Raids on delinquent UK property developers may calm overseas investors

The announcement of raids on some real estate developers by the UK’s Serious Fraud Office indicates that the British government is finally taking the matter of fraud seriously, which has been causing UK real estate reputational risk and undermining its status as a safe haven for investment. The SFO launched investigations into three stalled developments in Liverpool and Manchester and a number of search warrants were executed earlier this month. According to local media reports, the amounts involved in these failed developments are substantial. Angelgate in Manchester was set to feature a £77 million, 344-unit scheme of two towers, while New Chinatown included 800 apartments, 120,000 square feet of office space, and a 140-room hotel. North Point’s Pall Mall site had been promoted as a £90m, 366-unit scheme designed by Blok Architecture. Both Angelgate and New Chinatown ground to a halt in 2016 after the collapse of contractor PHD1. In the case of Angelgate, which entered administration in 2017, property buyers are set to lose a total of £23.7m , with unsecured creditors unlikely to receive a pence. According to a report by administrator Moore Stephens, the developer had withdrawn £28.7m of buyers' money without determining how this had been spent. The SFO news is to be welcomed by many international investors who have also seen some of their investments in the so-called student-let market turn sour. This fast-growing sector sprung up to meet the demand for purpose-built student accommodation, as academic institutions in the UK ceased to build and operate their own residence halls. Developers promoted appealing investment opportunities, promising returns on their building-stage instalment payments to purchase student units and, of more significance, promising assured rental yields for a certain number of years following development completion, irrespective whether the units were tenanted or not. With yields of 7 to 10 per cent per year for three to five years, and marketing that these investments would be “hands - free “, investors poured money into the various developments across the UK. It has been a mixed result with some investments doing well and keeping their promises but others running into trouble. The key is differentiating the good from the bad. While many current student-let developments are professionally managed and owned by reputable developers, some unscrupulous developers have tarnished the reputation of honest developers and the student-let sector in general. What is more surprising, is that the UK student-let sector is an unregulated one, unlike other real estate classes. The diverse nature of investors in the UK and has led some developers to believe that they can get away with it, given the geographical and language differences of investors and the difficulty in organising investor action groups. But the fact that many of the investors who have lost out are overseas based, with Chinese investors seemingly most affected, has made the issue more urgent to avoid a blowback to the UK’s reputation as a safe investment haven, especially after Brexit. In the short-term there are many steps that investors can take to try to differentiate between different developments and thus realise high yields. The UK real estate sector is still an attractive one for overseas investors, but this relates to the traditional regulated stand-alone houses and flats and in the commercial real estate sector. The student-let market has created doubts and uncertainties and has put many potential investors off this niche sector, despite some high pressure and slick marketing promotion pitches by visiting developers to the Gulf and other overseas investors. Despite this, there are many who are still attracted to the sector, seduced by the ‘hands-free’ assured yields over many years, with such yields being, on paper, far higher than yields obtained from bank deposits. For those still interested to participate in these schemes, some basic questions need to be posed to developers. These should include documentation evidencing the operational and financial track record of developers and company audited accounts, the number of developments completed and their track record on yield payments, and, of critical importance, of evidence that future assured yield payments are being held with independent solicitors and are ring-fenced from the developer in case of the company going bankrupt. Other questions that are relevant is the identity and track record of the operating managing company responsible for the development’s day to day management, and whether there are any direct or indirect ownership between the developer, freeholder and managing company to avoid so-called ‘shadow directorship’ and control. Law obligates investors to pay the freehold owners and operating management companies yearly ground rents and service charges. The law is clear on this – such service charges are based on a non-profit basis and are subject to leaseholders examination of invoices if need be, and the production of regular audited account statements. With many investors based overseas, it becomes unfeasible to carry out on-the-spot examination of invoices and account statements and reconcile these to budgeted expenditure items. Finally, it is also important to understand the identity and track record of the letting agent responsible for marketing the units to students, and who appointed these letting agents. This is a tall order for anyone, let alone overseas investors. Many give up and accept their situation, feeling helpless. For those that have no time to carry out more extensive due diligence, there is an alternative: investing at home. Many development projects are now available throughout the Gulf, either for personal use or investment purposes. At least one can physically visit the purchased investment unit and have recourse to legal regulation and protection under the law. Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia and co author of ‘ OPEC in a Post Shale world – where to next ?’ . His latest book is on ‘Saudi Aramco 2030: Post IPO challenges ‘ .

Raids on delinquent UK property developers may calm overseas investors

A spate of new niche housing schemes are in need of greater oversight - and may be getting it