eliminates any completion risk being faced by our customers - if an investment is offered on our platform, it is pre-funded and will not be withdrawn. This means that our loan investors accrue interest from the day that they invest. Our share investors are entitled to dividend income immediately that they own shares through the monthly profit allocation cycle.
Proplend obtain finance through their platform on behalf of third parties and so there is a risk that a partially funded investment will be withdrawn or the funding timeline extended during which time your cash is committed.
Financial modeling and how we use HPI
You raise an important point with regards to HPI and how this is input to our investment forecasting.
With the current economic backdrop and the impending uncertainty of Brexit, we understand your concerns around the risks being faced by asset prices generally and specifically property prices. We believe that times of risk are some of the most interesting times to be able to identify opportunities since many investors are looking at alternative assets purely as a result of those headline risks. Furthermore, in order to build in as much capital protection as possible we work hard on the following three areas:
(i) Buying well with cash in order to negotiate strong discounts to open market values (as reflected in property purchase price versus the individual RICS valuations provided for each property).
(ii) Carrying out any specific works to maximise the property value. This may be minimal for a new build property, extensive refurbishment for an older property or anywhere in between.
(iii) Structuring each specific investment in a way that we believe is most appropriate to allow customers to build customised portfolios.
Turning to our financial modeling process, our HPI inputs are very modest and focused over the full investment term which is currently three to five years. With regards to the capital assumptions this is generally very cautious and based upon the longer term forecasts averaged across Savills, Knight Frank, JLL and CBRE. As an example, the current input is around 2.5% growth per annum (and is detailed within the information pack for each investment we offer).
The outlook for residential property
Stepping back a little further and focusing on the outlook for the UK property market as we move into 2019.
We believe that due to the large transactional costs incurred in property investment (such as legal fees and stamp duty) that a longer term view has to be taken. There is no rapid entry and exit and as a result property is an asset class that cannot be easily 'traded'. As a result, British Pearl is very much focused on ensuring longer term capital preservation with growth where possible plus identifying strong rental demand. Of course, there are always risks of a general set-back in headline national property price levels, but we truly believe that this does not mean that opportunities are not always available.
Since the Global Financial Crisis shook the markets in 2008, there has been a fundamental shift in the financial world. Many central banks, including the Bank of England, pushed their interest rates lower in order to stimulate their economies. The result of this was an environment where interest rates payable on cash are extremely low or non-existent. Many investors are therefore looking at alternative ways to generate long-term capital growth or to boost the regular income that is needed to cover day-to-day living expenses. Property is one of these alternative investments. It also happens to be an investment that people in this country understand and have historically trusted. The key factors influencing property prices currently are:
Supply and demand – the overall size of the housing stock is still expanding very modestly (latest data suggests 190,000 per year). With overall demand growing at 200,000 to 300,000, this supply shortage continues to support prices.
Interest rates - While the uncertainty of Brexit remains, there is little chance of any significant upward shift in interest rates. Longer term, with an uncertain economic outlook, interest rates are likely to remain relatively low compared to historical norms.
Taxation - Government policy has been to reduce the attractiveness of second properties from a taxation perspective, which has clearly had an impact on buy-to-let landlords. This means there are opportunities for experts to identify attractive opportunities and operate more efficient property management.
Mortgage affordability – As a result of the 2008 credit crisis, recently the Prudential Regulatory Authority requires mortgage lenders to conduct more stringent affordability checks on borrowers for personal and buy-to-let mortgages, this has lead to a reduction in the number of mortgages available.
Where ownership maybe more difficult on your own we enable a collective approach to benefit from the same if not better returns through our platform.
These national drivers are crucial to understand, but then we also have to look more closely at the regional property markets that have their own characteristics of supply and demand. While parts of central London have seen property prices fall over the past year, other areas — particularly those around regional city centres — have seen relative strength in their property prices over the same period. Strong investment opportunities remain available.
Other factors to consider are large, impending infrastructure projects. Take HS2, the planned high-speed railway link from London to Birmingham, the East Midlands, Leeds and Manchester. Homes close to stations on this route may become more attractive as they become increasingly accessible, driving prices up in turn.
In short, there are always new market opportunities and we believe that when there are headline risks that are driving headlines nationally and weighing on the confidence of investors then it’s a really interesting time to be scouring the marketplace to identify interesting investment opportunities.
