- Introducing Robert Weaver
- Which Property Asset Classes do Property Partner Work With?
- What is Geared Property? Investing in Property with Debt
- How does Property Partner Select their Properties?
- What Due Diligence does Property Partner do when Selecting a Property?
- Do Property Shares Require Ongoing Management?
Rob Jones: In today’s question, we are going to be looking at what geared property is, specifically around investing in property with debt. Now, I know there are a couple of different elements to this, Rob, which we will touch on throughout the question but how do you currently position properties and do you consider gearing and leverage when you are looking at new opportunities?
Robert Weaver: When we started we were doing individual flats and houses. We didn’t have any gearing. It was a pure, equity product. And then, when we moved into the investment grade product, the blocks of flats, buying at a discount, en masse, we looked at adding debt to make it a much more traditional, investment product.
A number of investors were saying, I’m not going to invest in this until there is an amplifier on the returns.
So, we don’t put it on every property and really, the way we look at it is, if there’s a single income, say, with two flats, there isn’t enough solid, robust income to cover and pay that. Tenants will move and when they move there is no income paying off the interest.
So, you need to have a lot more cash in the entity to actually pay that and to carry you through.
We’ve taken the view, rightly, that where there are multiple properties, three flats or more, so, at any-one-stage, you shouldn’t have them all vacant, at worst, two, there’s likely to be one full at any one time. There’s always income, more to cover the interest.
Loan To Value
Robert Weaver: The level of debt we introduce on the properties, on average, is about 50% loan-to-value. We’ve got a couple of instances, I mentioned the one in Gainsborough which is 42 flats. As a product, it has a very robust income and on that one, we went to 60% LTV because we have got the sheer number of flats. 90%, 9 out of 10 are 50% and we use this as a tool to amplify returns. It does amplify the risk as well, it amplifies what’s going on.
So, if the market is falling, it will amplify the falls. If the market is rising, it will amplify the rise. You can amplify your capital gains and also can amplify, depending on the level of the yield, amplify the yield, as well, or the income that you are getting out of it, for a high yielding product.
We use it as an investment tool. It’s very different to a buy-to-let investor who might be borrowing 75%, 80%, which is not a tool, it’s a necessity because you need so much equity to buy property.
With a smaller, more manageable piece of equity and a big piece of debt, you can buy that investment. I think, for me, that’s risky.
Rob Jones: Especially in a turbulent market.
Robert Weaver: I’ve seen it when a tenant leaves, that is when your expenditure increases because that’s when you need to redecorate the flat, you find that there’s been a leaking tap under the bath and they need to replace the floor. So, that’s the time when you have not got any income coming in, you have still got to service the mortgage and it’s got outgoings, refurbishments and paying for the flat, whilst you get a new tenant.
It is a very different product. But again, it was very successful when the market was going really well and was amplifying those returns but it just takes a small movement, at that kind of level, to wipe you out.
Debt Products with Property Partner
Robert Weaver: The other thing that we are doing on our platform is offering a debt product. And so investors can invest in the equity of the property but this is where you can invest in the debt piece.
So, a very brief example is, if you’ve got a developer and he’s borrowed the principal, first charge money, 50% or 60% LTV and then there is what we call a mezzanine charge, which is the next layer up, a second charge that, because it carries more risk, has a much higher level of return. I think, what we did was 10% per annum.
Again, the difference is, because we’ve got the inherent, property skills, we look at it as you getting repaid on the underlying, property asset. If that performs well, you will get repaid. If it is a disaster, you will lose it. So, we take the time to, actually, as if we own the asset, look at it, assess it and look at the valuation of the values and ask, will this deliver? What’s the worst case scenario? Will this get repaid? That is how we approach it.
Rob Jones: You approach it with the skill set and the team you already have to assess those potential opportunities. And, I suppose, the debt element, from an investor viewpoint, have you seen certain types of investor attracted to one or the other or people diversifying and investing in both?
Putting it All Together
Robert Weaver: Again, it’s trends. In a weaker market people tend to prefer debt products because they’re not exposed to market movements. It’s just an income. And then when the market is growing, people then revert to the equity products because the equity has the growth and the fall and the debt, generally, has just the income, so, it is deemed safer.
But you have got to look at where you are on the debt scale, whether it’s a first charge, a second charge or the equity – the equity is the real risk – the second charge is the next risk down and the lowish risk is the first charge.
Rob Jones: Perfect. And I guess, whichever way you are choosing it is the level of gearing you are looking at.
Robert Weaver: Yes and is the level of return commensurate with the level of risk you are taking on?
Rob Jones: Fantastic. Thank you very much.