£1m to £120m GDV in five years.
The remarkable property success of Nicole Bremner.
“It’s no secret that when I started out in property I knew nothing. Not a thing. Now in my fifth year in property development, I have eleven projects across London. These projects contain more than 400 units and are worth more than £120 million in gross development value”, Nicole Bremner notes in her book, ‘Bricking It’. The book is an easy read. It provides inspiration and many practical pointers.
The success of this novice could lead us to believe that property development is a quick route to financial success. Fortunately, Nicole quickly illustrates the many ways in which property development can go wrong.
Nicole Bremner believes she was exceptionally lucky in finding a very experienced and trustworthy partner. Their skills complemented each other, which improved the effectiveness of their joint venture. Another piece of ‘luck’ was realising that property development is ideally suited to her as a business.
It is helpful to remember that property development remains a complex and capital-intensive commercial business. This type of business can be viewed in terms of the following components, each of which is full of technicalities difficulties and legislative requirements.
Finding and buying the land or building.
Financing the development project.
Local Authority planning approval of the development.
The physical building development.
Building your brand and marketing the property.
A cautionary tale
Although Nicole’s success is inspiring, it is worth remembering that property development and investment can go wrong. There is no guarantee of making money in property. As an example, Nicole recently interviewed Matt Siddell and he explains how he went from a very successful phase of property development and investment straight into another phase in which he could not continue his profitable run. The number of deals dried up for him, despite his continued effort and application of the same strategy and process which had previously generated considerable profits for him. The market conditions had changed. Such macro shifts are so large scale that an individual simply cannot alter them or swim against the tide: strategies that worked in previous market conditions simply no longer work – a completely new strategy had to be developed otherwise Matt could not have returned to success in the property sector.
Macro changes are responsible for terminating many businesses and investments that had enjoyed a run of success. Macro sentiment shifts start in subtle ways and then gain momentum gradually. Rarely are they obvious to busy market participants until they have built up and caused immediate pressing challenges. There is no simple snippet of advice that we can offer to avoid these macro shifts. Carefully watching industry data and comparing your own business result against market movement flag up impending changes and indicate that it is time for you to step back to assess how to optimize your strategies going forward.
Local conditions (with Central Scotland)
Citylets produce an excellent quarterly report which contains data on residential property within Scotland. Property prices and the associated rentals show single figure increases in the most recent report (quarter 3 2017).
Property agents and investors are very enthusiastic about current market conditions, especially within Glasgow. Gordon Campbell, of Alliance Property Group Ltd, reported strong demand, and continuing confidence in buy-to-let accommodation, especially within Glasgow city centre. He also noted a high level of demand for investment opportunities from international investors. Gordon quoted several factors contributing to Glasgow’s appeal: the City is on an upward trajectory propelled, in part, by the City Deal, inward corporate moves which have brought well-paid professional jobs to Glasgow, creation of highly-desirable modern residential areas within the City, and the availability of finance. One of our property contacts reported that conditions within certain parts of Lanarkshire (Hamilton, Burnbank, and Blantyre) continue to struggle to meet target prices, are slow to complete, and some potential buyers are unable to obtain the required mortgages. Lisa Smith, of LSG Property Investments which is based in Alloa, provided market feedback for the opposite side of Scotland. Lisa noted that there are many great deals to be had for people like us who renovate properties.
A few financial institutions are being tempted to support the Scottish property scene. It is notable that some of the new entrants within the Scottish scene include LendInvest. In a recent article, Peter McDermid of LendInvest stated that the appetite to get on the property ladder within Scotland was greater than ever. That creates a scene in which developers should be should rushing to fill that demand, but Peter noted several real problems that new developers face, including lack of specialised funding and insufficient knowledge about the development process. LendInvest is addressing some of the challenges by providing finance and running a training course for would-be developers.
Growing your property business
If you are committed to building your property portfolio, it is worth noting three key points that Nicole highlighted as pertinent to the success of her property business: debt-to-equity gearing ratio, crowdfunded finance, and joint venture partner.
1 Debt-to-equity gearing ratio
Property development involves a multitude of unknown factors beyond your control, which makes this is a risky and uncertain type of business. This explains why lenders examine all property development transactions extremely carefully and err on the side of caution, especially when assessing the appropriate level of loans.
Obtaining a mortgage to add to your own cash in order to purchase the property is an everyday event. The ratio of borrowed money to personal money will vary according to personal temperament, financial circumstances, and the value of the property involved. Something very similar occurs in a property business.
The proportion of loan to own funds determines the degree of ‘gearing’. That gearing multiplies the gain or loss attributable to the original money invested by the purchaser. The following simplified example illustrates impact of gearing.
All fees and interest charges are ignored in order to focus on the impact of gearing.
The purchase price is £100,000, but it could be any amount because the gearing multiplier effect is the same irrespective of the purchase price. It is the ratio of borrowing to own money that multiplies the gain or loss.
The purchaser has £30,000 and borrows a further £70,000 to make the purchase of the example property at £100,000. If the property is sold for £130,000 the owner will make 100% profit: the loan of £70,000 is repaid leaving their owners with £60,000 which is made up of the original £30,000 deposit plus £30,000 profit. However, if the property is sold for £70,000 the owner of will make 100% loss: the loan of £70,000 must be repaid, leaving no money for the seller. The gearing ratio caused the 100% profit and 100% loss.
|Purchase price = £100,000|
|Owner’s EQUITY remaining after repaying debt|
|Owner’s original money||Debt||£130,000||£100,000||£70,000|
This note merely seeks to explain gearing, not to make any recommendation. Borrowing is high-risk and complex. It is essential that you obtain expert advice from an experienced authorised adviser.
Although there are several different types, and many different sources, of finance, Nicole Bremner highlights crowdfunding as a means of providing additional capital for a property development business. Because this is comparatively new, it is worth considering some of the aspects of crowdfunding.
For some business owners, simply avoiding traditional banks is one reason they want to try crowdfunding.
In order to raise funds in this way, your property business must advertise extensively, mainly through the internet. That degree of advertising can be a bonus if your crowdfunding campaign is successful. Not only will your business obtain the additional finance it will also create interest in your completed property projects. On the other hand, if you do not raise sufficient finance, your unsuccessful business proposal is likely to remain on view for a long time on the internet.
Some business owners worry about releasing confidentially sensitive information to the marketplace (and possibly to competitors) via the crowdfunding advertising.
Crowdfunding is often provided by people who do not have full-time experience of, nor professional training in, business finance. That can result in less constructive feedback that is often provided by professional investors and commercial lenders. Good feedback can be used to restructure business proposals which subsequently raise the desired additional finance.
Some business owners who have used crowdfunding observe that the process involved much more interaction with investors (potential and actual) than they had imagined.
Crowdfunding funding is a legitimate additional option when considering the various ways in which to provide additional finance for your property business.
This note merely seeks to introduce the concept of crowdfunding, not to make any recommendation. Crowdfunding is high-risk and complex. It is essential that you obtain expert advice from an experienced authorised adviser.
3 Special purpose vehicles
In her book, Nicole highlights another unusual arrangement in the form of special purpose vehicles (SPVs). Because of the self-contained nature of each one of Nicole’s property
developments they are a good match for the restrictive nature of the special purpose vehicle. Each special purpose vehicle set up by Nicole applies to only one property development. This makes it an ideal way in which the developer can be open and detailed with investors about all of the cost and profit elements of each individual property development.
If the developer will be the only shareholder in each project, the special purpose vehicles lose their attraction because of the additional administration, bookkeeping, and compliance reporting. The financial management of individual projects can be monitored within the developer’s bookkeeping and accounting software by running a series of individual ledgers.
SPVs can contain financial risk within a single development project, and so protect a Group from ripple effects of a failed project. Providing share capital from a Group to a series of SPVs can be more difficult than cross-funding various projects within the Group.
Explore the pros and cons of all business structures and financing options. These are very important issues, and have long-term implications.
This note merely seeks to introduce the concept of Special Purpose Vehicles (SPVs), not to make any recommendation. Special Purpose Vehicles and other forms of business structures are complex legal entities. It is essential that you obtain expert advice from an experienced qualified adviser.
How ad+ can help
Your circumstances, requirements, and objectives are unique. If you would like one-on-one professional advice to help you optimise your property business, get in touch and we will arrange a no-obligation initial discussion with one of our chartered accountants.