Proper Wealth - Episode 1 - Property As A Vehicle for Wealth & Development Finance

Hosted in the Nova Cafe by Paul Mahoney, Proper Wealth explores all aspects of wealth creation with a specific focus on Property. This first episode covers property as a vehicle for wealth with Nick Wallwork from the Property Forum and Development Finance with Chris Davidson with Discover Development Finance. Click above to watch the first episode. Proper Wealth is broadcast on Property TV - Sky Ch 198.

Paul Mahoney:

Welcome to Proper Wealth with me Paul Mahoney here at the Nova Café. We have Chris Davidson today, the MD at Discover Development Finance, but first Nick Wallwork, the founder of Property Forum.

So Nick, why property? The big question.

Nick Wallwork:

Well property is a fabulous investment depending on whatever your goals are. Depending on the specific strategy you go for, it can give you either a short term investment goal, it can hit those goals or it can do a longer term solution.

I guess I like property because it’s flexible. There’s also options within it, it’s not just setting stone, you have to buy a share and just watch that share go up and down. It gives you lots of control, you can decide how much control you want to have, and how much involvement you want to have in a particular deal, and everything in between. It could be highly tailored to invest well.

Paul Mahoney:

Yeah. A broad range options that, is that there’s a different types of returns, whether be income focused, growth focused, different locations that give-

Nick Wallwork:

A bit of both.

Paul Mahoney:

… different capital values and all sorts of things. Perhaps in some case is where people sort of misconceive property is the fact that it’s too large purchase plus logistic cost, all that stuff, and that turns them off sometime. Not necessarily understanding the broad range of options out there.

Nick Wallwork:

In this day and age, deposits are hard to get. The competition for properties is tricky, the under-supply in the UK specifically is hard. You’re fighting lots of people to get that property, and cash is king, so having a bigger deposit or an investor to back you as an investor can really help.

Definitely, to get in can be tricky, but there’re definitely strategies out there where it’s a lot easier, and working with people like yourself can help open up opportunities people might not have seen on their own.

Paul Mahoney:

And what would you say are some of the key fundamentals for people to look out for? Specifically we talking to the mom and dad investors. People looking to get involved in buy to let. What are some of the key things they should look for?

Nick Wallwork:

Well I think capital growth is one side an income will yield is the other. So there’s two main factors you need to be looking out there. I couldn’t give any specific advice without speaking to a particular client, but those are the two main broad areas they want to be looking at. Depending on if they want a two year return, or a ten year return, they need to consider, is it a short term fix, or is it a 20 year pension.

I like to invest on yield, on income, and let the capital growth follow. You’ve got to make sure that your mortgage and all your bills, and your costs are covered. If there’s any fluctuation in interest rate, if there’s any market changes in rent, that kind of stuff, you don’t want to be caught out in the short term and have to subsidize your mortgage. What you thought was investment suddenly becomes a liability, and that’s-

Paul Mahoney:

Absolutely.

Nick Wallwork:

… not a good investment. Whatever it is I would say, focus on the yield, in my view focus on the yield first and take the capital as the cherry on the cake and look at that as a longer term view that should come, almost certainly, certainly in UK, if you pick the right area and things like that. A combination of the two.

Paul Mahoney:

So essentially deciding what their goals are and reverse engineering that to determine what works best for them.

Nick Wallwork:

Absolutely.

Paul Mahoney:

There’s no one [inaudible 00:03:36] or is there?

Nick Wallwork:

No, absolutely.

Paul Mahoney:

Unfortunately.

Nick Wallwork:

You could look at the individual circumstances, and I guess trust that risk profile comes into it. You will find some people are more risk adverse, and they are worried about what investment might bring. They might go for slightly lower yield property that’s lower risk. It’s not always the case that higher returns give you a high risk, but it can be. You’ve got to factor in the risk profile for someone as well. That’s key.

Paul Mahoney:

I suppose the thing with property is, in the right location people always need somewhere to live, don’t they?

Nick Wallwork:

Absolutely, and that’s fueling the under-supply of property in the UK. We are not building enough houses, we haven’t matched the deficit of housing in UK for many, many years, and that gap is getting worse often. We’re struggling to build, recession hasn’t helped and since the 2008 recession, developers have come back in a few years after that when finance started to come back for developers, they’ve built a lot more stuff, but we’re still not building fast enough.

Paul Mahoney:

Pretty interesting stats on that I was reading recently was that the requirement is 300,000 new units per annum, and we’ve been averaging about 150,000.

Nick Wallwork:

Its quite a-

Paul Mahoney:

That’s half-

Nick Wallwork:

… big deficit.

Paul Mahoney:

… the requirement.

Nick Wallwork:

And that’s just year on year, so essentially to clarify that start you’re saying, 150,000 items are getting worse each year. Deficit’s getting bigger in a year. The problem is getting worse. What that will potentially do is increase rents, increase demand, and the government are doing certain things to try and help this. It seems like an attack on investors, but it’s not meant that way, it’s meant to keep the market sensible, and things like this, the stamp duty changes, and things like that, it’s all there to try and keep the market even.

I know any investor really wants … We don’t want to be a [bustarn 00:05:15] I think. Property investors are given a bad name sometimes in the general press. You’re not there to make a quick buck, you’re not there to make loads of money when the housing price is boom. We want a stable market, I mean I would like to operate in an almost completely flat market with slight rise to [inaudible 00:05:32] inflation at the very least, but you can make money in that market. What you don’t want is uncertainty.

Paul Mahoney:

I think that’s a very good point. I think a lot of people perceive landlords as being these fat cats counting their money, but generally they’re normal mom and dad people. They’re just looking to-

Nick Wallwork:

Exactly.

Paul Mahoney:

… utilize their resources.

Nick Wallwork:

Create a pension, and create hopefully a small legacy to pass on to my kids, and also support the market. We need houses, and we need investors to be able to buy those, if deposits are too high it’s hard to provide those houses. We need a combination of government supplied housing and subsidized housing for key workers and things like that, there’s some good schemes out there for that. We also need investors. I think there’s no opportunity there if you’re a sensible investor to make reasonable returns and provide a good quality service, and good quality housing, which is much needed.

Paul Mahoney:

I suppose we’re talking there quite a little about supply, demand is probably the other side of that equation, and the simple law of economics when it comes to making any investment, and for some time now that’s been quite heavily [wided 00:06:30] in favor of property investors, hasn’t it?

Nick Wallwork:

Absolutely. Don’t forget immigration has been … Over the last ten years, has been a large influx of people moving to this country, which fuels the population growth as well. It’s not just … You say the supply is the demand as well from both sides that affects the number of people who need housing.

Paul Mahoney:

And when it comes to location, is there any tips you’d give there on the selecting of severe [inaudible 00:06:54]. It’s quite a broad market, you know different areas are very different to other areas. Is there any tips you’d give there on selecting a suitable location. I suppose it depends on the outcome you are hoping for, but just in general.

Nick Wallwork:

Yeah, good point. I wouldn’t pin-point any particular location per se, I would give some more general advice because I think investors should also … Well, if it suits them. Some investors are different. Invest maybe locally if it’s more hands-on. If it’s more hands-off I think the location is less important, the proximity is less important I should say. In terms of the location you want to be looking for, either city center location or on the fringes of city centers. Should have very easy walking or very short commuting distance into town center’s train stations, good commuter belts, good towns that have got a good professional population.

So if you’re investing, you’ve got to think about your tenants. You’ve got to think about your exits, are you looking for a long term tenant. You’ve got to look at the business in that area, you’ve got to look if there’s any investment from the government in terms of transport links, in terms of new business parks. Walk through the town. Is the town looks like it’s going down hill, or is it doing well, is the old, new housing estate popping up as well.

There’s a lot be said for piggy backing on the back of some of the bigger developers out there. If you see them going in, they probably got a ten, 15 year view to build so many houses. You might want to get involved in that area as well.

Paul Mahoney:

I definitely agree with that. That central location tip there so far as investing it marks with depth.

Nick Wallwork:

Absolutely. Well, it’s a caveat though. I would personally stay clear of London, unless you’re a gambler and you like extreme capital growth ups and downs. There’re plenty of good investments there I’m sure, but with London in particular, do your due diligence [inaudible 00:08:36] because it’s its own micro-market. It tends to be the first to be hit when there is a property crash, and it tends to be the first to boom. It’s got the most extreme fluctuation, and its got its own micro-climate in terms of investing.

That can be riskier if you don’t what you’re doing, and with the prices being so high, you tend to get lower yields. Your return from an income perspective is lower, so you’re going to struggle to pay your mortgage and all your costs. So it’s something to consider there.

Paul Mahoney:

And I absolutely agree with you. I think especially in the current market, and that leads on to another point. Is some of the changes that are happening at the moment, or have happened and are continuing to happen with regards to watch let mortgages, mobile service abilities, stamp duty premiums. The list goes on and on with changes that happen recently and making the market a bit more complex.

Something we’ve noticed is a shift in the market, away from high value low yield assets, pre-dominantly London and the South East. More so towards lower value high yield assets, which really minimizes the impact of most of those changes.

Nick Wallwork:

Absolutely.

Paul Mahoney:

That’s quite an interesting trend we’re noticing in the market at the moment.

Nick Wallwork:

Yeah it is. It is interesting and I think there’re still very much a strong opportunity to invest in property and asset class. Certain changes like you say the stamp duty changes, and things like that have made it harder, but not impossible. You shouldn’t be investing in an individual property, three percent is going to break the deal. I think that’s the message, look at the due diligence on the deal, check the numbers work, connect your three percent here and there. If that affects the deals, you shouldn’t probably be investing in it in the first place.

Just a little bit of extra due diligence is … Margins are getting a little bit more squeezed. So that’s overriding advice really, is look carefully. Don’t necessarily be put off [crosstalk 00:10:19]

Paul Mahoney:

Yeah absolutely. Something is suppose I’ll take on property when it comes to comparing it to other options, as far as what you can invest into to create wealth, is the real different shedding factory is the leverage. The ability for the mortgage.

Nick Wallwork:

Yeah, absolutely.

Paul Mahoney:

The fact that you can take a 25% deposit and you leverage the rest. So quite high earned value ratios at low interest rates over the long term. In most cases with no ability for that lender to recall that money.

Nick Wallwork:

No, absolutely. The debt is being eroded by inflation as well. So it’s a double whammy with the leverage.

Paul Mahoney:

Exactly right. That allows to achieve 20% plus returns per annum on your cash without setting the world on fire. When you show those numbers, often they’re quite surprised because that seems like a very hard number.

Nick Wallwork:

And if you compare that with the equity market for example, and the only way you can leverage … I said the only way, I’m not a stock trader, but there are ways, other ways to leverage. But things like futures and things like that, and options of ways to leverage in the stock world, they’re highly risky. You can lose all of your capital quite easily.

Paul Mahoney:

Yeah. Imagine loans if the value of your equities were to fall, then of course you get a margin calling to sell or putting more money in the worst possible time. I think that is one of the biggest differentiating factor, not just the returns, but also the stability.

Nick Wallwork:

Absolutely, the security breaks the motor.

Paul Mahoney:

Exactly. We mentioned so far as people actually needing somewhere to live, even in a recession people don’t just disappear, do they?

Nick Wallwork:

No absolutely. What we found in the last recession is that our property portfolio that we built up before that, got us through that recession because rent was still solid, and in fact very quickly recovered and were stronger. My rent has been going up pretty much since 2008. Where the capital value took a hit, as long as you don’t have to sell, and you become a distress seller, you find that you can service the mortgage, you keep the property well maintained and looked after or you have someone to do that for you, the rent will cover you. You just wait for the capital values to come back.

That’s why I said I think it is important to invest on yield, and then capital comes after because the capital will fluctuate. You have to accept that.

Paul Mahoney:

Completely agree. Thanks so much Nick.

After the break, join me for a discussion with Chris Davidson on property development in the UK and development finance.

Welcome back, and with me now is Chris Davidson from Discover Development Finance. So Chris, tell me where the Development Finance market is going.

Chris Davidson:

Well, at the moment there’s quite a lot of changes going on, and that’s both for the people that buying the unit as well as the guys who are building the units. For developers, the margins are getting heavily squeezed wherever you are looking. Whether that be high lump prices, could be on construction cost, and the GDV with Brexit that’s been done today is very uncertain at the moment.

Developers in terms of what leverage they have in terms of where their profit margins are struggling fronts in many ways. Time is certainly a leverage, one leverage a developer can use in terms of really shortening the cost and actually increasing the profit. And they can do that using new construction technologies that really quicken up the time of build, or they can look up projects that aren’t ground up. For example permitted development schemes where the structure is already in place, and they are making a hire purchase to start with, but ultimately the margins are great, or they can turn these projects around and that’s how important time is.

Paul Mahoney:

For those who don’t know, can you just explain permitted development rights, and how that’s working.

Chris Davidson:

Permitted development is, and at the moment in the UK, is based on converting office to residential. If you are someone who maybe doesn’t like the Greenbelt being built on and thing, well where are we going to get all these new houses from. There’s quite a lot of office stop particularly in the cities, London, Birmingham, et cetera, which are ten, 15, 20 percent occupied.

The idea is, tenants will move out of those properties, they will be bought. Permitted development is a fast track planning service. It takes 56 days to go through.

Paul Mahoney:

I suppose that’s being done to just [inaudible 00:14:15] better utilize the current [stockets 00:14:13] on the market. Vastly under-supplied residential market.

Chris Davidson:

Absolutely, the more properties keep going up and trying to get the supply and that will help everybody.

Paul Mahoney:

How do you help developers reduce their costs and improve on those squeeze margins you mentioned?

Chris Davidson:

We work with over 40 different lending options in the market place, and what has happened in the last ten years is, the development finance market place has exploded out of all proportion. You used to go to your bank, that would be three or four of them, and you would have an easy product there. With the increase in choice, it’s become harder and harder to chose which lender to go to.

We help in service of analyzing the finance products, the really deep level. Interest rate isn’t enough, you’ve got to look at how they apply the interest rate, what the fee is based on. And actually, across 40 lenders, your top four or five comparing up [inaudible 00:15:05] is a really difficult thing to do.

Paul Mahoney:

Are there any mistakes that you see developers making, or misconceptions they might have you could help them improve their strategy?

Chris Davidson:

There’s quite a few. I suppose the main failure is to plan properly. Your asset and liability statement is a key in terms of being able to qualify in service loans on the long term basis … Mistakes that developers make. Chasing a sheep into stray when they are putting down a lot of cash up front. For an extra two percent on the interest rate you might be putting down … Which might be 50 grand in interest, you might be putting down an extra 300 grand on the purchase, and actually that’s stopping you leverage up on two or three different sides.

Different structures they can use and I think a lot of it is about the planning before you get a-

Paul Mahoney:

Great, that sounds like good advice. With the recent PRA changes and how that might affect both developers and their subsequent buyers, how you saying that affect them [inaudible 00:16:02] and how do you say that affect them after moving forward?

Chris Davidson:

It’s a great question Paul, because there may be 25% of stock for any development. It’s going to be bought by select investors, and with the new PRA changes really hampering by select investors in terms of they are going to put a lot more money down, they’ll be buying less stock. I don’t think we’ve seen the impact of this yet, but if we look in probably six to 12 months time, I think you’ll see less by select investors buying into development, and probably harder to shift those lost 20, 25 percent units.

Paul Mahoney:

What I mean to say Chris is that it seems like there’re some challenges at the moment for developers and also the subsequent buyers especially buy to let investors, but I suppose that’s your shifting supply and the other side of that coin is that the month is continuing. So property crossed [inaudible 00:16:48]. It’s an interesting market line I think.

Chris Davidson:

Yeah. Someone’s always benefiting aren’t they. You’re either benefiting because you own the property already. Everyone wants to profit out of that property. I think that the key is at the moment that we’ve got a dearth of people who combine by first time out, those are the key areas around the country. More and more lenders are looking further, failed from London and South East, and again it comes down to micro-occasion.

There’s still opportunities, it’s location, location, location, location again.

Paul Mahoney:

Okay Chris. We spoke a bit there about permitted development rights and some of the opportunities that are offered there as far as further supply and already available stock. One of the challenges that we’ve seen recently is with the availability of buy to let mortgages on the already conversion [inaudible 00:17:33] type stuff. Buy to let is done [inaudible 00:17:36] to be saying it out right, but what we’ve seen is in more regional areas. The availability of the mortgages is a little bit limited.

I think something is very important for both developers and subsequent buyers is to assess the availability of those mortgages to make sure that their investment’s actually viable. That’s something we found quite interesting and surprising, but I would say most people probably aren’t aware of.

Chris Davidson:

Very much so, and it’s always about the under-mind. if finance’s been taken to a developer, then he’s got to be thinking, “The lender is thinking about the exit strategy.” Developer’s got to be thinking how he’s getting out.

I suppose specifically with permitted development … There’s no natural strategy for permitted development. You go into different areas of the country, it’s somehow banned, it’s not allowed. Certainly some development, you’re the Buy to let investors are not able to get mortgages. At times in property in general, there’s not this joined up thinking nationally about everyone is working of different agendas. How can we actually bring together strategy that is going to benefit everybody and frankly isn’t wasting everybody’s time.

Certainly it’s an issue that I think needs looking at, at a national level.

Paul Mahoney:

That you [inaudible 00:18:43] from both ends.

Great. With regards to developers overcoming perceived issues whether be with bad credit, or rejections in the past, how can they do that?

Chris Davidson:

I think a lot of developers get quite discouraged about the idea of, “Well, I’ve got to be in my bank. My bank won’t fund me, therefore there’s nothing I can do, or I’m looking at a horrendous bridge anyway, so why bother.”

These are some of the developers that we speak to. We can show them that actually that’s not the case. For example if we take credit history, most lenders will take a view of that credit history and a good number, good lower mid mark of guys will take a view on bankruptcy. And bankruptcy if it’s to do with 2008, there was nothing anybody could do. Frankly if they didn’t lend to the guys from 2008, they would be lending to most of the market place.

Provided you’re up from the lenders, they like an honest, communicative relationship, they are happy to take … What lenders don’t like with bankruptcy is if you’ve over-traded, you’ve been involved in fraud or some sort of criminal activity, and believe me guys try and hide it and think they’re going to get away with it-

Paul Mahoney:

Yeah, I’ve seen a lot myself.

Chris Davidson:

I’m sure. They think they’re going to get away with it [inaudible 00:19:59]. It’s always worth asking the question. Another rally for example would be guys who don’t have any cash to put in, “I can’t get any funding because I need to put in 20% equity, 30% equity.” It’s not the case. With some lenders they can get 100% funding, and there’s three or four different methods and strategies to do with that.

You can partner up with equity investors, there are two or three different investment vehicles that can bring the 100% together if you’ve got additional security, effectively you’re getting part of the loan from another project … There’re different ways of doing. Quite often developers who are tied up in one, two, three projects want to do four and five don’t have the cash. It’s always worth asking the question.

Paul Mahoney:

And very high level, what sort of information should developers have readily available when it comes to looking for development finance?

Chris Davidson:

If they got a sign, and they’re ready to go, could do due diligence on the side. The lender is going to lend on GDV, have your comparables ready. Make sure you understand that, easier to do say in Central London than is to do on the North Wales Coast Line.

Paul Mahoney:

And they want proof of the NGDV?

Chris Davidson:

They would like to see it. It’s all about evidencing for the lender. That would be if the developer is the contractor, or there’s another contractor, “Show us the evidence the cost that will come out with the quantity in terms of paperwork.” We always start with the asset and liability statement. A developer has to service a loan, and they will be asked to sign a PG at around, about 20-25% of the loan. That’s calculated on their owned property and cash.

It’s a good starting point-

Paul Mahoney:

[crosstalk 00:21:37] we’ll actually need to have that available in equity or cast in some way?

Chris Davidson:

Yeah, or they partner up with someone who can provide that it could effectively act as a loan guarantor. This is why it is so important, before you go looking for funding, you’ve got all your docs ready. You know what you are looking for.

Other paperwork, development appraisal, cashflow schedule, cashflow is key in terms of actually showing what your costs looks like, and it makes you look professional. There’s five or six different things that need to be in place.

Paul Mahoney:

Once you have that in place, actually finding the finance, what are the mistakes you see people make when it comes to doing that, and what should people actually be doing?

Chris Davidson:

Well wasting a lot of time online. Assumptions on searching for finance vary, but essentially you are either looking for recommendations from your accounts or your architect, or you get online and googling. As with anything we buy on Google, we think all the best options are on page one or page two, but actually those are just the people who have paid the most money.

In development finance, there’re at least forty decent options, and some of those don’t advertise. It can cost you a lot of time and a lot of money, if you’re missing out on good lenders, you’re not evaluating them correctly, and there’re ways and means of short-cutting that process, and frankly that’s using good industry professionals who can save you a lot of time and money and get you to the right place quickly.

Paul Mahoney:

So seeking advice? It’s quite important.

Chris Davidson:

Yeah, I would say.

Paul Mahoney:

Great tips there.