Property crowdfunders turn to flipping as down-valuations mount
Not all is well in the world of crowdfunded rental property investment, it seems.
A number of down-valuations have been applied to the collections of properties packaged up into buy-to-let investment vehicles by four year-old start-up Property Partner.
The investment platform has suspended trading in, and dividends from, two collections due to the impact of fire safety reviews.
It has also broken with its original buy-for-the-long-term positioning by advising investors in four London properties acquired under four years ago to sell up and cash in on strong capital growth.
This move towards more of a flipping strategy came just before the platform revealed that its London portfolio had lost 1.5% of its capital value in the 12 months to 30 September 2018.
Down-valuations
Property Partner makes a virtue of transparency, disclosing monthly ‘desktop’ valuations of all its collections as well as six-monthly re-valuations by an independent, RICS-accredited surveyor.
The latest of these, on 30 September, resulted in 17 down-valuations (compared to March 2018 valuations) out of its approximately 100 collections. It’s only fair to also point out there were 21 up-valuations too.
While the previous period brought a similar number of down-valuations, only one was greater than 5%. This time, there were six greater than 5%.
The three biggest came at the same development of flats in London’s Surrey Quays.
Property Partner users have the chance to buy into three collections in this development: one ungeared and consisting of just one flat, another geared and with two flats, and another geared and with three flats.
There were unusual circumstances at work behind this particular down-valuation, Property Partner has told its Surrey Quays investors:
“The surveyor points to the prices of three recent sales of similar flats within this scheme. We’ve discovered that the three flats had never been let or occupied since they were acquired as part of a package of six by an offshore fund two years ago. The other three flats had already been sold, giving these transactions the hallmarks of a highly motivated, potentially distressed seller, pricing to sell at a level not reflective of market value.
“We are confident that while there is some weakness in the current London sales market, values in this block have been artificially depressed by these transactions and will recover when evidence of regular sales from more prudent vendors comes to light.”
The impact of the down-valuations is more serious where gearing (borrowing) is used to boost returns.
On the ungeared investment the down-valuation affecting investors’ shares in the company owning the property is 14.4%. On the two geared investments the same impacts are 21.6% and 27.1%.
As of 10 November 2018 all three investments are currently valued below the price per share investors paid when they funded the acquisitions in early 2016. Dividends (paid from rental income) were raised on all three in April 2017 by between 1% and 2%, but have remained flat since.
A total of 17 collections are currently valued at less than their original price.
Fire safety reviews
In two more serious cases investors have (temporarily) stopped receiving dividends and lost the ability to sell their shares on Property Partner’s internal resale market.
Both are due to the properties in question having fire safety issues that have raised cost implications.
One is a geared collection of three flats in Premier House in Edgware, which has been identified as having unsafe cladding with no certainty over who will bear the replacement costs.
“A number of extraordinary costs have already been incurred, and with the uncertainty surrounding responsibility for bearing the cost of replacing the cladding, we have no choice but to suspend dividend payments for the foreseeable future. Trading in shares on the Resale Market has been suspended until we have more information on the likely conclusion of the situation and the potential impact on the value of the flats. Once the repair work has taken place the property should be deemed safe. We will then evaluate the options for re-commencing trading on the property. We cannot say how long this process will take and it is difficult to assess the impact of this situation and the aspects of ongoing uncertainty on the current value of the property,” Property Partner has told investors in Premier House.
The other is a geared collection of eight flats in The Picture Works in Nottingham, which has “a number of issues” after fire safety inspections were carried out, according to Property Partner.
“With the uncertainty surrounding the potential cost of this work, we have no choice but to suspend dividend payments for the foreseeable future. Trading in shares on the Resale Market has been suspended until we have more information on the likely conclusion of the situation and the potential impact on the value of the flats,” it has told investors in The Picture Works.
The independent valuations of the two collections have not been changed.
‘The right time to sell’
Despite Property Partner explicitly telling customers it was set up to make long-term property investments and they should work to five-year investment periods, it has just started to offer selected chances to sell up early.
In a blog on 4 September it revealed it had “recently identified four properties on our platform which we believe offer a good opportunity to sell and realise a significant capital return for investors, in advance of the five-year exit process.
“We alerted shareholders in each of the properties to this, and provided them with a detailed case outlining why we believe now is the right time to sell, and they overwhelmingly agreed by way of a vote to proceed with the sales. We are now in the process of selling these properties with the aim of achieving significant annualised returns on the initial purchase price.”
The platform appears to be calling a market top in Outer London, judging by the location of these four properties: Hounslow (acquired in February 2015), Ilford (March 2015), Hornchurch (May 2015), and Plumstead (June 2015).
It is not clear whether the properties have successfully been sold yet, but the indication that dividends from them have not been paid since July suggests tenants were moved on to allow for sales with vacant possession.
If true, that rather undermines Property Partner’s case to be a positive force for renters, not to mention bringing close to, if not into, the ‘flipping’ class of property investors.
Backing away from London
What is clear from the platform’s admirable transparency is that its previously expressed fears about the wisdom of investing in London residential property are coming true.
Its London portfolio suffered a 1.5% drop in capital values (offset by a 2.8% return from income) over the 12 months to 30 September 2018, it disclosed in its latest update.
This was a deterioration from the 4.7% capital growth achieved in the prior 12 months, but a deterioration foreseen by the platform, which started to focus its sourcing efforts away from London about two years ago.
However, the above graph shows that returns outside London have also been slipping.
No coincidence that Property Partner has increasingly sought to diversify, firstly into purpose-built student accommodation. More recently it moved into commercial property and into lending on property development.
Since the Brexit vote in June 2016 it has only acquired two collections of London property out of a total of nearly 50 across the country, also steering fairly clear of the South East.
It’s fair to say that its recent record highlights not only some key risks of investing in residential property but suggests investors are turning very negative on London.
