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Overseas Investors Burned By Failure Of Buyer-Funded Build-to-Rent Projects

by Paul
Overseas Investors

It’s been well-publicised that the Midlands and urban centres of northern England plus Edinburgh and Glasgow in Scotland have provided many of the best returns generated by UK-based investment properties over the past couple of years.

Much lower end prices for properties compared to London and the South East mean investment properties further north are more accessible to a wider pool of investors. Rental returns are also much higher and when healthy price growth is added into the mix, it’s not a surprise that so many buy-to-let investors have been attracted to cities such as Liverpool, Manchester and Birmingham.

The UK government’s ‘northern powerhouse’ initiative, designed to promote economic centres to rival London around Birmingham, Liverpool, Leeds and Manchester has also helped increase investor interest. Trade missions trumpeting the investment case for regions north of the M25 were dispatched around the world with an emphasis on China. Support was also provided for UK companies to attend trade fairs and investment shows, again with an emphasis on China and the booming economies and new wealth of South East Asia.

There is no argument that all of that was done with the best of intentions. However, investment properties in newly built residential developments, often in regeneration zones such as Liverpool’s dockside, were the most common investment proposal exported to foreign investors.

Most of these were in projects specifically designed for the buy-to-let market and sold off-plan. Their business model is ‘buyer funded’. The investment company buys the land, usually with a mortgage, develops the project and gets the necessary paperwork in order to start construction.

However, with traditional bank finance for the actual construction that much harder to come by post-2018, and private investors enthusiastic, it made sense to offer discounts to buyers in exchange for them putting the majority of the final purchase price upfront. That usually takes the form of a significant deposit and further instalments throughout the construction process. All-in, buyers in these off-plan projects can expect to have paid between 50% and 80% of the total sales price before their investment property has been completed.

Unfortunately, many of these projects have now either stalled, with not enough units sold to complete construction, or have failed to even get off the ground. The ground has never been broken. Investors who have made hefty initial deposits and possibly even additional instalments, most of whom are foreign and many from China and Hong Kong, are now out of pocket.

An investigation by The Times newspaper counts at least 8 such stalled or collapsed buyer-funded property developments in Liverpool alone. The worst case to date is that of North Point Global, the company behind the Berry House residential development. Having sold numerous properties off-plan, attracting significant deposits from investors, the company entered an insolvency agreement. Early investors have been left empty-handed and having to pour more money into lawyer fees in their attempts to recover at least some of the lost money.

The Times investigation states that insolvency practitioners working to recover investor funds from failed schemes estimate that at least half a billion pounds in deposits have gone missing in projects across the north of England. It’s believed that could end up totalling as much as £1 billion.

There have also been many successful examples of such ‘buyer funded’ schemes. Elliot Lawless, founder of Elliot Group, which has delivered around 3000 properties to investors in its own schemes commented:

“When it’s overseen by suitable professional advisers, this is an excellent way to marry developer talent with investors’ funds.”

However, the scale of the damage that has been caused by bad actors in the sector means that the business model’s reputation may be damaged beyond repair. There are now understandable calls to regulate the model, something which Elliot supports.

“We would welcome a clear and manageable regulatory regime for the sector. The absence of one is what gives less scrupulous operators headroom.”

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