There is no doubt that the domestic and overseas property investment sector has taken a series of big hits over the past 3 or 4 years and that investment levels are down. In the 5 years between 2007 and 2012, property investing trends have shifted dramatically. Speculation on booming market trends has been replaced by extreme caution and capital retention.
Investors are still out there looking for good opportunities in property. But where should they be looking?
The first thing that jumps to mind is to buy property at a price which is perceived to be ‘below market value’. However, that investment will still be subject to uncertain market variables and all the costs and risk associated with a traditional property investment.
There is another way to invest in property which is actually made possible directly by the current liquidity crisis.
The Secure Exit Strategy™ (SES) model generates significant returns over a maximum 3 year period, whilst both deposits and profits are protected and the transaction is made directly with regulated UK law firms. The investor need not take ownership of the property and the associated costs and risks, to profit from it.
Does it sound too good to be true? Investor Square would like to introduce you to the basic concept behind SES to help you understand how and why it is indeed possible, before you embark on your own detailed due diligence.
Construction Finance Criteria
Traditionally, the construction sector has been a safe, steady investment option. Although prone to being one of the first sectors to suffer adversely in any financial downturn, it has always recovered quickly and continued to generate reliable, if not spectacular returns for its investors.
However, the recession of 2008 has changed the landscape.
This recession and the liquidity crisis which followed, has caused the construction sector to shrink to unprecedented low levels, making good returns more and more difficult to come by. Lending criteria for large construction projects of all kinds have been tightened significantly, leaving developers in a precarious position in their business planning.
Tougher targets on pre-sold units to individual buyers are being set by the senior lenders to unlock the developer’s construction finance but in the current market, can the developer be 100% confident of hitting these targets within the necessary timeframe? What if those targets are missed? Alternative bridging and mezzanine financing models are a potential option, but these are notoriously expensive and with little flexibility.
The developer may also have had to commit significant equity to the lender to lower their credit risk. These negative market and lending conditions have lead to more projects failing before a spade is in the ground than ever before.
Chicken & Egg Scenario
While the developer struggles to obtain construction finance and begin building due to his need for strong pre-sales figures, the property investors they rely on for those pre-sales are reluctant to commit.
Generating such pre-sales from individuals who are unaccustomed to investing so early in a project cycle would be a challenge for any developer at the best of times. However, a fragile economy and concerns about a second recession fuel the investors’ fears about their exposure to negative market conditions, and make those pre-sales targets almost impossible for the developer to meet. Ultimately, the investor has little confidence in the security of their capital once invested and how their profits can be realised.
This creates a ‘Chicken & Egg’ scenario which means the investors’ capital remains in the bank earning minimal interest, and the developer’s construction project fails due to a lack of investor confidence in the market. However, this does not have to be a dead-end for either party, as this scenario is actually empowering alternative finance sources from the private sector.
One such example of this new presence in the market is IPIN’s Secure Exit Strategy™ (SES) which has been devised by marrying the issues faced by the developer and investor to create a unique, sophisticated property investment model which provides a solution for both sides. The developer achieves the volume of pre-sales required to unlock construction finance in return for extremely favourable investment conditions for the individual investor.
SES is a property investment with a structured exit and contractual returns for the investor. The developer makes a contractual commitment to re-sell the SES investor’s unit before completion, with the rate of return increasing every 6 months that it takes to complete that re-sale to another substitute purchaser. Funds and profits are protected and the transaction is directly with a UK regulated law firm.
The investor will never need to take ownership of the property, and take on the associated costs and risks that ownership entails. Their deposit, which is protected by a property deposit bond, is the only investment made by the investor, who has little to lose but much to gain.
By providing a secure platform and returns of a minimum 20% annualised to the investor, market conditions become irrelevant and confidence returns.
The SES model also makes sense for the developer, who is paying a rate of return based on the unit deposit figure only, rather than the full purchase price. Comparably, this is a cheaper option than mezzanine and bridging finance and provides greater flexibility, as he can exit the investors at regular intervals rather than repaying an expensive loan over a fixed full term or facing penalties for early repayment.
The developer’s main concern is meeting those tough pre-sales targets set by his lender to unlock full construction finance, which SES makes possible.
Tried & Tested Strategy
The SES model has now been applied to 9 major projects in the UK over the last 2 years, generating property transactions totaling over £500m. Given the economic times in which we currently live, this is no mean achievement. Applications of SES have included projects within property asset classes such as city centre regeneration, student accommodation, residential developments and branded hotels.
To begin research on the SES model, Investor Square and IPIN invite new members to register free and without obligation to gain access to full analysis documents, legal opinion letters, real life case studies from existing members, market reports and other due diligence tools. Members can even plot the course of their investment by using the online SES calculator.
Still think it sounds too good to be true? SES is a contractual, structured real estate investment which makes complete sense to all parties in this market. Don’t just dismiss the opportunity. Begin your due diligence and challenge IPIN with your toughest questions. Let IPIN show you how to make the most efficient returns possible on UK property.
To find out more please visit: UK Property Investment Model