Financial Times: Crowd Funding For Property Developments

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Financial Times: Crowd Funding For Property Developments

Postby Ahmwaah » Sat Jan 25, 2014 1:37 pm

My 'brother from another mother' Martin Skinner hit the front page of the FT yesterday as receiving the largest crown funding for a development:

http://www.ft.com/cms/s/0/0c8587a8-835d-11e3-aa65-00144feab7de.html?hpt=ibu_bn4#axzz2rPaOFE2q

I thought it was very interesting model.

Potentially a way of funding projects that maybe banks are unwilling to do or take too long.

What does everybody think?

Here to stay (some will argue it's been here for a while)? Or just a fad that will fall to its knees soon?
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Re: Financial Times: Crowd Funding For Property Developments

Postby Nick » Mon Jan 27, 2014 2:16 am

Ahm,

There is just so much in your post that I don't know where to begin!

There is clearly massive demand in the market for secure collective property investment, and Lendinvest & Assetz Capital are not the only ones taking advantage: -

Lender Paragon Group is offering savers the chance to make an income from the buy-to-let boom, but without having the trouble of buying and letting any properties themselves. It is looking to borrow money by issuing an eight-year retail bond, and promising an annual return of 6.125 per cent.

Martin Skinner has a fantastic track record as an entrepreneur (caveat:not always successful, but that's the definition of an Entrepreneur) and it doesn't surprise me that he is at the forefront of innovative fundraising. His business is powering from strength to strength, and I am sure that there will be many copycats now. The thing that peaks the interest of the economic theorist in me is what this means for fractional banking. In the past economic activity was funded by government using the Banking Ratio to fund economic activity with virtual money. Crowd sourcing uses real money, and if it takes off banks will have little in the way of deposits, and thus little leverage to create virtual money. It could be the end of high overhead commercial banking.

You heard it here first.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Ahmwaah » Mon Jan 27, 2014 2:44 pm

Nick,

Some very astute observations there.

I think the thing that was most notable was the interest rate; 12.1%. So I think this is filling that gap between commercial funding rates and bridge financing rate.

Ironically I think property investments are one of the safest places to put your money at the moment (but i'm biased).

I've seen other crowd funding sites, but for non-property businesses, and can't recall seeing any rate over 8%.

So it this a shift away from commercial funding, as you stated, or just a case of many people wanting to get a piece of the property action and could not resist the high interest rate.

Where that rate say 6%, which is more a typical commercial lender interest rate, would there be such an appeal.

However, I think Martin Skinner has done fantastically well to secure the funding.

I'm meeting with a few financiers over the coming months any may follow suit.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Marcus » Mon Jan 27, 2014 3:09 pm

Interesting approach and smart financing, clever begger. The way I'm reading it it's a bridge until the development funding is secured. If that's correct then he'll only be paying the 12% for a short period. As before, clever begger :-)
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Re: Financial Times: Crowd Funding For Property Developments

Postby Nick » Mon Jan 27, 2014 5:04 pm

Yes 12% is definitely Win-Win - for the investor it in a different league to anything else on offer, and for the developer it's cheap (well not that cheap, but just plain AVAILABLE).

You are right that property is the place to be, but equally the security isn't what you think it might be. Teresa Rollands lent £80K to Glenn Armstrong on a first charge on a property, with 1% interest per month - that sounds like a fantastic secure investment, yet it cost her £50K to recover anything, and all she got was a property with tenants not paying any rent and unfit for habitation. I believe that the court order was £130k (Interest and costs) so the "secure" investment made a loss. Investors need to be very cautious about who they lend money to, and that's where Martin Skinner can clean up - there are very few property businesses who can show a track record of success going back 10 years, but that is what investors need to look for.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Jo King » Tue Jan 28, 2014 10:13 am

It's my guess this can only work in a healthy, rising market. So right place right time!

Historically, residential Housing Developers only net 15% profit and that was in the good times with cheaper finance. Obviously Martin must have done his sums but there is a danger that others assume it's a great deal because it's cheaper than bridging, but in fact don't do the sums properly.

I spent many years working for a residential housing developer both during the good years and the credit crunch - I did the accounts and cash flow forecasts. It was pretty tough to make things work when you were on finance of 10%, only when you could mix it with lower finance could it work.

So yes, to get things off the ground and in a healthy, rising market I would say it could be great, but not sustainable as a solution to the lack of long term development finance at rates we are used to eg 4 to 8%.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Nick » Tue Jan 28, 2014 2:17 pm

Good point Jo, and actually I am rather surprised that he is paying such a high interest rate. I know nothing about the project, but property development is normally at the safe end of the spectrum, so with few other good investments for the armchair investor to park cash I'd have expected Martin to be in a buyers market.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Ahmwaah » Thu Jan 30, 2014 8:08 am

I think Jo makes a very good observation one which I picked up on immediately when I talked to Martin.

However, I know the projects intimately and can say I think it's a win-win for both sides as the returns definitely support the interest rate.

The critical factor for this sort of thing is that you have to be significantly out performing 15% Margin on Cost (MoC).

There are opportunities out there that are achieving over a 50% MoC.

I've got two (London Land > Planning Gain) and Martin has a few.

I think a critical factor, with longer developments, is cashflow. Because if these loans are not rolled up (I don't know I didn't ask) then it's a case of having to support this rate over the 1-2 years the project needs.

In short, I'd be a bit apprehensive about borrowing 4.1mil at 21.1% until I felt I had a stronger capital base for that sort of loan. Hence why I prefer to either raise more capital for the company or wait until I cash out of the land projects during 2105 - 2016.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Jo King » Fri Jan 31, 2014 9:35 am

Just to be clear, when I refer to 15% Net Profit, I am referring to Net Taxable Profit and not Margin on Cost which is of course entirely different and I could never imagine anyone surviving even one development on that margin.

As I say for 'one offs' in a rising, healthy (?!) market such as London right now then 12 % could well be ideal - I remember the days of us being able to put up the prices by £5k per unit per fortnight and I wouldn't be surprised if Martin is in a similar situation in London at the moment. But I took the question to be "is this a way forward to replace development finance" and for the majority of large scale developers who are churning out mass residential development every day all over the country, then I can't see how 15% Net Profits could support finance rates of 12%.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Nick » Fri Jan 31, 2014 9:57 am

My last big project returned 15% (so spot on Jo) and the finance is costing 2.75% over base - but I am a very sound financial proposition, and the funding was a ridiculously low LTV. I'd be scared to do what Martin is doing, but then if it goes small birds up he can walk away - I can't.
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Re: Financial Times: Crowd Funding For Property Developments

Postby Jo King » Sun Feb 02, 2014 9:59 am

In London right now? I doubt it will go small birds up. In 5 years time, when things may be quite different? ... Well hopefully, if Martin has worked a few more developments successfully, he'll have the track record he needs to get cheaper finance.
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