Property Matters - Episode 2 - Paul Mahoney - Nova

Property Matters – Episode 2 – Paul Mahoney

Stephen Galpin:

Hello. I’m Stephen Galpin. This is Property Matters. With me today is Paul Mahoney, CEO and founder of Nova Financial Group, and we’re going to be talking about finance across the property market. Welcome, Paul.

Paul Mahoney:

Thanks for having me, Steve.

Stephen Galpin:

Good to see you. Seems a long time since we’ve done any of this. Doesn’t it?

Paul Mahoney:

Yeah. It has been a while.

Stephen Galpin:

Anyway. Here we go. Paul, I’m very keen to understand what the effects of this pandemic are going to be, or the effects of coming out of it into, really, a new world. Your industry covers people borrowing money for buy-to-let, for mortgages, for commercial purposes. What do you think is going to change?

Paul Mahoney:

Well, I don’t think anyone has a crystal ball so far as …

Stephen Galpin:

That’s what you’re here for.

Paul Mahoney:

So far as actually what’s going to happen. Obviously, it’s caused a shift in the market. It’s forced all businesses to reassess. Any businesses that could keep operating throughout the lockdown did, but predominantly from home. My business, for example, we had a 30 person office in the city that’s been empty for four months now.

Stephen Galpin:

Four months now. Yeah.

Paul Mahoney:

We never would have had the whole team working from home, and we were forced into it. We’ve discovered, actually, it works quite well. So, we’ll probably keep doing that until the end of the year and then we’ll keep our space in the city, but probably operate between the two. A bit of working from home, a bit of working in the city. I think a lot of companies are in a similar situation to that, and therefore …

Stephen Galpin:

Is this going to cause a virtual office explosion?

Paul Mahoney:

It probably will. I think it probably already has, to some extent. Anybody who could have got out of their office space probably has. Because they’re not going to want to be paying for it whilst it’s not being used. But it, obviously, still makes sense to have a city address. So, I would’ve thought that it probably already has caused a bit of an explosion and that. Yeah. I think that will continue. More people will work from home. I think there will be a progression back toward the norm at some point, but I can’t see that really happening before the end of the year. Until COVID-19, hopefully, is well and truly behind us.

Stephen Galpin:

What’s the mood with investors, people who would’ve regularly come to you for buy-to-let information and advice and, ultimately, finance? What’s the mood?

Paul Mahoney:

Surprisingly, it’s been quite upbeat, I think. When all this started to come around, we thought it was going to be dead, but it hasn’t been. Obviously, I’ve thought about this quite a lot. So, I think part of that is more people have ha more time on their hands. So, they’ve also got the opportunity to spend some more time with family and have a bit more freedom. So, I suppose that has led them to think, “Well, how do I create more of this? How do I better utilize my money? How do I not work 60 hours a week for somebody else, and actually put that money to work so I can improve my financial position?”

Paul Mahoney:

A lot of the conversations we’ve had have been around that. They’ve had that bit of taste of not necessarily freedom but more time with their family, all that sort of thing. So, I think a lot of that is going through a lot of people’s minds. Yeah. Interesting, we were just talking before the show, but so far as a lot of the property that we’re involved in, a lot of our clients are passive investors. So, they’re looking most at new build and off-plan type properties because they tend to be lower maintenance and all that sort of thing.

Paul Mahoney:

April, for property transactions, was one of our busiest months. Well, was our busiest month for the year so far. May was close, very close. June was also very busy, and now July’s been busy, as well. So, people are definitely still buying property. They’re being given more reason to buy now given the stamp duty concessions, or the holiday they’re calling it. So, that gives pretty well everyone a saving on stamp duty, aside from if you were buying a home under 125 grand, [crosstalk 00:04:41] I think it was. So, yeah.

Paul Mahoney:

There’s lot happening. It’s been quite positive. The property market, certainly since lockdown, has ended, has bounced back really quickly. You mentioned about finance. There was a lot of negative media. Well, not negative media, misleading media, I’ll call it, around lenders withdrawing from the market at the start of lockdown. That was because, mostly, from what I’ve read, it was around Barclays and Lloyds were throwing product, sort of juicing their loan-to-values. I was getting lots of questions. “Are lenders withdrawing from the market?” That’s not what we were being told by lenders, just that things were on pause because they couldn’t do surveys.

Stephen Galpin:

Well, there was a moratorium on trading anyway.

Paul Mahoney:

Yeah. Pretty much. What’s interesting is once lockdown ended they bounced back very quickly. So, obviously, we had a reduction in the Bank of England base interest rate. That was passed on somewhat. Not in totality, but what has been interesting following the lockdown release is that some lenders have released new products at better rates, and at higher loan-to-values for some lenders. So, the market has bounced back really quickly and really strongly. It shows that lenders are confident in the buy-to-let market, which is a positive thing.

Stephen Galpin:

Paul, there’s new penny regulations coming out, which are going to, amongst other things, allow shops to be turned into residential properties. May or may not be a good thing. I’m not sure it will help any towards the maintenance of the High Street. I think it will be quite harmful in some ways. But, of course, with a lot of these big shops withdrawing from the High Street, some of them going broke, causing a little bit of trouble on the normal shopping malls and that sort of thing, this is going to affect pension funds.

Paul Mahoney:

Yeah.

Stephen Galpin:

Now, I want to be very careful about my wording here, because you’re the pension expert. I know you’ve written books on it, Paul. They’re very helpful. I appreciate that residential property, as such, can’t be a pension or a formal pension. However, a lot of people to treat buy-to-let as their pension.

Paul Mahoney:

Yeah.

Stephen Galpin:

That’s a subtle difference, I know, but it’s an important one. So, my question is, do you think with this freeing of planning, with interest rates being such a low level, there will be, I could imagine, a huge rush towards buy-to-let, because people’s pensions are being affected. They’re worried. But on the other hand, interest rates are very low, possibility of picking up bargains. It’s quite tempting.

Paul Mahoney:

Yeah. I think so. Interesting you say that in that I had a conversation with a big developer that we work with last week, and about half of what they do is PRS schemes. So, they’re building them to keep them and rent them out. Quite often, what they’ll do is they’ll partner with a pension or a large investment bank that will fund it for them, and then take it off their hands. The whole building of, let’s say, 200 units.

Paul Mahoney:

So, I think it is logical, what you just said there, because in the past a lot of the pension funds and things have bought up commercial space. I think, without a doubt, what’s happening at the moment is going to negatively impact commercial property, and especially, for example, Central London commercial property, office space and that sort of thing, is going to hurt for some time, I would have thought. So, to rebalance that, you would have thought any new money needs to find a different home, and, potentially, the likes of PRS or residential property could be a more lucrative option for them.

Stephen Galpin:

Well, I can remember some years ago doing a consultancy for somebody, and they’d been encouraged to take a very long lease at a huge rent for one of the college funds. I had to go and see one of the college advisors, who was chairman of one of our biggest investment companies in property. I said, “Look, we have a totally inappropriate tenant payment, a totally inappropriate rent for a totally inappropriate length of time.”

Stephen Galpin:

He just looked at me. He said, “My dear boy, my books are full of such people. That’s how we make our money.” I thought, “Well …”

Paul Mahoney:

Well, that’s all well and good until they get bust.

Stephen Galpin:

Smooth answer then. I’m not so sure that sort of logic would work these days. I think Londoners are going to have a very much more open mind, aren’t they?

Paul Mahoney:

Yeah. Look, from my experience, speaking to people who own large commercial space, they’re not getting rent. You can’t force a struggling company into paying rent. Otherwise, they go broke. So, there’s going to be some sort of rebalance there, without a doubt. That does, potentially, make a residential property more attractive. Because, of course, tenants will generally be in a better position.

Paul Mahoney:

Potential for some job loss and that sort of thing, but that’s going to be relatively short term, I would have thought. But the rentability and the value proposition for residential property, I would have thought, it much stronger, given the imbalance between supply and demand in the UK that everyone’s well aware of.

Stephen Galpin:

Yeah. Paul, I’m very much older than you. So, I lived not only through the 2008 recession but one before and the one before that, as well. I think on each occasion the trouble was people who’d bought off-plan being forced to complete some two years later when circumstances have changed immensely.

Paul Mahoney:

Yeah.

Stephen Galpin:

That was caused by two factors. One, the valuers who were undervaluing the properties making it most impossible to fund these people’s purchases. Of course, just the lack of desire to want to go into investment property in the height, if you’ll excuse the expression, of a recession. So, that said, now, I look around here, I’m looking at buildings with the thick end of 1,000 apartments in each block, most of which have been sold to Asia-Pacific areas off-plan, 10% deposit. A lot of those people will be looking for funding in the UK when it comes time to complete. Are these developers going to have a problem?

Paul Mahoney:

I think it depends on where the properties are, what they are, and whether it actually stacks up in the secondary user market, if that makes sense. You mentioned about a block of 1,000. Are they actually going to rent, is really the first and foremost thing that lenders are going to have in mind. Are they confident these properties are going to rent? Because that’s what gives the owner their rent, that’s what gets them paid, their mortgage interest, and, ultimately, maintains the property and the proposition as a whole.

Paul Mahoney:

I’m a strong believer that in the right locations it can work regardless of the economic cycle in that predominantly the areas we’ve been focusing on have been Birmingham, Manchester, mostly, and a bit of central Liverpool, as well. Quite central, either center of the city or very close to the center of the city. There’s very strong demand for properties in those locations. The demand is outweighing the supply.

Paul Mahoney:

I would have thought in those locations where you’ve got billions of pounds of infrastructure spending underway, strong job growth, strong population growth, there’s still going to be demand for those properties, and I think that it still works. I think where a lot of people go wrong when thinking about, “Well, what’s going to be the impact of this crisis,” for example, and, obviously, there’s been multiple crises in the past, is looking at the UK as a whole. So, for example, all the research houses, the property brands that are predicting what’s going to happen, generally, they talk about the UK property market.

Paul Mahoney:

It’s going to go backwards by X percent. But that’s almost irrelevant to an individual landlord that’s buying a property or a number of properties in specific locations, because different locations move at different spades. I’m committed to buying three off-plan properties at the moment that I’ve committed to months ago, and I’m not concerned about them because two of them are in central Birmingham and one of them’s in central Manchester. I’m very confident that the value will stand regardless of what happens in the economy because of what they are, where they are, and what they’ve got going for them.

Stephen Galpin:

Okay.

Paul Mahoney:

I think it comes down to the specific properties and the specific proposition, and too many people throw blanket statements across a particular type of investment without considering those micro effects.

Stephen Galpin:

Okay. Paul, we’re going to add a little bit more deeply in a moment. Thank you for watching this half of the show. We’ll be back after the break. Hello. Welcome back to part two of Property Matters. I’m Stephen Galpin, and with me is Paul Mahoney. Paul, welcome back.

Paul Mahoney:

Good to be here.

Stephen Galpin:

Paul, we’ve talked about money and the property market. Of course, one of the key things about whether property sells or not, certainly in the residential market, is what the valuers will ascribe to the properties. Are we going to see an era of nervousness? I seem to have spent my life fighting valuers.

Paul Mahoney:

I do the same. Don’t worry. It’s the bane of my existence. Look, I can’t work out values for the life of me, and never have been able to. They’re a lore unto themselves somewhat. I just get more and more confused as time goes on. I had a valuation done on a couple of properties I was buying … I am buying, and had a valuation done a few weeks ago. The valuer called me up, which they never do, had a nice chat with me, told me about how great of a price I was buying them at, and it was lovely. I thought … It was the same company that gives us strife sometimes.

Stephen Galpin:

Right. I better know who it is.

Paul Mahoney:

You will know who they are. Then you get others who … We’ve got another valuation the other day that quoted COVID-19. I don’t think they undervalued, but they put in a lengthy bit about COVID-19. It’s like, “Well, everybody knows that.” I don’t really see the relevance of it. So, we haven’t really seen undervaluations coming in, as yet. We’ve had some valuations done recently, and they’ve been quite good.

Paul Mahoney:

Maybe that’s because the properties were well priced and that sort of thing. So, you don’t really know, do you, until you get some difficult ones. Other times, I’ve seen valuations that one’s come in one day at the right price. The unit next door, which is exactly the same, comes in the next day at 15% less, which shouldn’t happen but it does.

Stephen Galpin:

It does.

Paul Mahoney:

Again, I don’t have a crystal ball. I would assume that we probably will see some issues with valuers, just knowing the beast that it is, and given that they have the ability to take into consideration things like we were seeing Brexit known on valuations not so long ago. Now they’re writing about COVID-19 because they’re journalists apparently.

Stephen Galpin:

Right.

Paul Mahoney:

Yes. You have to expect that you might incur issues with valuers whenever there is a question mark about anything, but that doesn’t mean that you need to fall victim to them. It might cost you 300 quid to get a valuation done by one, and that might mean that you need to change lenders and go with a different one. But you need to be aware that is their situation. That doesn’t necessarily mean there’s a bad property. It doesn’t mean that your broker’s done a bad job or the lender’s being difficult. It’s just sometimes valuers cause issues.

Stephen Galpin:

You mentioned in the first half of the show that lenders were being a little bit more relaxed about loan to equity rates.

Paul Mahoney:

Some are. Yeah.

Stephen Galpin:

Do you think they’re taking into account the possibility of difficult valuers?

Paul Mahoney:

Potentially. I think the other thing to consider is the fact that the Bank of England base rate has come down substantially, and it’s lower than it’s ever been before. That hasn’t been passed on predominantly through the products that lenders are offering. So, products are more profitable for lenders now. Potentially, that means they’re willing to take a little bit of risk, because they’re making more money per time they put out a loan.

Stephen Galpin:

But I also think, I mean, we talked about some of the pluses of buying at this particular time. There are some benefits. I do just wonder if, again, the lenders are thinking, “Well, whereas the half percent interest rate might have been fairly short lived, it’s going to take a very brave government to allow an increase in interest rates for the next couple of years.” Isn’t it?

Paul Mahoney:

You wouldn’t have thought so. You’d think they’d stay where they are. That can only be a good thing for lending and for the property market as a whole. As we’ve said, we’ve got the stamp duty holiday until March. A lot of people are saying they think that will be extended beyond March, because it may not have quite had the impact they wanted it to by then, which would be nice.

Paul Mahoney:

Yeah. The interesting thing is the property market’s been performing very well. I think where people go very wrong sometimes is listening too much to the media and predictions by certain outlets. That can be self realizing sometimes. People will read in the paper, “Oh, there’s going to be a huge recession,” or, “Property’s going to crash.” So, they don’t buy property, and then that’s what causes a potential reduction in prices.

Paul Mahoney:

I’m constantly saying, “Ignore the media.” If you’re going to invest in property, buy up good properties in good locations with really strong fundamentals for the mid to long term. You really can’t go too far wrong.

Stephen Galpin:

Paul, we’ve talked about the various aspects of finance, but your real skill and your real interest is in the production of good quality portfolios for the longer term, for people to invest, how they should invest, how they should construct that portfolio. Talk to me about that. How much has it changed in the last four or five months?

Paul Mahoney:

Yeah. Okay. That’s a good question. Our approach hasn’t changed all that much. I like the question because it justifies why our approach was what it was previously. So, we’re big believers in leverage property investment. Mainly because, for example, I can take 50 grand and buy a 200,000 pound property, get relatively average returns on the 200 grand property, which gives me fantastic returns on my cash.

Paul Mahoney:

So, you don’t need to set the world on fire with regards to the property returns to do really well on the money you’ve put in. That’s interesting to me because it says that property investment isn’t necessarily about maximizing returns but investing safely in good properties in good areas, where you’re confident in consistent returns. Therefore, what we tend to focus on is desirable properties in central locations, close to major cities, where you have an abundance of large tenant pools, strong tenant demand, a broad range of industries, facilities, amenities, infrastructure.

Paul Mahoney:

All the reasons that people want or need to live in a location, you want the most of those things possible because that gives you the most confidence in demand. So, we’re constantly being asked about buying in coastal towns and buying in secondary regional areas, which might have a boom in pricing, but, also, might not. I think more now than ever we have concerns around the economy, concerns around job loss, how that might flow onto property. You want to be investing in major cities with an abundance of jobs and a broad range of industries.

Paul Mahoney:

I think most people will agree with me that if we do have more job loss, and we likely will following the furlough scheme, and how that will flow onto property, the areas that are going to be hurt most are smaller cities and towns with thinner job markets. Because a small amount of job loss there hurts more.

Stephen Galpin:

Specialized industries, as well.

Paul Mahoney:

Yeah. A lot of regional towns and cities in the UK are driven by one industry, or even one company. If that shuts down, or even scales back, people need to go elsewhere to get jobs. Where are they going to go? The major employment hubs, which has a broader range. So, they’re the areas. The major cities are the ones that are least likely to be impacted, if impacted at all, by this current crisis, if you want to call it that.

Paul Mahoney:

Very different. You mentioned about previous crises. The previous recession was a credit crunch. Finance dried up. That’s very, very different to where we are now. Finance is abundant. The only reason it would dry up is if lenders got really, really concerned about price crashes, and I don’t think that’s a major concern. Most people are pretty confident, I would have thought, that this may not be a great year but things should bounce back pretty quickly. So, quite different to previous recessions.

Stephen Galpin:

So, you’re a subscriber to the V-shaped recovery.

Paul Mahoney:

Well, look, I think, again, I’m not a subscriber to predictions on the UK property market. I think it’s ridiculous. Because no one can invest in the UK property market. It’s almost irrelevant to property owners, because your individual property, even if you own 100 properties spread across the UK, it’s still not going to match the index.

Paul Mahoney:

So, it’s more about individual locations and the drivers of those individual locations, and that’s why I personally, and for our clients, we like to invest in desirable properties close to major cities and employment hubs, because we’re confident they will rent in Armageddon. There’ll still be a tenant in those properties regardless of how bad the recession is, and that means you’re safe.

Stephen Galpin:

Okay. Now, tell me, we’ve had the government bring in some semi-penal things, haven’t they, as far as taxation has gone on for smaller landlords, and, really, the idea, I guess, is to have everybody buying in limited companies and being a little bit more structured about the market.

Paul Mahoney:

Yeah.

Stephen Galpin:

Has that affected investment levels?

Paul Mahoney:

It did when it first came in. I think most people are getting their head around it now. There’s been a massive increase in people investing through limited companies. Whether that’s a good thing or not is up for debate, but it doesn’t really matter. It’s something I’d do personally. It’s something a lot of more professional property investors have been doing for many years, investing in limited companies, because it’s a point of separation.

Paul Mahoney:

By doing it through a limited company, you get around Section 24. So, it doesn’t affect you at all. If you’re a basic rate tax payer, it doesn’t affect you at all. The main people that are affected by that were people who had decent portfolios with high levels of debt and low yields. They’re the people that are really hurting due to Section 24. Most people that are buying new properties now that are higher rate tax payers that would have been hurt are just doing it through a limited company and, essentially, getting around it.

Paul Mahoney:

So, at the time, there was lots of confusion. It definitely impacted the market, but I think people are understanding how to get around it now and it’s almost a thing of the past, or just something you need to take into account.

Stephen Galpin:

Okay. Well, Paul, you’ve certainly given us some encouraging thoughts. You’re, obviously, quite positive about the market, I think.

Paul Mahoney:

Yeah. As I say, I think the thing about property is we’re an island. They’re not building any more land. Population is going. There’s a lack of supply of new property and a strong increase in demand, substantially. We’re not building anywhere near enough, and that’s not going to change any time soon. Strip it back to basics, that’s what it’s all about. So, prices in the right locations, in the right areas, the right properties in the right locations will increase in value, and all of this short term stuff, like COVID, Brexit, they’re blips.

Stephen Galpin:

Okay. Shall we tell the government that?

Paul Mahoney:

Yeah.

Stephen Galpin:

Right. Paul Mahoney, thank you so much for sharing your wisdom with our viewers. I’m sure they’re all very grateful. I’m very grateful for your watching, and don’t forget, Property Matters.

 


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