Only the buy-to-let properties. This includes the mixed-use, HMO and single family lets. It does not include any development, loan note or private equity investments.Why is this being proposed?
This is being proposed as a result of the recent voting to exit properties.
From our own experience to date with the properties we have on the market and from some of our members own assessments of the conditions, the sales market appears to be slow and it may not be possible to achieve sales as quickly as was originally anticipated. In addition, due to the continuing changes to the property market as a result of things like Brexit and individual buy-to-let ownership changes, the price that could be achieved now is likely to be less than some of the funds raised. This means that the properties could be sat empty for longer periods, resulting in more costs and no returns whilst untenanted whilst potentially ultimately selling in a potentially declining market.
As a result, the suggestion has been made as outlined. Following initial discussions with our larger investors, it is apparent that the suggestion is seen as a sensible approach and one which meets the overall desires of the investors we have spoken to so far to retain the properties until the market improves or for a longer period. At the same time, it provides a possible solution for those that still wish to exit properties now, despite the market conditions.What is the structure of the new portfolio investment?
A new PLC company will be incorporated to hold all of the properties (the equivalent of a single SPV). This will issue ordinary shares to investors on a pro-rata basis to their values as assessed below.
The process is to incorporate the PLC which takes a few days, then to register this entity with the FCA. Our legal advisors have said this is relatively quick but we are in their control on this point. Whilst this is ongoing, we will continue to work on the portfolio as a whole to execute the plan.
The PLC will have its own internal management team rather than using external third party managers (e.g. Property Moose) so this should help to, in the long term, reduce costs on the PLC and improve yields. As the portfolio, hopefully, grows, the team will be increased accordingly but the costs of an internally managed portfolio are generally lower than that of an externally managed structure. You can read more in this helpful note by Ernst & Young: HERE
It also ensures that the dedicated employees are working solely in the interests of the shareholders to manage the properties and report to the shareholders and, of course, the portfolio PLC is owned entirely by the shareholders and is not part of Property Moose or our group.
In the future, the PLC may have its own dedicated website for day-day-reporting to investors and potentially for capital raising. This is something that may be discussed with shareholders in the future if it is desirable.How do the valuations work?
As always, we have to be, and want to ensure that any proposal is, fair to all investors. This means that those investors who are seeking to leave the investments at this point receive the value of their investment today as if a sale of a stand-alone property was being executed in today’s market conditions.
As such, we will instruct two independent local agent valuations (these may or may not be by a RICS qualified surveyor but are not RICS surveys). Each agent will be asked to produce an open market valuation and a “4-week valuation”.
The difference is that an open market valuation is one that looks at what the agent believes is an achievable price in normal market conditions and without any time pressure to obtain a sale. During the time of a sale, the property would, of course, be empty and require costs to be paid by shareholders.
A 4-week valuation is one that looks at what the property would need to be priced at to achieve a sale in 4-weeks. This is an important element of the process as it is this valuation that is used to give each SPV a value (and therefore each share).
The purpose of using the 4-week value is to more closely relate Option 2 (i.e. to liquidate as quickly as possible) with the real world situation whereby a buy-to-let investor would instruct an agent to sell the property as quickly as possible. Although that may take longer than 4-weeks, this is typically referred to as the “4-week” value.
It is worth noting that the 4-week value will be below that of the open market value (typically 10 – 25% below). A further important consideration is that the open market value is as of the point it is valued now and so could be higher or lower than the fund amount.
For the HMO properties in particular, as there have been discrete market impacts that have impacted on rental performance (such as the large sports retailer factory closing in one of the areas where there are a number of HMOs), these are likely to be valued from an already reduced starting point. There is a specific FAQ in relation to the HMOs below.
This approach is considered to be the fairest approach to all investors as everyone is treated the same in the process. All properties are revalued and this value is used to “reset” the shareholding based on today’s values. Those that are looking to liquidate, can do so, but are doing so at a point where the valuation is likely to potentially be the lowest as it is based on the 4-week value to reflect the decision to liquidate as quickly as possible.
Those that are remaining, although the 4-week value is used to price the share transfer, the properties are, of course, still worth their relevant values (which is the same as or closer to the open market value) so the share price should increase back up over time – especially as the properties can be more actively asset managed in the portfolio structure.Why wouldn’t we just stay in individual SPVs and sell the properties?
It has been interesting speaking with investors to date who have, all bar a few, indicated their desire to retain properties rather than sell in a depressed market. This has led to the suggestion being proposed to allow everyone achieve what their aim is at this stage.
Staying in the SPVs is covered in Option 3. This will mean that the properties will be sold and, if a property isn’t selling, it is likely that price reductions will be required (as voted on by investors) in order to sell the property.
During the period the property is for sale, there will be costs associated with the property whilst it is empty. These will need to be paid for by the shareholders of the property, or by raising additional finance/investment into the SPV just as would be the case if an individual had their own buy-to-let.
If this vote is successful, we will look to raise the relevant capital to pay for the costs in due course.
This may be attractive and preferable to some investors and the option is available to vote for if people wish.What about properties that haven’t performed well? How does the proposal improve the situation?
As with any large portfolio, whilst some properties have performed well, some properties have performed less well than others. This has been as a result of various reasons as explained over the course of the investments.
Moving forward, the new structure allows the properties to be much more actively asset managed – something that the team is restricted from within the SPV structure as every decision must be voted on by shareholders and the SPVs don’t necessary have the available funds to conduct specific strategies.
An example is where a HMO has been unsuccessful as a HMO investment but could be suitable for a conversion to apartments. This is a major project that would require capital to complete and is very different to the original buy-to-let that people invested in. However, the conversion could result in increased capital values and ongoing rental yield. Being within a portfolio structure would give the management team the opportunity to use their expertise to actively manage the asset in the best interests of the shareholders.
Any properties that continue to underperform or which are simply not desirable for the ongoing portfolio, will be sold and the capital used to redeem any exiting shareholders or grow the portfolio by acquiring a better quality asset.What happens after the vote and what are the time scales?
After the vote, and assuming that the portfolio option is voted for, a number of actions need to happen including the valuations, the setting up of the PLC and the registration of the PLC with the FCA.
We anticipate that the portfolio could be created within around 1 month of closing the vote although, as mentioned, the registration with the FCA does place the timing in their hands.
Once the valuations have been received, the relevant share values will be calculated and an email sent to all investors notifying them of the final details of the transfer. We will give some warning of when this email is coming as all investors will have 3 days to then swap between Option 1 and 2.
Although it is not possible to give an indication of how long it will take to redeem exiting shareholders investments, the team will strive to repay those exiting shareholders as soon as possible.
There may be an opportunity for existing shareholders to invest additional capital to be used to redeem exiting shareholders. We’ll be in touch about that should it be relevant.What’s the plan moving forward?
The initial focus of the management team is to work through the properties and maximize rental across the portfolio as quickly as possible.
This will involve continuing the process of serving notice on some tenants to get access to the properties, and then conducting refurbishment works to maximize rental returns and target high quality long term tenants.
For some properties, the existing tenants will be notified that they can remain if they wish.
Properties such as some of the HMOs will be asset managed to maximize their value and rental potential given the current market conditions and opportunities. This could involve conversion works to apartments or high quality renovations to target professional tenants.
The rental income from the fund will be used to first cover any operational costs of the portfolio and then the PLC would look to pay dividends to shareholders as quickly as possible. These would be paid quarterly as currently but over the first 12 months, they are likely to be at a reduced level whilst the portfolio is worked on and re-tenanted.Can you give a projection for returns in the portfolio?
At this stage, it is impossible to say as we do not know the outcome of the vote and the relevant percentages.
However, the most recent review of the properties that has been undertaken has indicated that, if we can conduct some improvements and decoration to the properties to bring them back up to a high market standard, it could be the case that the portfolio potentially may produce higher rental income than previously as there have been no rental increases generally across the portfolio since ownership.
In addition, as the portfolio matures over time, there will be costs savings within the PLC structure (example being not having to cover individual accounting and corporate filing costs for small SPVs) that potentially could increase the overall return.
An important opportunity is that low loan to value mortgages could potentially be obtained on the portfolio once it is in a single structure. As outlined in the vote, this has the potential to be enhancing on the yield payable to investors due to the cost of finance currently available.
Any new properties acquired within the PLC will aim to rebalance the portfolio away from the current areas (i.e. the North East) and asset type (i.e. social housing) and more to the general family market.