A Question of Property - Ep 2 - Paul Mahoney, Stefano Lucatello & John Howard - Nova

A Question of Property – Ep 2 – Paul Mahoney, Stefano Lucatello & John Howard

Lucia France:

Hi everybody and welcome to A Question of Property. Joining me on the panel here today, we have Paul Mahoney, head of Nova Financial Group. We have John Howard, our property expert of more than 40 years and author of more than three books, Buying and Selling at Auction being the most recent. And Stefano Lucatello, senior partner at Kobalt Law, international property lawyer. So, welcome to all of you.

Paul Mahoney:

Morning.

Stefano Lucatello:

Morning.

Lucia France:

Guys. We’ve got lots of questions to get through, so I’m going to start there with John for the first one. Obviously, we are in the middle of COVID-19 at the moment. And we’ve had people asking questions of what they should do given the situation that they’re in, and how things have changed. So, this person is halfway through the conversion of three flats. “Should I stop work now or continue knowing that the values might be less than I first thought when finished?

John Howard:

Well, it’s a very good question and, obviously, whoever’s emailed that in is obviously very concerned and worried and I feel for them. Being a developer, being an investor, having a project half finished can be quite scary in a situation like this because one, even if you want to finish it you probably can’t get the materials at the moment, which I find very odd that materials can be delivered to site, and I cannot see why they’ve closed all those types of businesses because it seems madness to me. Anyway.

Lucia France:

I thought they were considered essential work.

John Howard:

Well, I would have thought so, but a lot of them have closed. A lot of them have closed.

Lucia France:

Right.

John Howard:

It’s a shame. Especially paint businesses. You think people want to paint the houses at home, we’d leave them open, they can deliver it. But anyway, nevermind. So this situation, if they’ve got the money to finish, I would definitely finish it. And a couple of reasons for that. One is if they don’t finish it, and they get into trouble, they’ll be sending it to people like me at a knocked down price, and they definitely don’t want to do that.

John Howard:

And if they finish it, if they’ve got money to punish it, they’ve got some options. They might be able to rent it, they might be able to sell it, sell them still, but for less money perhaps, maybe not. They may be able to refinance it. There’s three options there, perhaps, potentially. Whereas at the moment, if you don’t finish it, you’ve got one option and that’s to sell it to someone like me at auction or privately, but either way it won’t be a good outcome.

Lucia France:

So your advice is just get it finished by any stretch that you can.

John Howard:

I know it might be a hollow victory as it were because in as much that you might be working for nothing, virtually, but you’ve got more options when it’s finished. And like we said in the last show, if you can afford to, you could rent them and keep them for a few years and then sell them. You’ve got more options, so please try and get them finished. Yeah.

Lucia France:

So Paul and Stefano, any thoughts on that situation?

Paul Mahoney:

Yeah, just to comment. I suppose it depends how much work they’ve got left to do.

John Howard:

Yes.

Paul Mahoney:

But at the moment, it’s not really a good time to be finishing a property right now because finding a tenant is almost impossible and refinancing is almost impossible.

Stefano Lucatello:

I suppose selling is almost impossible as well.

Paul Mahoney:

I’m sorry?

Stefano Lucatello:

Selling is almost impossible as well.

John Howard:

You… I tell you what, I can’t stand the negativity here. It’s unbelievable.

Paul Mahoney:

Let me finish, let me finish.

Lucia France:

Let Paul finish, please.

Paul Mahoney:

I suppose that if there is three to six months work to be done there, and they can manage to finish it in that three to six months, hopefully that gets us out of this COVID-19 situation and actually, that there is without doubt going to be a pent up demand with regards to people wanting to buy properties at that point in time. Regardless of what happens in the economic cycle, I advise people on investing in property a day to day basis and I know people want to buy, but a lot of people are waiting, which is understandable.

Lucia France:

Yeah. So in that case, it could actually be a good time really to get everything done that you needed to do.

John Howard:

To leave yourself in a position, if you can financially finish of course, exposed by not having it finished is madness.

Lucia France:

And Stefano, any thoughts to that situation?

Stefano Lucatello:

No. John said it all.

Lucia France:

Okay.

John Howard:

Thank you.

Lucia France:

Okay. Let’s move on to the question then for Stefano. “I have a foreign mortgage. I can’t pay it as I’m now on furlough, and I don’t have enough to pay my English outgoings, let alone my foreign mortgage. What should I do? What happens if I don’t pay my mortgage?” I’m assuming they mean the foreign one here. And, “Would the bank chase me in the UK and take my assets here or am I safe?” So it’s a lot of questions, but yeah, I suppose it’s the secondary mortgage or outgoings.

Stefano Lucatello:

The first thing to do is to contact the lender in Spain, Italy, France, Portugal, wherever it is. If you can’t speak to them direct, get someone who can speak the language to contact them and to voice your message to them, which is that you can’t pay it. Also send them an email, there must be a contact email. But all foreign banks always have a department that speaks English. They always have English speakers. So there is no reason why you should not be able to contact them by telephone. But I would stick it in an email as well, telling that you can’t afford to pay and proposing that you either have a three month holiday period, within which of course the interest will continue to go. But you have a three month period where you don’t pay and after that three months, you will come back to them with some proposals. Or go straight back to them and say to them, “I can’t pay all of it but I can pay a third of it, half of it. Are you happy to receive that?”

Stefano Lucatello:

Do not stick your head in the sand. Do not just pay less than you would normally without telling the bank or the lender. Can they do something about it? Yes, of course they will. Because of the European enforcement treaty between all the country members of the European Union, Spain, France, Italy, and Portugal, will send people to come and get the money from you. So what they’ll do is they’ll issue proceedings. If you fail to respond in Spain, France, Italy, they’ll get a judgment. That judge will then be sent to the high court in the Strand. It will be translated into English and transferred to a Sheriff’s officer and the Sheriff’s officer or a bailiff, probably a Sheriff’s officer, will come around and knock on your door and he will say, “I’ve been sent by such and such to recover a loan. What can you do?”

Stefano Lucatello:

But the problem is then of course, if you’ve got a Sheriff’s officer at your door, he will take walking possession of your goods for 21 days, which means you can’t sell anything and do anything, and it’s a real problem. So yes, you must continue to pay your mortgage if you can. If you can’t, excuse me, tell the bank and enter into some form of arrangement. Remember, the banks are also, foreign banks especially, prone to doing this. They sell their loans off to companies which then charge you a higher rate of interest. Had one the other day where he’s possibly being judged 46% per [inaudible 00:07:17] from an interest rate of three or 4%. so you must be very, very careful. You cannot just bury your head in the sand and do nothing about it. Same goes in England. I would’ve thought John and Paul have same thing.

Paul Mahoney:

Yeah.

John Howard:

Yeah. Very much so. Stefano, how long will it take for that process to happen if you stop paying, do you think?

Stefano Lucatello:

Three months. Usually a bank abroad will wait three months and then what they’ll do is they’ll start proceedings. And the worst thing of course about it is that if it does go all the way and judgment is obtained in Spain, they could also in the meantime sell the property. They can put it to public auction. In France, Spain, Italy, and Portugal, they have the system of public auction. So if you get judgment, you’re allowed as the creditor to put it to a public auction and then you might find yourself home to buy it back.

Lucia France:

Yeah. So it’s a very scary situation I imagine for a lot of people there. Do you think that most banks would be amenable to a suggestion of paying less or paying half of whatever you were meant to be paying?

Stefano Lucatello:

Banks want to receive some. Banks all over the world want to receive something. They depend on income coming in and they depend on he movement of money. So if you’re paying something, it’s better than nothing. They will say, “Well, we’re not very happy,” but at the end of the day you will have to… The other thing is, Lucia, you will have to prove, in most cases, you’ll have to do a schedule of assets and liabilities. So you’ll have to say, “Look, this is what I was earning beforehand. This is what I’m earning now, which is whatever, I can’t afford it. This is what my outgoings are. I can offer you, instead of 100%, I can offer you a 50, 25% for a period of time. I’ll catch up.” I’d ask for a period of 12 months to catch up in and to review it every six months, let’s say.

Stefano Lucatello:

But you need to have that constant dialogue with your lender because otherwise the lender will say, “Well, he’s in default. I’ve got the permission in the agreement to do what I want to do,” which is to recover possession of the property, sue you for the interest and the monies not paid, send a Sheriff around, and it becomes really complicated. The other thing is of course you will find yourself as an English citizen with a registered debt judgment against your name. So when you go for credit, if you ever go for credit again in the future, you will have a problem.

Lucia France:

Yeah. So it’s going to affect everything in the UK. And Paul, any thoughts on this?

Paul Mahoney:

So it’s worth keeping in mind that obviously at the moment, lenders in the UK are pretty flexible with regards to mortgage holidays and that sort of thing. It would be in their best interest to contact their lender and ask for that if they need it. We thought we’ve had a lot of questions about whether people should be applying for these things, both on the residential and the buy to let side, and so far as I understand, although they might get three months of not having to pay, that three months are just added onto the end of their mortgage. So they are going to have to pay it at some point anyway. So the guidance we’ve been giving is to only do it if you have to, otherwise you’re extending your mortgage period.

Lucia France:

Yeah. It’s not a holiday as such, it’s just sort of deferring it to a future date, isn’t it? So yeah, that’s very sound advice there. Anything else to add to that, Stefano?

Stefano Lucatello:

No, not really. I think we’re in a very fluid situation. I think that if the situation gets worse, not understanding the fact that John thinks it’s going to get better, if the situation does get worse, I think banks will have to come into a common thought which is, “Yes, we’re going to have to give people holidays and we’re actually going to have to stop paying the payment of interest,” because if people haven’t got money, what are you going to do? If you haven’t got money, you can’t pay it. And if they can’t leave and they don’t have a house and all the rest of it, I think this has got a long chain of progression together. I think we’re just at the start of it.

Lucia France:

Yeah, absolutely. Okay, a question now to Paul, please. Do you think the British banks will be in any financial difficulty after this situation? Sort of linking on from what Stefano was just saying.

Paul Mahoney:

Yeah, look, I’m always trying to be positive, but I think that there has to be… Well, there is going to be repercussions on lenders. And I had a long conversation with somebody about this yesterday, so far as where the bucks stops, with regards to mortgage holidays, that sort of thing. For example, a residential or commercial tenants refusing to pay means that the landlord is not getting their money. The landlord then refuses to pay their lender, and the lender is not getting the money, and that seems to be where that buck stops.

Paul Mahoney:

It seems like it will affect the revenues of banks, but of course in saying that, it’s in the best interest of government to have robust banks, so therefore have a robust economy. So the government is helping out individuals and businesses to a certain extent, and they’ll probably have to help out some banks to a certain extent at some point when this flows through that cycle that I think Stefano referred to before. So again, I don’t have a crystal ball. I don’t know which banks are going to be in trouble, but I think it’s hard to just assume that they’re not going to be in trouble because I think some probably will.

Lucia France:

Yeah. And John, any thoughts on that situation?

John Howard:

Yeah. Yes, I love banks, as you know, I really love them. I actually got an offer from my bank on Saturday morning, which I was very pleased to sign and send back, I can assure you. And that was at 3% so that’s pretty good. But I’m only buying 50% of course and that makes a huge difference what you’re buying.

Lucia France:

Yeah.

John Howard:

So what I would say is a British banks have been stress tested after the last disaster in 2008 to a very, very strict level. I’m told much stricter than other European banks, and world bank. So I think in this country we’re better off probably than certainly some of the other European banks. Especially someone like Italy, obviously, who presumably, Stefano is bankrupt now, isn’t it?

Stefano Lucatello:

We are never bankrupt, John. We are one of the only countries in the world that has its own gold reserves, my friend. 21 trillion euros worth of it.

John Howard:

Well, you might need to sell some of that, I think, the way things are going.

Stefano Lucatello:

Our banks never go into bankruptcy. They’re always picked up by the government.

Stefano Lucatello:

[crosstalk 00:13:48].

Stefano Lucatello:

Funnily enough like the banks in the United Kingdom were.

John Howard:

Can I just say, thank goodness we’re not in Europe anymore because we’d be supporting Italy once again, and all the other countries that can’t look after themselves.

Stefano Lucatello:

John, I heard the other day that Italy is deciding on whether to come out of Brexit. They’re doing the Europe thing. They’re doing a Brexit themselves. An Ital-exit.

John Howard:

I know you and I disagree on it, but there we go. We won

Stefano Lucatello:

We don’t disagree on anything, John.

Lucia France:

Are we going to go down the Brexit route? How is COVID-19 going to affect the Brexit situation do we think?

Paul Mahoney:

Sorry, just one point of what John said, I should have raised myself. It is a good point. The lending in the UK is quite robust. We spoke earlier about buy to let. When you think about an average maximum lending of 75% and I think the average across the landlords in the UK is about 60, 65%, that means that the equity in those assets that the bank’s money is secured against is substantial.

Paul Mahoney:

So, for them to lose money on those assets is very unlikely in my opinion. Then there is that consideration that actually [crosstalk 00:15:03]. They’re not overstretched to any extent, in my opinion.

John Howard:

The only thing I would say, Paul, is the ones that concern me are the bridges because they’re charging, in some cases, 15 to 20%. Most people that bridge tend to borrow more. Some of them are up 75, 80% probably.

Paul Mahoney:

They’re usually private equity money as well.

John Howard:

Yeah, true.

Paul Mahoney:

They lose the money, no one’s going shed a tear on that.

John Howard:

No, let’s not worry about them, eh?

Lucia France:

Okay, so another question for you here, John, now. When everything is back to normal, do you think that the domestic residential market is going to take a hit on values?

John Howard:

Okay. This is what I think will happen.

Lucia France:

Crystal ball time.

John Howard:

It’s a crystal ball time, of course it is. But as long as we don’t have massive job losses, as long as, and we come out within in the next eight weeks or so, we are seeing, for the country offices we have, of course Norfolk, we’re seeing most our agreed sales holding together at the moment. And we believe that there was a pent up enthusiasm and demand for people moving and getting on with it, once we come out of this, as long as it’s not too long.

John Howard:

And the government realize that the housing market is hugely important to the economy. Massively important. You buy a house, you put new carpets in, you put new kitchen and bath, and builders, roof, heating. It goes on and on and on. So, as long as we come out relatively quickly, we believe that the domestic market should hold up okay. Yes, there’ll be the odd person who can’t go ahead because they’ve lost their job and of course they will, and there won’t be a massive growth. We know that as well. As for the developers and people who have got high interest, high borrowings, that’s very different, and that there will be opportunities there going forward, without question.

Lucia France:

I think this is a good time actually to ask now, to all of you. We’re trying to keep a positive spin on things here today.

John Howard:

We are trying, some of us are.

Lucia France:

What do you see as being some of the positives to come out of this situation, in terms of the property market and in terms of all of your sort of specialisms?

Stefano Lucatello:

Well, I think that people, because the majority of the people who own homes abroad… That homes abroad are second homes, they’re not main homes, I think we’ll find a glut of international property in the next three to six months, because people will not be able to pay the mortgages or people will want to sell because they don’t want to be owning a property abroad because they’re finding that they’re having to tighten up the belts, and the money that they need is for the United Kingdom and the foreign property is no longer what they want.

Stefano Lucatello:

On the converse side of things, I think there will be a fantastic market for people want to buy at a lower price. And I think prices in France and Italy and Spain will fall even more, especially in France. And I think that there will be a glut of property, which means that the market will come back in let’s say six months time.

Lucia France:

Yep. Okay, great. Thanks, Stefano.

Paul Mahoney:

I think things like these credit innovation. People are now having to deal with working from home and have to make their businesses more flexible and generate revenue in new ways without having to be face to face with people. So I think in some ways that that’s quite a positive. We’ve already seen environmental improvements due to COVID-19 over a period of a few weeks, which is pretty incredible. Something that I had a conversation about yesterday and we have to be very careful about the sensitivity of these types of conversations, but I think it is worth mentioning is that the impact of the deaths and things that COVID is having at the moment, it’s tragic obviously. [inaudible 00:19:20].

Lucia France:

Sorry, Paul. Can I just get you to say that again?Obviously we all agree the situation is tragic, and then it just glitched a little bit.

Paul Mahoney:

Yeah, sorry. So I want to say this in the most sensitive way, but one of the biggest worries of the economy over the next few decades was the major impact of the aging population. And your potentially longterm… Some of the things that are happening at the moment who could lighten that burden. It’s a very difficult conversation, obviously.

Lucia France:

Of course.

Paul Mahoney:

But potentially, sometimes they talk about swings around about, sometimes that there is something worth considering.

Lucia France:

Yeah. Thanks very much, Paul. And John from you?

John Howard:

I think what might come out of this is that people realize they need to look after themselves better. I think certainly the health of people is more important now than ever. And I think this dreadful virus has tended to attack people with ill health, but it has affected other people as well. But I think people certainly need to look after themselves better, health wise, going forward. Type 2 diabetes is one example. So that’s very important.

John Howard:

From a business point of view, I think some businesses that perhaps were teetering on the edge anyway, financially, obviously this will push them over and put them out of their misery, if you like. Other businesses will become stronger and I think there’ll be, like any turbulence in any market, which there will be on the investment stroke, commercial market especially, there will be opportunities and it’s for people like me and others listening to this show to take advantage of those in a sensible, decent way.

Lucia France:

I guess it’s affecting so much of people’s lives, isn’t it? Like travel and everything. Do you think it’s going to affect within the property market in the way that people work? Do you think going forward more and more people just will continue to work from home in more sort of satellite offices?

Paul Mahoney:

Absolutely. I had a conversation yesterday with a client of mine who’s a manager in a very large London, Sydney based company with about 5,000 employees in London, many of which are now working from home. And she told me that after this is all over, they’re going to aim for half of those people to continue to work from home.

Lucia France:

Wow.

Stefano Lucatello:

Amazing.

Paul Mahoney:

That’s two and a half thousand people from one company that are now not going to be working in the city of London. For commercial landlords, that’s not necessarily a positive thing, but certainly for new businesses and people that do need office space in a place like London that’s super expensive, that creates opportunity as well because I think without a doubt, rents are going to come down.

Stefano Lucatello:

[crosstalk 00:22:30] I think we’re going to find that institutional landlords, people in the city, in the Docklands, they’re going to find many of their premises empty because I have a friend of mine who works for ASOS, the online clothes manufacturer, they have 3,000 employees. They’ve now got 2,000 of them working from home and then another 1,000 in the next few days are going to be working from home as well. That means there’s not going to be anyone there, and they’ve decided that probably the majority of them can work from home in the future.

John Howard:

Amazing.

Stefano Lucatello:

People like Google at King’s Cross, and in [inaudible 00:23:04] where all the technology people are, they’ve all realized that they don’t need to be in buildings, which costs a lot of rent to maintain, to actually exercise the businesses. High tech businesses like that don’t need premises right now.

Lucia France:

I suppose in that way, maybe Stefano and guys, that’s going to help them to potentially recoup some of the losses that they might have had. Do you think there’ll be a different way that the actual owners of the properties use that space now that they’re not using them as offices?

John Howard:

Well, I think that certainly of course with the PD schemes around at the moment, people will want to look at other of ways of developing and dealing with their own properties. The biggest problem a lot of these landlords are going to have, and we all have it, is empty rates. Empty rates is a massive amount of money for people. And of course if you’re shop at the moment you’re not paying any rates for a year, but if that shops becomes empty, it’s the poor old property landlord investor, people like me, that are still having to pick up the rates. That is unless it’s listed, if it’s listed, there’s no rates.

Stefano Lucatello:

Lucia, just one point. I think that the planning laws will change. I think the planning laws will go towards more and more office buildings being given permission to change into residential, hotels. Places like the Docklands, I think you’ll find that lots of those office buildings will become residential places. They’ll become hotels and residential. And the Docklands will change from being an office place to being a residential place, totally.

Lucia France:

Yeah.

John Howard:

In Canary Wharf, at the moment, there’s over 20,000 flats being built already. I’m not sure they need anymore, which will be interesting because if the property market in London gets a bit cheaper, even I might be able to afford to buy one.

Lucia France:

Thanks very much for watching A Question of Property here today. My name is Lucia France and you can email us if you have any questions that you’d like to be answered in a future show. ask@aquestionofproperty.co.uk. That’s A-S-K, ask@aquestionofproperty.co.uk. Thank you very much for watching and we’ll see you next time.

 

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