Property TV – Property Question Time – S2 EP 31 – Richard Bush and Paul Mahoney - Nova

Property TV – Property Question Time – S2 EP 31 – Richard Bush and Paul Mahoney

Stephen Galpin:

Hello. Welcome to Property Question Time. I’m Stephen Galpin, and this is the program where you can have your property related questions answered by our team of experts. Now today it is a special program. It’s one of a series of two. We’re going to be looking at property finance. And joining me are Paul Mahoney, CEO of Nova Financial Group, public speaker, and author. Paul, welcome.

Paul Mahoney:

Thanks, Stephen.

Stephen Galpin:

Nice to have you back. And Richard Bush, CEO of CrowdLords Crowdfunding Experts. Richard, welcome to you.

Richard Bush:

Thank you.

Stephen Galpin:

How are we finding business in the first part of the new year, gents?

Paul Mahoney:

It’s picking up.

Stephen Galpin:

Good.

Paul Mahoney:

Yeah, it’s getting over Christmas.

Stephen Galpin:

Same for you?

Richard Bush:

Very positive after the election, yeah.

Stephen Galpin:

Well that’s good. So we’ve got a bit of election bounce then, right. Paul, your first question. Could the panel please explain why some lenders, particularly in the London area, won’t lend on properties located in buildings above a certain number of floors. With a lot of developments being built now to an ever-increasing height, is this not damaging the prospects of providing much needed homes?

Paul Mahoney:

Okay. Yeah, it’s a good question. It’s interesting they say particularly in the London area, because actually the market’s a lot tighter outside of the London area, in that there’s quite a few lenders that will lend to an unlimited height or lend to a higher height in London, but won’t outside of the M25. Which I’ve always thought was a little bit silly, especially when you consider cities like Birmingham and Manchester, which are pretty big cities in their own right. But it’s a fair point, why do lenders do these things? And I suppose they’re risk averse, and they view large buildings as being harder to fill. I personally don’t agree with that, because I don’t think … I think regardless of the size of the development, it’s more about the market. Then if you’ve got a development of a thousand units and a development of five units, you’re not just competing against the other units in your development. You’re competing against the greater market, the square mile around that area. So I think it’s a bit silly, but lenders aren’t always that logical. They do their own thing.

Stephen Galpin:

But Paul, the same thing applies, a lot of buildings, they won’t fund buildings where there are shops underneath, for instance, a block of flats. Now, I always find that a bit silly, because if you’re a developer, which I’ve sort of been involved in over the years, you go to the council and they say, “Well, we just don’t want you building a block of flats. We want a bit of life, a bit of infrastructure for the people that live there. We want shops around the bottom.” And then the next thing is your mortgage companies won’t lend the money.

Paul Mahoney:

Absolutely, yeah. Well obviously those-

Stephen Galpin:

Are you going to tell us why?

Paul Mahoney:

The thinking there isn’t aligned, obviously. I think that policy of lenders not liking that comes from a bit of an old way of thinking of a shop like a curry house with two flats above it. Obviously that cannot really be a very … In some cases that can be a negative thing, because of the smell, and the fumes and things like that. It seems that that’s where it’s kind of come from. I’ve seen a case where there was a gym on the ground floor, and the flats above the gym were hard to find funding on because they were worried about the noise from dumbbells and things dropping in the gym.

Stephen Galpin:

But this is very old fashioned, Paul, isn’t it? Because soundproofing today is pretty good. Even standard building regulations would cater for that. And on top of which, if you look at ventilation. I mean, I can remember years ago looking into a flat somebody was trying to sell me on Baker Street, and there was a KFC underneath. And I said, “Any problem?” Well, I went up on the roof and out onto the balcony. Crikey, you could almost eat the fumes. It was awful. But today it’s pretty sophisticated.

Paul Mahoney:

And in some cases it’s almost a bit of backwards way of thinking, because tenants love facilities. Tenants love having pools, and gyms, and all these facilities. But for some reason lenders not only get upset about where they are, but the cost of them as well. The service charges and those sorts of things. So there needs to be a better balance in their way of thinking. But keeping in mind, lenders are lending their own money in a lot of cases so they’ll do as they please.

Stephen Galpin:

Yeah. Well I go with you on the thought about service charge, because I mean the building I live in not a million miles from here, I mean we’ve got a pool, we’ve got a gym, we’ve got a private theater for cinema. We’ve got all sorts of facilities. But gee, the service charge, I mean it’s something else. And the funny thing is we’re almost reaching that level where it’s 0.1% of the value of the property. And again, lenders are going to start saying, “That’s too dear. We’re not going to lend.” And where you’ve also got in tandem with that ground rents that are doubling every so many years. It can be pretty penal can’t it? I think.

Richard Bush:

I think it comes from lenders needing to have easy criteria to decide whether or not to lend because they don’t always, when they make that decision, go and visit the property and assess the location and look at the demand. They just need almost a spreadsheet tick box.

Stephen Galpin:

Well this is the advent of desktop valuations, isn’t it?

Richard Bush:

Precisely.

Stephen Galpin:

And again, you’re sort of caught between a rock and a hard place. People say, “Well, I really love these valuations at £150 a time instead of £1,000 a time. But what you’re getting is a check list on the computer, isn’t it really? That’s the issue. I mean, is this still a big problem these days, Paul? Valuations?

Paul Mahoney:

Don’t get me started. Valuers are a law unto themselves.

Stephen Galpin:

And I’ve spent my life fighting valuers.

Paul Mahoney:

I had a conversation about this yesterday. Sometimes you get a survey back that says, “Declined. Doesn’t meet lender’s criteria.” What does that mean? We’ve had another one where deck access, the flats were new build. It was actually a conversion from an old mill, lovely development. But the top floor doesn’t have … The lift doesn’t go to the top floor. You have to walk up one little set of stairs to get to the lift. And they’re saying they won’t lend on it because the lift doesn’t go there and they’re calling that deck access. Which I believe deck access usually refers to social housing, and the exposure of flats from a security perspective.

Paul Mahoney:

We’ve got another one that’s come back £40,000 undervalued on a £200,000 unit, where we’ve had the one next door come back on the money. It’s crazy how much power these surveyors have. And what they don’t realize is they’re really messing with someone’s life.

Stephen Galpin:

Absolutely.

Paul Mahoney:

The repercussions of these comments and how whimsical they are about them, they don’t realize the on flow effects that has on the individual, and the development and all the things that we’re trying to achieve in the UK, developing, providing new properties and all that sort of thing, that they hold that back.

Stephen Galpin:

Well, I mean, I had exactly the same thing personally, again, next door I had evaluation done for whatever reason, and it came in about four to 500,000 pounds less than where I thought it should be. I’d got some evidence of identical properties, about four floors below, coming in at the higher level. And they said, “No, no, no. That was three months and one week ago. So it’s out of our time spread for using a district comparable.” And I had it valued again by somebody else. I mean, fortunately I was in a position to pay for another evaluation, and it came in actually 200 over what I wanted. So there we are. But there’s no arguing with these guys because you’re on a futile argument, aren’t you, with a valuer, because what you’re really telling him, if he doesn’t come up with the figure is, “You don’t know what your job is.”

Richard Bush:

Yeah.

Paul Mahoney:

Yeah.

Richard Bush:

But that shows how subjective it is. The fact you had two valuations with a £600,000 difference in a matter of days. That doesn’t make sense.

Stephen Galpin:

It’s a great shame. Anyway, there we are, such are the vagrancies of the property business. There we are. Richard, your question, can crowdfunding be used to finance my first venture into the buy to let market? If so, would the equity requirements be the same as a conventional funding route?

Richard Bush:

Okay. It’s a difficult question because every platform is different.

Stephen Galpin:

I think probably just before you answer, I’m going to say probably one of the things you need to address here is, is it big enough?

Richard Bush:

The property?

Stephen Galpin:

The proposal. So is one or two properties something that would attract a crowdfunding company?

Richard Bush:

Yeah, definitely. There are some platforms who would do single buy-to-lets from £50,000. It depends really on how they’re looking to fund the buy to let. If they’re looking to fund it through debt, then it’s always easier. There are more platforms that are available to fund it, but they would need to put in more equity in that situation. If they’re looking for a pure crowdfunding purchase where investors have equity in the buy to let, then most likely they’ll get a no, because they don’t have any experience. So most platforms will look for landlords that have a proven track record and they have a portfolio that they’re currently managing, because at the end of the day, other people are investing their money to support this professional landlord to do their job for them. It would be difficult I think, but there are some platforms. And there’s such a wide range of platforms at the moment that they should talk to the people that specialize in buy to let properties, and there are a couple, to see what they say. It’s worth a try.

Stephen Galpin:

Well you’re a buy to let expert as well as knowing all about crowdfunding. So what would be the ups and downs of going to crowdfunding to do it, rather than just perhaps somebody Paul might know as a dedicated buy to let funder, shall we say?

Richard Bush:

Well, the main difference would be the criteria under which they’re willing to lend. So as we’ve just discussed with mortgage companies, they have strict criteria and those criteria vary by lender, whereas the platforms tend to look at each individual borrower and property in isolation. They don’t tend to have fixed criteria, so there’s more flexibility. Secondly, they’ll probably be able to raise more money. So they might only need to put in, say, 15% of the value, and raise 85% from the crowd, which means that they can probably afford to do a better property or more properties, or have more scope than they would if they went the traditional way of financing.

Paul Mahoney:

Okay. Are there any controls over the level of equity?

Richard Bush:

There’s no formal controls. Every platform has their own criteria. We have certain criteria that we use, and other platforms will have different criteria, but that will vary again. So, for example, if we’re doing development then we need the developer to put in a certain amount of the equity, or if we’re doing buy to let, we need the landlord to put in a certain amount of the equity.

Stephen Galpin:

Okay. Thank you for that Richard. Richard, just to sort of get to the halfway mark in the program, Paul and I were talking earlier about the effects of Brexit and what effect it may have on borrowing, particularly in the property market. There’ve been a couple of banks this week that have announced they’re pulling out of the UK because their banking licenses won’t be effective after the end of the year. How much do you think that sort of thing is going to narrow the market?

Richard Bush:

I think the market is mature enough to adapt. So we’ve had situations in the past where large banks or groups of banks had stopped doing some things and other things have come into play. And so whilst it has a short term impact, I don’t imagine it will change things. Every person pulling out creates an opportunity for somebody else. So personally I don’t think it’s a longterm impact.

Paul Mahoney:

And my answer Richard, to Stephen’s question earlier was that the only real impact I’ve seen on the finance market that Brexit’s had is on the development finance side of things. Lenders that are much more risk averse because it’s a riskier business. Whereas with buy to let, we haven’t seen any real impact. And a lot of people have assumed that we would, but we haven’t. I suppose because it’s a more conservative lending.

Richard Bush:

Yeah, we’ve seen the same Paul. And so whereas before many of the banks would lend say 75% of GDV, they’re now down at 65, even 60. But the good thing is their rates are coming down as well. So it’s possible to replace that bit that they would have done with some other source of funding, like crowdfunding for example.

Stephen Galpin:

Okay. And I mean lastly on that point, I mean the government is saying they want to build 300,000 new homes this year. We saw our home office minister-

Richard Bush:

It was the same last year.

Stephen Galpin:

Yeah, I was the same about 10 years ago, wasn’t it? But we see our Home Office minister this morning saying, “Well, builders are not skilled, so they won’t fall into the criteria for coming into the country.” I’m not sure how bright that is really. I think this is headline grabbing sort of games really.

Richard Bush:

But it’s a serious point, isn’t it? The labor issue, I think is-

Stephen Galpin:

The labor issue is going to have a huge effect on the price of property, I think.

Paul Mahoney:

You can’t build a building without workers, can you?

Richard Bush:

No.

Stephen Galpin:

Well, as I said, again, to Paul earlier, one of my questions is when Boris and his cohorts put their hi-vis jackets on and hard hats and say, “We’re going to build 300,000.”

Richard Bush:

Ourselves.

Stephen Galpin:

Who’s we? Anyway, that’s all we’ve got time for in this half of the program. Join me again after the break.

Stephen Galpin:

Hello. Welcome back to Property Question Time, our finance special. I’m Stephen Galpin, and joining me are Paul Mahoney and Richard Bush. Welcome back gents. Paul your second question, am I correct in thinking that a buy to let property cannot be included in a private pension plan, whereas a commercial property can? If I am correct, why is this?

Paul Mahoney:

So you are somewhat correct.

Stephen Galpin:

Or should we call you Chancellor?

Paul Mahoney:

So you are somewhat correct. I think first off it’s important to clarify the different options available for private pension, that’s a very broad term. So for obviously with your traditional pensions you can’t have any direct assets that you control within the structure. You essentially have a fund manager that manages it all for you, and you have a little bit of choice on whether you want to be high risk, mid risk or low risk, but that’s about it. You can then set up, you can take that money and set up a self-invested pension, but again they’re not all that flexible. You have a little bit more flexibility on those. Then the third option is a small self-administered scheme, so a SAS. That’s where you have a lot more flexibility and essentially that’s where you become the fund manager.

Paul Mahoney:

You can only do that, you only get approval to do that if you’ve got experience as a business owner. So you can prove that you kind of half know what you’re doing. Because in that case essentially you’re becoming the fund manager. So with that option, you can pretty much do what you like so far as investing the funds. It does need to be investment, can’t be for personal benefit. But one of the restrictions is you can’t invest it in residential property. So they are right in their question. I think probably the most commonly held understanding as to why that is, is that they don’t want billions of pounds in the pension pot driving up the price of residential property. Because if you all of a sudden let people invest their pensions in residential property, a lot of people would do it.

Stephen Galpin:

But wouldn’t that be a good way of solving the housing shortage?

Paul Mahoney:

Potentially if they said that you could only do it to invest in off-plan property to fund developments, but we could go around in circles on that all day. So they’re the different structures. There is one slight way around that, in that if you set up a SAS, you can … Again, they should be seeking personal advice on this. This isn’t advice in any way. This is just my understanding of your options. That you can lend funds from a SAS to your own limited company, up to 50% of your total pension pot, and you can lend the rest, or all of it, to anyone else you like. Now obviously that creates an opportunity to then lend money from a SAS to your limited company, invest in residential property through that limited company. Remembering though that this is only an option available for people who can prove that they have been a business owner in the past. If you can’t prove that, then you’re much more limited as to what you can do with your pension.

Paul Mahoney:

But just because you can’t invest your pension in property, doesn’t mean you can’t use property investment as a supplement to your pension. A lot of people do that, rather than locking their money up in what is quite a tax efficient vehicle but it is quite limiting, and is also somewhat at the whims of government. Because if you lock up a million pounds in a pension and all of a sudden the government decides the new pension retirement age is 75 and you’re 60, well you can’t do anything about that. And the pension age is extending, the tax rules are always changing. Whereas if you keep the money in your own name, you’ve got a lot more flexibility in what you can do with it.

Stephen Galpin:

Do you think the pension age is under review?

Paul Mahoney:

It’s always under review, isn’t it? Seems to constantly be getting older. We’re living longer.

Richard Bush:

But you can take money out of your pension after a certain age, even if you’re not yet retiring. There is that.

Paul Mahoney:

You can start, but that can change as well. That’s my point, is the age for when you can actually do anything with it is always under review. And obviously with the budgets and things are always trying to access more money, aren’t they?

Stephen Galpin:

I think the important thing there is, again, without giving any specific advice, but always keep enough out of any sort of locked in scheme to pay your bills for a number of years. I mean we hear countless times, people who got buy to let properties who calculated on rent received 52 weeks a year, and “Oh dear, we’ve only let it for 40 weeks.” Have you got enough money to fund the difference? And that’s quite a consideration isn’t it? You got any views on that Richard?

Richard Bush:

Well, Paul mentioned there about lending money from your SAS or from your SIP. And so I think there are ways to be exposed to residential property by lending, or through your own limited company. I think that’s quite an interesting way. It is complex and I think it’s critical that you get advice based on your particular situation, but I think there’s more flexibility than first seems when you first look at it.

Paul Mahoney:

Yeah. And obviously there’s other ways of getting exposure to property, if you have those more flexible structures through your pension, such as property funds, crowdfunding, for example.

Richard Bush:

Yeah. Right, or [crosstalk 00:19:09].

Paul Mahoney:

Property bonds. There’s a whole range of different things which have security against property but isn’t direct property ownership.

Stephen Galpin:

Just seems to me that if you’re going to buy things like property bonds, you’re effectively putting your money again in other people’s hands, aren’t you? A little bit like you would with a share portfolio or something. I always feel a bit distant from it.

Richard Bush:

That’s not necessarily a bad thing because sometimes there are people better than you-

Stephen Galpin:

Oh, of course.

Richard Bush:

… to make the most of that money. So I think it’s not necessarily about that.

Stephen Galpin:

But you are remote from it and-

Richard Bush:

Unless you’re a control freak, Stephen. I think it’s worth considering.

Paul Mahoney:

And in a way, that’s a benefit to having a pension, is locking the money away from yourself and kind of saving yourself from yourself. A lot of people really want access to everything, but in some cases aren’t the right people to be doing that.

Stephen Galpin:

That’s true enough. Okay, thank you gents. Richard, your second question. I’ve read recently there is now the start of the European banks, which we talked a little about earlier, withdrawing from providing services in the UK due to licensing restrictions post-Brexit. One of the first is N26, which was quite an efficient online service. Do the panel think this will escalate and cause difficulty with the funding of new developments, and indeed normal house purchase for private individuals? I mean you are sort of at the heart of the financial market. What are you hearing?

Richard Bush:

It’s interesting isn’t it? I think there’s always change. There’s always banks pulling out, and new entrants coming in. But if we look at the, particularly the development funding, market as a whole, the typical high street banks are not that active. So they don’t represent a very large proportion of the everyday builders. They might be involved-

Stephen Galpin:

Can I just jump in there?

Richard Bush:

Yeah.

Stephen Galpin:

I mean what I see down here for instance with the development funding, whereas at one time you’d go to one of the big skyscrapers and say, “Right, can you lend me three, 400 million for a 60 story building?” They’re all saying, “Bit big for me, so can you syndicate it?” And it’s going round probably four or five banks. And I can’t tell you as somebody who’s been in the marketing of these developments, I mean, to deal with four lots of credit committees in the banks. I mean it’s-

Richard Bush:

But you typically have one point of contact, don’t you? The fact they syndicate it behind-

Stephen Galpin:

Sometimes.

Richard Bush:

Well, yeah. But I think that’s a slightly separate point, Stephen, although it is an interesting aspect of it. But the key point I think is that banks might pull out, but there will always be somebody else coming back to fill the gap. And a lot of the developments that we see, they’re not the largest, so they tend not to involve syndication. But they tend to be funded not by the high street banks, by other people who see the opportunity. And so if you’re a developer or you’re a landlord and you’re looking for finance, I wouldn’t worry about the fact that some banks are pulling out. The only possible downside is that if a few of them do it, then it might put pressure on rates and there might be an increase in rate because of the opportunity that’s created by less-

Stephen Galpin:

Shortage of supply.

Richard Bush:

… less actors. Yeah, precisely. But as a business we’re not concerned about it, and I don’t think as a market generally that it’s yet going to be an issue.

Stephen Galpin:

Do you think crowdfunding has taken up that slack in particular?

Richard Bush:

I think it’s beginning to, I mean it’s still minute compared to the size of the market. I would guess it’s less than 2% of the funding for SME development, let alone the total development. So it’s still a very small slice of the pie.

Stephen Galpin:

Right. And Paul always tells me off for being too London-centric, but I mean do you find that crowdfunding is a London-centric thing? Or do you find it is nationwide?

Richard Bush:

Yeah, there’s a lot outside the M25, Stephen, you should go and have a look. It’s quite interesting.

Stephen Galpin:

How do you do that?

Richard Bush:

We don’t … Take a train.

Stephen Galpin:

I forgot to wait for this HS2. I [crosstalk 00:22:57].

Paul Mahoney:

Yeah, that’s quite funny.

Richard Bush:

No, we don’t see that. I mean we probably get more investment from within the M25 just because the wealth tends to be centralized there, but a significant proportion of developments that we fund outside of the M25, they’re in the North. We’re doing one in Scotland. So I don’t think it’s limited to the M25.

Paul Mahoney:

Yeah, I think a lot of people will focus a lot on the restrictions of lending, but it’s important to keep in mind that lending is opportunistic as well. These people make money from lending money. And especially when we’re talking development finance, they’ve solid rates. I’d say probably the average for development finance is 1% a month, and that’s 12% a year obviously.

Richard Bush:

Quick maths.

Stephen Galpin:

That’s huge today isn’t it?

Paul Mahoney:

Yeah, and that’s for … I mentioned property bonds before, which in the right circumstances can be quite good. But if you think about 12% to a consumer is massive. So if there’s some way like crowdfunding to pass that really good return on to someone who it’s worth more to, that’s quite a powerful thing. So yeah, I agree. I think as certain lenders leave the market, others will enter because they’ll see the opportunity that’s not being met.

Stephen Galpin:

And just finally gents, where do we see the market going?

Richard Bush:

The property market or the financial market?

Stephen Galpin:

Just the property market.

Richard Bush:

I’ll let you answer that first Paul.

Paul Mahoney:

Okay. I think there’s been a lot of positive recently, which has resulted in confidence returning. Obviously we’ve had the majority Tory government, we’ve had a Brexit deal go through. There’s still some negotiation happening around that. That has definitely resulted in more confidence. It’s definitely results in people reentering the market. And I think whether that turns into a bit of a mini boom, or kind of plateaus again, will be determined by those little things. The Brexit negotiations, whether the Tory government actually delivers on promises and actually shows that they are pro-property. All those sorts of things actually coming to fruition will determine whether … As well as more, on a micro perspective, different areas, major infrastructure projects actually going ahead, etc. will determine whether we see the market moving in the right direction.

Stephen Galpin:

Well, over the last few years we’ve looked at a lot of stats which show property ownership, again specifically in London, owned by overseas investors. Do we think this wretched ‘flu business is going to affect us with perhaps a limitation on Chinese investment?

Richard Bush:

I don’t think so. I think it hopefully is a short term issue rather than longer term issue. I thought you were going to say then that the issue over home ownership, I do think one of the challenges for the new government is how to address affordability. I think there is … We have seen over recent years a dramatic increase in the number of people that are renting and not buying. And that’s a difficult trend to reverse. And I think that will continue until the question is, where are they going to get properties to rent, because buy to let is becoming less and less attractive? And so on. So that I think is the challenge.

Stephen Galpin:

Okay. Well look, that’s all we have time for. So we’ll carry that subject on in the second part of our series of Property Question Time related to finance. So big thank you to Paul Mahoney, CEO of Nova Financial Group. Paul, thank you for joining us. Richard Bush, CEO of CrowdLords thank you too for joining us. I’m Stephen Galpin join me again next time on Property Question Time.

 

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