Proper Wealth from the Nova Cafe EP 6 – Collective Investment Schemes

Hosted in the Nova Cafe by our MD Paul Mahoney, Proper Wealth explores all aspects of wealth creation with a specific focus on Property. This sixth episode covers Collective Investment schemes, Tax Changes affecting the Buy-to-Let Market and Advice on Investing in Properties with Rachel Stark from Cogress Ltd. Click above to watch the sixth episode.

Paul Mahoney:

Welcome to Proper Wealth with me, Paul Mahoney. This show we discuss all things wealth creation including property. Today we’re going to discuss collective investment schemes, an alternative to traditional buy to let. Joining me today is Rachel Stark from Cogress. Thanks for joining us Rachel.

Rachel Stark:

You’re welcome. Thanks for having me.

Paul Mahoney:

No worries. Rachel, let’s talk about collective investment schemes. How they can be an alternative to buy to let or at least part of a buy to let portfolio. If we start out by talking about the differences between tradition buy to let and collective investment schemes.

Rachel Stark:

Here the truth is that buy to let used to be one of the few avenues that investors could use to build a property portfolio. The alternative obviously was to be ultra high net worth and perhaps build an empire directly with a developer. The truth is now, there are far more options open to investors and even those investors who are already in buy to let like those options ’cause it allows them to diversify more freely with entry levels that would be lower than if they were going to go into buy to let themselves.

Paul Mahoney:

So start with the entry levels. What are the usual entry levels so far as people, that the amount of funds required for this type of investment?

Rachel Stark:

Again, it varies enormously depending on what kind of investment opportunity you want to go into. Obviously you can mess in a property fund which is a very traditional form of property investment, it’s been around for a long time. But you’re not choosing the specific property development that you want to invest in. If you want to have that freedom to choose, then there are things like crowdfunding and other collective equity investment schemes as well as also collective debt schemes and opportunities that are able. And they’re entry level, can be probably 10 pounds all the way upwards, depending on the nature of that investment.

Paul Mahoney:

Right. That would appeal to some people who may not necessarily have the funds available for a buy to let or maybe might want to spread their funds to achieve diversification.

Rachel Stark:

Exactly. The diversification is probably the key thing that people really like about it. They want to be able to pick and choose and they want to diversify their risk in their portfolio and this would very much allow them to do that.

Paul Mahoney:

All right. For people who don’t actually understand what collective investment scheme is, what are they actually investing in?

Rachel Stark:

Let’s take for example a collective equity investment scheme. The most likely scenario is that you’d be investing in a specific project. If we talk about property, then there may be a specific property development. You will be taking an equity stake in that development but without having to fork out this whole sum of money that would be necessary if you were taking the whole 100% share, you can take a proportion of that.

Paul Mahoney:

It’s almost like a joint venture with a developer somewhat.

Rachel Stark:

Exactly. It is very much like that.

Paul Mahoney:

Okay, that’s interesting. It gives someone the ability to get involved in a project they’re interested in without necessarily taking on all the risk.

Rachel Stark:

Exactly. There is probably still less I would say, without taking on all the risk, but without having to put out the full amount of money necessary. It’s very important to still be aware of the risks.

Paul Mahoney:

Without having to raise a million pounds to do it.

Rachel Stark:

Exactly. Precisely.

Paul Mahoney:

And I suppose joining with other investors and therefore spreading that risk somewhat.

Rachel Stark:

Spreading the risk in that you can diversify your portfolio is the most accurate way to look at it.

Paul Mahoney:

What would you say is some of the advantages and disadvantages of this as an alternative to buy to let?

Rachel Stark:

The advantages are as I said, diversification and also probably the potential yields. Obviously if you’re taking an equity stake in something, if it’s going to be, when you buy to let, you are normally investing in something for a long term period of time and you’re looking for more income generating asset. The typical yields to be around 4 to 5%. If you want something that is going to yield a higher return, then obviously you need to look at something where you’re going to develop something, really improve it and probably sell it off in a shorter period of time. That’s going to be the likely way you’re going to earn higher returns. Obviously you have to look at the risks that are associated with that as well.

Paul Mahoney:

Okay, all right. There’s always a risk return type balance. We’ve spoken about the size of investment, that can vary quite a lot. I assume that the time frames of the investments can vary quite a lot too?

Rachel Stark:

Very much so. With any investment of this type, it’s very important that you do your own due diligence so you’re making an educated and informed decision. One thing to be bearing in mind is whatever platform or company you are investing in, being very aware of what due diligence they have done. Because again, in the collective investment world, the degree of due diligence varies enormously. You really need to know your stuff before you make that decision to invest.

Paul Mahoney:

Yeah, okay, I certainly agree with that. Your due diligence is always important. I suppose when it comes to something like a collective investment scheme, there’s an extra level of due diligence, isn’t there? Because it’s not just the investment, it’s who’s offering you the investment.

Rachel Stark:

100%, exactly.

Paul Mahoney:

And the platform where your money might sit or where you’re placing that money.

Rachel Stark:

Exactly. So you might want to look at what is their track record? How much have they raised? What kinds of projects? What is the experience of the people in that platform? And also very much, what is the information that they are providing you on the actual investment itself? The more information they provide, the more transparent that information is, then the easier it is going to be for you to make an informed decision.

Paul Mahoney:

And the more piece of mind.

Rachel Stark:

Yeah, 100%. Certainly if I was to be presented with very opaque information about an investment that it would make me very suspicious as to what I was getting into.

Paul Mahoney:

I certainly have seen some of the guys out there offering almost unbelievable returns but when you look into the information, potentially it’s not as transparent as you might want it.

Rachel Stark:

No. Our view is that we should provide prospective investors with as much information as possible. Including detailed financial information on the project they’re going into. And be available to answer all the questions they may have in order to help them make informed decisions.

Paul Mahoney:

And that’s probably required. Given this a somewhat new market, isn’t it? It’s a new way of investing and having exposure to property, in some cases can offer better returns. Balancing that with risk and understanding what those risks might be is probably pretty important for people to have piece of mind around.

Rachel Stark:

Very much so. Particularly since the platforms out there are not the big traditional banks that you may have seen around on the High Street for years and years. You want to make sure that you feel that you trust them and you know enough about them before investing.

Paul Mahoney:

With regards to investing in collective investment schemes, are they limited to any particular type of person or investor?

Rachel Stark:

Again, it very much depends on what you’re investing in. In some cases peer to peer lending is considered a type of crowdfunding and again, that is open to all people. My understanding is that most equity crowdfunding or collective investment is normally limited to people that are qualified as high net worth individuals or sophisticated investors.

Paul Mahoney:

What is a high net worth individual.

Rachel Stark:

A high net worth individual is somebody that is earning 100,000 pounds or more in income or has net assets of about 250,000 pound or more, excluding their personal home.

Paul Mahoney:

Okay, great. What’s a sophisticated investor?

Rachel Stark:

A sophisticated investor, there are many potential brackets that you could fall into. For example, if you’re an angel investor you’d be a sophisticated, if you’d invested in unlisted assets, investments, you’d be a sophisticated. If you’re a director of a company, you’d constitute as sophisticated. Those sort of …

Paul Mahoney:

That’s a good a point. Some people wouldn’t know quite whether they fit into that bracket or not.

Rachel Stark:

And very much the platform that you invest by should make sure that those categories are clear to you before you qualify to make sure you know what it is that you’re doing.

Paul Mahoney:

Yeah, okay, all right. Understanding what is open to you so far as the different collective investment schemes out there and therefore whether it’s suitable for each person as an individual. Are there different levels of regulation in collective investment schemes?

Rachel Stark:

Yes, there will certainly be some that are regulated and some that aren’t. If you are investing, I would recommend that you would look very carefully at whether that platform is FCA regulated because that may give some greater piece of mind to know that they’re going to adhere by certain rules of fairness to customers and transparency in their communication.

Paul Mahoney:

Yeah, okay. By being regulated, there would be more requirements for transparency.

Rachel Stark:

Very much so.

Paul Mahoney:

And potentially a little bit of recourse over misdeeds or anything that’s untoward.

Rachel Stark:

Although just because a company is FCA regulated, doesn’t mean that the investment itself is necessarily regulated and it may not be covered by the financial services compensation scheme. Again, that’s something that as an investor, you should do your due diligence on.

Paul Mahoney:

It seems that there is quite a lot to consider.

Rachel Stark:

Very much so.

Paul Mahoney:

And a lot of varying types of investments. Varying due diligence. All those sorts of things. Potentially something worth seeking advice on?

Rachel Stark:

Potentially.

Paul Mahoney:

As far as understanding these things.

Rachel Stark:

It very much depends on how much money obviously you’re looking to risk or to invest and what your background is. But if it’s something that you feel uncertain about, whether it’s asking your friends who might have done something similar or asking for professional advice, that’s always a beneficial thing to do.

Paul Mahoney:

Okay. It seems to me like there are certainly some standouts with regards to collective investment schemes and peer to peer lending and all those sorts of things. Some companies are doing it quite well and other potentially not doing it as well. There’s been some concerns raised about the ones that aren’t doing it so well so might be worth avoiding those ones.

Rachel Stark:

Very much.

Paul Mahoney:

With regards to fees, assume they vary.

Rachel Stark:

Yes.

Paul Mahoney:

How do they vary? What determines that?

Rachel Stark:

That will be based on the platform itself obviously and it’s something that number one, you should make sure those fees are very clear to you from the outset because again, a warning sign would be if you can’t find that information about the fees or it’s a little bit opaque. Some fees may be upfront fees, there may be fees that are based on the success of a certain investment. Again, it depends on the nature of the investment.

Paul Mahoney:

Generally, are the returns quoted as a net? Net of fees?

Rachel Stark:

Again, that would differ and that’s a very important point because obviously it’s much clearer to you as an investor if there is projected final returns are quoted nettable fees ’cause then you really know what it is that you’re potentially going to get. It’s more opaque when they’re hidden.

Paul Mahoney:

That’s probably what’s turned a lot of people off things like funds and also pension schemes and things like that where they’re being quoted a reasonable return but then they’ve got a big chunk of fees coming out of that return. Understanding what that chunk of fees might be is really important to understand what your return is going to be at the end of the day. Again, the transparency of that would differ across the board. Making sure that is as transparent as possible. Great. Some excellent points there Rachel. Thank for joining us. Join us after the break for more discussions on collective investment schemes as an alternative to buy to let property.

Welcome back to Proper Wealth, me Paul Mahoney. Today we’re discussing collective investment schemes as an alternative to traditional buy to let property. Joining me again is Rachel for Cogress. Thanks for sticking with us Rachel. We’ve spoken quite a lot about collective investment schemes, how they work, different things to consider. Perhaps we should talk now about some of the changes with regards to buy to let, the tax changes, potentially Brexit, how that might affect things. And how that relates to the collective investment schemes.

Rachel Stark:

There have been various fundamental changes that have affected the property market as a whole that investors should be aware of. That is changes to the tax regime for buy to let investors, it’s stamp duty changes and Brexit. And those have very much changed the investment landscape. If you’re considering investing it’s worth understanding the impact that it will have. Certainly the part of the market that has been most affected, particularly by stamp duty and Brexit is the really premium end of the market. Developers we’re piling into high end, premium central London properties but with really, really high capital values. That part of the market has really started to dry up in terms of the transaction volumes. If you’ve got a property there and you’re hoping to sell it, it has become much more difficult to do so.

Paul Mahoney:

It’s interesting how those changes have affected the overall demand and as you say, the transactions and how that flows through to developers and then to things like collective investment schemes. Certainly I’ve noticed less and less people going for high value, low yield properties, as you say, prime central London, and putting a bit more focus on lower value, high yielding properties. That has been caused by the tax changes which are accentuating the importance of yield. And potentially things like Brexit. Uncertainty. People aren’t wanting to spend multiple millions of pounds on a single purchase anymore. They want to take a little less risk.

Rachel Stark:

Yes, one of the important things to do is to look at how your investment strategy may need to adapt to the changes that have taken place. Certainly many of the collective investment schemes if they are investing in property, will be doing just that. And certainly our research shows, supported by other expert research, that you should be looking further afield. Zones two and beyond if we’re talking in London. Areas with good transport links still but where they are perhaps multiunit properties, mixed use residential and commercial where the individual capital value is a million pounds or less. The price per square foot is 1,000 pounds or less. That is where it’s believed that there is a more sustainable demand. People are still looking for that first and second home and still willing to move.

Paul Mahoney:

There certainly is quite a shift, as you say, away from the high value toward the more cost effective or investment effective type properties. It’s interesting how that has flowed through from demand to developers then either to the collective investment schemes and to the end user. Or even through to funders and what funders are looking to get involved in. That’s happened quite quickly, hasn’t it? Over the last 12 to 18 months even.

Rachel Stark:

Yeah, very much since Brexit and stamp duty changes took place. Sadly none of us predicted them but they have had a very fundamental dramatic impact on the markets.

Paul Mahoney:

Okay. From the end user’s perspective, our viewers’ perspective, it’s probably quite important to understand those things. If they are looking to investing in collective investment schemes, making sure they’re investing where it makes sense. Where that end demand lies. Because if they’re investing in a development and that development doesn’t sell at the end, their capital is even more at risk, isn’t it? If that development doesn’t end up being successful.

Rachel Stark:

Very much so. That’s where due diligence, which we keep harping on about becomes even more important. Where there are going to be probably fewer successful schemes out there and it’s certainly much harder to find them. What you want to be doing is making sure you do very thorough due diligence on the developer and the development itself. Hopefully whatever platform you’re investing in will do that due diligence for you. Provide you with all that information so you feel informed. You want to look at the developer’s track record. What is their experience of building in that particular area? Do they have planning permission for the site? What is that area like? As we talked about before, do you understand who the end buyer is going to be and how sustainable that demand is going to be? To be honest, the amount of due diligence you could do is almost endless. Those are some of the few things that are certainly important to look at.

Paul Mahoney:

It all boils down to though, if there’s going to be an end user demand, doesn’t it? There’s lots of things that determine that end user demand but at the end of the day, it’s about determining if that end user target market is going to buy these properties and buy them pretty quickly.

Rachel Stark:

Certainly. If you were investing in a development for a short term exit then there are various risks that one should be aware of. And there’s obviously the developer risk, there’s construction risk potentially planning risk. Saleability at the end is probably one of the biggest things to be aware of in the current climate.

Paul Mahoney:

Something that I’ve seen, certainly a common misconception when it comes to whether it’s investing directly in property or with collective investment scheme, is only investing in things that you personally like. That doesn’t really matter at the end of the day does it? What you personally like.

Rachel Stark:

It doesn’t, but it is a very common thing that investors, that’s a route that they go down. To some extent I understand it because particularly for example, if you know an area, then you may feel more comfortable investing in that area because you just feel more informed about it. But ultimately you’re not the person who’s going to be living in that property at the end of the day so the most important thing to think about who is and how likely it is that they will buy.

Paul Mahoney:

Look I bang on about it, but making sure you’re very commercially minded and unemotional when it comes to investing. Understanding what the target market wants and where that demand is going to be. As opposed to what you might like or the colours or the carpet or all that stuff. Excellent.

With regards to different ways of investing in collective investment schemes. We’ve been talking about just investing in general, people would look at that as cash in bank that you’re investing into one of these platforms or schemes. Are there other ways of investing in collective investment schemes?

Rachel Stark:

Yes. Firstly I would point out that as well investing in a individual capacity, there may be some schemes where you can invest in a corporate capacity, which may appeal to you depending on your situation.

Paul Mahoney:

From a limited company into that platform.

Rachel Stark:

Exactly, yes. Or some sort of partnership structure into that platform. The other thing to perhaps consider, is whether you can invest by your pension which may be in the form of a SIPP or a SSAS, which is a small occupational pension scheme. I am not a pensions or a tax advisor so I’ll caveat what I say, ultimately my understanding is that as a SIPP pension that you cannot invest in residential property but you can invest in commercial property so that may be something to consider. SSAS pensions are more flexible, slightly more flexible and there may be possibilities to invest in a more flexible manner but you should obviously always seek advice when you’re considering doing it.

Paul Mahoney:

With regards to the idea of residential and commercial property from a SIPP, that’s something I understand. Does that apply though, when investing through a collective investment scheme?

Rachel Stark:

Yes, very much so. Not all collective investment schemes may necessarily enable investment via a SIPP or a SSAS, but regardless of the form in which you’re investing you can’t invest in residential property if you’re using a SIPP.

Paul Mahoney:

If a collective investment scheme is invested in commercial property or is funding a commercial property development, that would allow SIPP investment but not if it was investing or for funding a residential property?

Rachel Stark:

Yes. Again, it would have to be 100% commercial, rather than any time of mixed use.

Paul Mahoney:

Right, that is very interesting. Certainly what I’ve seen is that people don’t necessarily realize they can utilize their pensions and they think about it as this thing to put money into for a long time and they don’t really keep an eye on it or don’t really know what’s happening with it. That’s an interesting way of them perhaps raising funds they didn’t know they had or didn’t know they had access to. And often is an option for them to invest that in traditional buy to let. Ties in quite well to our discussion. With regards to the SSAS option, that does allow them to invest in both residential and commercial?

Rachel Stark:

Yes, it can do. The rules for SSAS are more flexible than they are for SIPP pensions, but again, it’s very much something that you should seek professional advice on.

Paul Mahoney:

That’s a running theme throughout the show is that when making major changes, life changing changes to your finances, it’s always worth seeking advice. It’s good for people to see in a general sense what their options are. That’s certainly something that we’ve covered a lot. We’ve spoken quite a lot about the different options with regards to collective investment schemes, how that can work as part of a portfolio, both buy to lets and shares. The overall investment strategy. Why do you think collective investment schemes have become more popular and becoming more and more popular within the market?

Rachel Stark:

They’re part of an overall trend of new entrants in the financial services space which has been spurned on by regulatory changes, by dissatisfaction with banks and very much by technology enabling some of these players to come around. Once they’re there, they offer an amazing opportunity to investors to invest in a whole wide range of opportunities that wouldn’t have been available to them before.

Paul Mahoney:

That’s very interesting. What do you feel is though is the future of these collective investment schemes or crowdfunding type platforms?

Rachel Stark:

They will continue to grow. If you look at things like peer to peer lending, that has grown enormously over the last few years. It’s got a really big chunk of the market. Crowdfunding is still relatively small in comparison. And there are traditional players looking to get into peer to peer lending and I expect that crowdfunding will continue to build in the way that peer to peer lending has. We will have potentially more players, but certainly the players that exist getting bigger and more established. Perhaps there will still also remain very specialist players who are offering very specific types of investment but I certainly think it’s a type of investment opportunity or platform that is here to stay and will continue to make inroads into traditional players.

Paul Mahoney:

It will be interesting to see where it all goes. Obviously different investment options for people is never really a bad thing so long as, as we say, they are doing their due diligence and they’re making the right investments for their particular situation and their goals. Certainly as part of the overall strategy they might have. Excellent.

Thank you Rachel, some great points there, I’m sure our viewers learned a lot. Thank you very much for joining us here on Proper Wealth with me Paul Mahoney. Join us next time for more discussions on wealth creation, including property.

 

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