The Great British Property Scam (pt 8)
But that is only one part of the picture. The other was the dramatic drop in interest rates following the collapse of Lehman Brothers and the ensuing credit crisis. Suddenly, all those people who had been prudent with their finances, probably throughout their whole lives, now found that the banks were not offering anything like a decent return on their money. One or two per cent (if they could get it!) wasn`t going to fund their retirements and a whole new marketplace erupted out of the ashes of Lehman`s. Investors needed to put their money somewhere and everyone has been told at some time that land and property is a safe bet.
By 2016, it was estimated there were 1.4 million SIPPs in the UK, totalling £175bn in assets. There are now estimated to be around 2 million in existence and GlobalData projects the market to grow by a further £1.9bn. As we have seen with Store First some of that money has already gone into and been lost in unregulated collective investment schemes.
If a decade of austerity has taken its toll on UK investors it has served those from overseas better. The combined effect of low interest and attractive exchange rates has seen the UK become even more of a target for foreign investors and particularly those from the Far East.
UK property has always been a prime target for overseas investors, but in recent times the number of properties let by non-UK based owners has soared. Property investors from Asia, the US, Europe and more have viewed the UK property market as a solid investment location for many years, with strong capital appreciation, growing rental markets and the support of continued private and public investment across the country.
Now, new data revealed by Hamptons International shows that the number of investors based abroad who let out property in the UK has spiked and is up from 7% to 11% of the total market share.
One major factor influencing overseas investors right now is the depreciation of the sterling since the EU referendum in 2016. Favourable exchange rates for foreign investors mean they get much more for their money now than they once did, opening a wider section of the market. Often, much of that overseas money ends up in developments that are never finished or room investments which will never provide the promised returns.
We will look at this in more detail later but for now it is helpful to look at how The Financial Services and Markets Act 2000 (FSMA) sets out what constitutes a Collective Investment Scheme (CIS).
S235 says that a CIS relates to property of “any” description…..the purpose of which is to enable those taking part to receive profits or income arising from the acquisition; the investor must not have day-to-day control over the management of the property; the contributions of the investors and the profits or income out of which payments are to be made to them are pooled; and, or the property is managed as a whole by or on behalf of the operator of the scheme.
The vast majority of these schemes will be caught by that final “management” clause as most have a single manager appointed by the developer. It`s difficult to imagine a 500-space car park or 100 bedroomed hotels being looked after by multiple managers on behalf of numerous investors.
And therein lies the difficulty. As we`ll see later, it is almost impossible for these types of scheme to be organised in a compliant manner unless the developer seeks the approval of the FCA. Without that approval these schemes will continue to be not only unregulated but also unlawful.
The good news for investors is that there is the possibility of recovering their losses. It is unlikely to come from the provisions for compensation offered by the legislation because that will require the developer to pay back what they`ve received. In most cases that will not happen because the developer has already spent the money on lavish lifestyles or allegedly invested it in their next project.
Over the coming pages we will examine all the fault lines in these projects and how all the pieces of the jigsaw come together to create The Great British Property Scam.