Hello there, I am new to this group and am seeking informal advice about financial choices that I currently face. I am very interested in people's opinions, especially creative ideas as to how to go about growing my business.
My wife and I are in the lucky position of owning nearly thirty residential flats within a small geographical area in Oxford, all of which we rent out directly (no agent, we manage it all ourselves). Due to the buoyant nature of the rental market in the area we have almost no void periods and so returns are predictable if modest.
We have a relatively high amount of debt in relation to the capital value of the portfolio (70-75%) and would like to attract inward investment to our business, but we don't want to actually sell the property. Our idea is to set up a company to which we would sell our properties and maintain a shareholding ourselves, but to offer shares (say perhaps 50% of the equity) to outside investors who would then be paid a dividend out of the rental profits. The value of the shares would of course be closely tied to the capital value of the properties.
We're very good at managing the properties, but much less experienced at organising a business of this nature, hence the request. We shall also be taking professional advice of course, but I was interested to bounce ideas around with some like-minded folks. Any takers?
Do you actually want the investment to grow the business or to pay off your debts ? (Be honest)
EH ? - Do you want to sell the properties or not ?
So after all the costs that I guess you will pay yourselves how much dividend vs the value of the properties minus the debt do you see this company paying ?
NO NO NO - The value of the shares would be tied to what the market thinks of a small business and its management team.
Go out and buy a copy of this weeks Investor Chronicle and see what it says about the German Residential Property market vs the UK market.
Then have an honest think about what it really is you want to do.
- Grow the business ?
- Get rid of your debts ?
- Sell out your properties at a profit ?
Once you know what you want to do, working out the best way of doing it is easier.
P.S. Once you sell these properties to this new company, have you worked out how much capital gains tax you will owe ?
Thanks, that's extremely helpful feedback . It's very difficult to accurately convey what I'm really trying to ask in a short introductory summary, so I understand if we come across as complete no-hopers, but what I didn't want to do was to go into so much detail in my first message so as to bore everyone to death and get no response whatsoever.
If I may I'd like to answer your comments/questions in order.
The honest answer is - yes - in the short term we want to release some of the capital in order to reduce our exposure to a possible downturn in the property market. However, we don't want to get out of the rental business altogether as we believe we manage the properties well. If we just wanted to pay off our debts and retire on the proceeds we would just put the lot up for sale and take the profit of twenty years' hard work, but that's not our long-term plan.
Sorry, I agree - what I typed didn't make any sense. As I just stated above, we don't want to simply sell up and go - we want to reduce our overall stake in the properties but increase our management activity. So overall we would see the number of properties in the business increasing, but our holding in those properties decreasing over time if we could make a success of this. We would sell the properties we own as individuals to the company over a period of time, hopefully to match the inward investment.
We're looking to make this an attractive investment proposition, not simply a scheme to make a quick buck at someone else's expense. We want to take a long term view of growing this business, and that means playing fair with both our investors and our customers. We would naturally pay ourselves a management fee out of the company for finding the tenants (we have a strong pipeline in that respect), managing the day-to-day issues arising from the properties, handling the accountancy, etc, but at the low end of what you would pay a managing agent on the High Street (we have 10 - 12% of gross rental income in mind). We anticipate being able to pay in the region of 4-5% of the investment as an annual dividend based on experience with our current portfolio. Of course the real opportunity comes with the prospect of capital growth over the medium to long term, so an investor would hopefully get the best of both worlds (income plus capital growth from property rentals but without the hassle).
Oops, showing precisely why I'm looking to this group for advice. Of course if the business were managed well and the value of the properties increased over time you would hope that the share value would also increase, but that is not necessarily a linear correlation I agree. There are many other factors as you point out.
I will - I would imagine it says that the German market is well regulated with large players, compared to the UK market which is full of "cottage industry" types like us. We are striving to improve things by providing better quality rentals and better quality service than is normally out there and - hopefully - to make some money for ourselves out of the opportunity. REITs appear to be very interesting in this respect, but I am yet to research just how (or if) they might work on a small(ish) scale like ours.
Long term aim is to grow the business. Absolutely. But we would also hope to realise the capital in some of our properties in the short term too by attracting inward investment.
Getting that investment will, of course, be the huge challenge in all this and I couldn't hope to persuade you in just two emails that we are the sort of people who could achieve this, but I am extremely grateful to you for the opportunity to air my thoughts. It is this process which helps us think about just what it is we are trying to achieve, and I thank you for your input (and would appreciate more if you or anyone else feels so inclined to chip in).
To the moderator - I trust this kind of thread is acceptable (and maybe even interesting) to this group? If not please contact me and I'll leave it alone, but to me this is the power of the Internet - to be able to throw ideas out there and find someone willing and able to respond with constructive feedback - and this looked like a very mature group to try this with.
Cheers all,
Rob
Too right - and it is eye-watering - but we know our CGT liability and as far as I can see there is no getting out of it at any point in all this, so we just have to take our punishment. The CGT aspect is what caught our eye with REITs, but at the moment I have no idea how or even if we could benefit from this in future.
OK - Those two statements dont exactly run together.
If you are good at manageing property, then why not set up a business managing property ? (Other peoples as well as your own)
Who knows, if you are good you could do it on an International basis and get free holidays :-)
OK - So what is your long-term plan ?
Hmm - yet again pointing to setting up an estate management business.
There is really no need to hold any stake in teh properties if you are managing others properties, and that also makes it easy to grow more quickly.
Why have any inward investment ? Why not sell one or two properties to fund the business start up, if needed, but it sounds like you already have the business started up - just not formalised.
Why can you do it at the low end ?
Also - any business trying to be the cheapest is doomed, because someone will always be prepared to do it cheaper (and worse).
I suggest that if you have the confidence that you can do a good job - then you become the BEST and most expensive.
I believe that REITs have to be listed on the main stock exchange, so it is not an option for you. - But check I might be wrong.
I think you need to be focussed on one aim.
Then dont do it :-)
adding a few other peoples properties to be managed would be a lot easier.
There isnt a moderator :-)
So if you start the management business and sell the existing properties privately and separately one per year that should mitigate the CGT a little.
The German BTL market looks very much like the current UK one (low yields, lots of players owing one property) and has been like that for decades.
The reasons are partly historical:
1) It used to be that a CGT excemption was available for a property bought to rent out and not to one bought for owner occupation (that has changed and CGT is now payable on all properties owned for less than 10 years). [1]
2) Mortgage regulation makes it virtually impossible for averagely waged Germans to be able to afford to buy a family house. Consequently, many people get onto the housing market by buying a property that they can afford, whilst in turn live in a family home rented from someone else. The property that they can afford is somewhere that they would never in a million years want to live in (again) as it will be very small, possibly with shared facilities and suitable for rental to a student. There is a very large market in Germany for buying/selling 1-200 sqft property that (outside of Kensington) would be virtually unsellable as a single unit in the UK. This property is aimed squarely at the BTLers.
(I would be interesed in knowing what the article does say BTW)
[1] There is also another piece of tax meddling that gives mortgage tax breaks for 'build you own' and not for buying ready built. Consequently the market for building land in Germany is entirely different to the UK.
Totally in breach of copyright regulations, but on the basis that they wont sue me because I am giving them free advertising :-)
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- There is a lot of free content.
From their T's&Cs:
Non-UK Access
The Site Services are directed to UK residents. For the avoidance of doubt, the Site Services are not being offered in the US or Canada or to US persons or Canadian persons.
So as I am currently in the USA, I guess they would have to sue me over here for breach of copyright :-)
26 January 2007
London to Berlin
The doom-mongers have been at it again, warning that UK commercial property valuations are too high. In its 2007 Global Outlook, fund-management giant Standard Life Investments said: "The erosion in the margin between property yields and bond yields, or swap rate, was a key trigger for our house view, which has moved to being light in UK property. More of the market now looks expensive and, as a result, we anticipated a more muted performance for the period ahead."
And the key concern about valuations is that rental yields from commercial property are now lower than the risk-free return from long-term government bonds, while the cost of borrowing money to finance property purchases is greater than the rental income.
But UK investors do not need to look far to find markets that still offer rental yields that are above borrowing costs - known as a positive carry trade.
"You can still find positive carry trades on the continent," says Lehman Brothers analyst Chet Riley, "but you won't find them in the UK". Instead, Germany, where carry trades are still available, is now proving a popular choice with investors, and there are plenty of listed vehicles offering exposure to the market.
As recently revealed by investors chronicle, property guru Jack Petchey has attempted to take advantage of the potential value on offer by buying shares in Summit Germany. This Alternative Investment Market (Aim)-traded company is an offshore-domiciled fund, which invests in the German office market. Dawnay Day Treveria is a similar Aim-traded fund, investing in German retail properties, and was recently touted as a stock of the year by KBC Peel Hunt's property team.
Indeed, there are strong arguments to suggest that the German office, residential and retail property markets are all set to have an excellent
2007. Since the German property market began to recover a couple of years ago, retail has been the darling of the sector and still has a lot of fans. "We invest mainly in out-of-town retail," says Capital & Regional's deputy chief executive, Xavier Pullen. "And that looks better value on any yardstick in Germany [than in the UK]. And Germany's capacity to spend is enormous."
This is a point that Dan Horwood, an analyst at KBC Peel Hunt, also highlights: "The German population has been consuming less and saving more, which means there is a massive consumer spending overhang." However, there is some nervousness about the potential impact of a planned rise in VAT on consumer spending.
The German office market, meanwhile, seems to be seeing a recovery and that is beginning to trigger rental growth. Robert Orr, a Jones Lang LaSalle director from its International Capital division, says: "All the major German cities are beginning to show some signs of recovery, and Hamburg and Munich are even showing modest signs of real rental growth."
The residential market has also been a target for investors taking advantage of the carry trade. Added to this is the hope that Germany will transform itself from a property-renting nation to a property-owning one, which could be great news for residential property owners such as Speymill Deutsche Immobilien. So far, though, there is little evidence of the emergence of a widespread home-owning culture.
But despite the generally rosy outlook, German property markets, and those funds that invest in them, need to be approached with a bit of caution. German landlords are usually expected to shoulder a far larger proportion of the cost of upkeep than those in the UK. So reported rental yields on German properties need to be scrutinised to see if they take all costs into account. Also, German leases do not follow the British model of upward-only rent reviews, linked to amounts recently paid for space in comparable buildings. Instead, German leases tend to be index-linked, so landlords only benefit from improved rental conditions when a lease expires and a new one is signed. That said, leases in Germany are typically shorter than those in the UK, running for approximately five to 10 years.
Another consideration is that some UK-listed German property funds could struggle to meet their dividend targets. That's because a flood of money into German property has begun to push prices up fast, which is eroding the carry trade that supported some funds' original dividend assumptions. Jones Lang LaSalle calculates that, in 2006, total German property investment volumes soared 140 per cent to ?50bn, with 75 per cent of the money coming from foreign investors. Even when a fund has invested the initial equity it raised, this is usually only the tip of the iceberg because most Aim funds plan to use debt to invest about four times as much again. Mr Pullen warns: "You can still get a positive yield gap, but that is changing daily."
UK property: pricey but still perky
Although UK property prices look high, that does not necessarily mean it is time to throw in the towel. As Standard Life Investments concedes: "It must be pointed out that UK property valuations are by no means uniformly worrying. In central London [offices]... the strength of projected double-digit rental growth suggests continued attractive returns for investors."
So maybe investors should not be getting so upset about the disappearance of the carry trade after all. Lehman Brothers pointed out in a recent note that today's valuations may actually just reflect the re-establishment of an old market norm: "The reverse yield gap, which prevailed for 40 years from 1958 to 1998, has reappeared, with the rental yield from a building less than the cost of borrowing money to buy it. The leveraged private companies, we believe, have been decisively priced out of the market, with pricing power having shifted to equity buyers."
Jones Lang LaSalle director Robert Orr agrees: "It's just a case of the type of money seeking a home in real estate changing as markets change." And there should be no lack of equity buyers - petro-dollar-rich nations, the new real-estate investment trusts (Reits) and pension funds looking for reliable ways of matching their liabilities are all on the hunt for investment opportunities.
Indeed, the disappearance of the carry trade does not seem to have stopped property valuations in London's West End from rising, thereby compressing rental yields even further. In its recent trading update, Great Portland Estates told shareholders that half of the 6.1 per cent rise in the value of its properties during the final quarter of 2006 was the result of yield compression.
The other half of the rise in the value of Great Portland's property was down to rental growth. So, with good prospects for further rental growth from both City and West End offices, these continue to look like exciting areas of the UK property market, despite more challenging valuations.
Copyright Financial Times Business Limited - 2007. "Investors Chronicle" is a trade mark of Financial Times Business Limited, "FT" and "Financial Times" are trademarks of The Financial Times Limited. No part of this publication may be reproduced or used in any form without prior permission in writing from the editor.
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Hello, I a new to this ting too. Afriend who emailed me told me about your interesting querie.
I work for a company that provides an Exchange for people wanting to open up their property investments to a sharebuying public. At the moment the business concentrates on residential only. Normally we take one property at a time and float it on the exchange but there is the flexibility to float collections of properties and for the vendor to hold onto a stake. The business is relatively new but has some rich and influential city backers.
I'm not sure whether we can help but it may be worth a chat? To look at what we do visit
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- to see the site you will have to register but it is relatively simple and does not commit you to anything.
Let me know what you think
Gav> Hello there, I am new to this group and am seeking informal advice
Why put the properties in a company and lose your annual capital gains allowances?
Why try to bring in outside investors which will have different wishes and cause problems?
If you are doing well I don't see the point in changing. As long as you are making enough extra income over the financing of the debt to justify the work and risk managing the properties you should continue.
The key point here is that we have been building a substantial holding all on the same estate. We would like to continue to acquire on the estate, but cannot afford to take the financial risk of funding it all ourselves, hence we are looking to attract investment to enable us to acquire further properties. The economies of scale in terms of management time and maintenance regimes in having all your properties within walking distance of one another is not to be underestimated. There is a ready supply of tenants, and we regularly have to turn people away who have been referred from current tenants due to lack of available properties.
It certainly doesn't feel like a crumbling empire - we're just looking for creative ways to grow the business organically. We're not interested in setting up a new general estate agency - we want to concentrate on our core business in a fantastic locality.
Thanks to everyone for their interesting input. It has been fascinating watching the comments, and has given us much food for thought. Please don't stop there if anything else warrants discussion.
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