- What is buyer-funded development?
- It is an increasingly popular model of financing property developments by using deposits from many individual buyers. Apartments are sold off-plan to buyers, often overseas, who pay substantial deposits of up to 80% upfront. Their money is used to fund the entire project, from marketing fees to construction costs.
- The model has become more commonplace since the financial crisis of 2008, after which it became harder for developers to borrow from banks and institutional lenders to fund their schemes. It is seen as a risky form of investment as construction often begins without the commitment of funding to complete it, and there is no safety net if costs balloon beyond projections and funds run out.
- The Solicitors’ Regulation Authority has warned of "substantial risks” of misappropriation of money the developer failing to deliver on the proposal or becoming insolvent, with buyers “unwittingly financing high risk or fraudulent property development.
North Point Global
The £200m "New Chinatown" development was one of several projects in the north of England promoted to overseas investors by Osborne during a 2015 "trade mission" to China. Osborne said he was working as a "tag team" with Joe Anderson, Liverpool's Mayor, to persuade individuals to invest in the scheme. Samuel Beilin said "Everyone in North Point Global group is totally and utterly devastated that the group has been unable to complete its development pipeline and that as a result buyers have incurred any losses."
Pinnacle (Angelgate) Ltd
Pinnacle, developing the Angelgate complex in Manchester, was placed in administration following a petition of investors to the high court last year. The administrator said that, of the £31m accrued from off-plan purchases by investors, £13m had been paid to a related Pinnacle company in sales and marketing commissions. “It is not clear how on any basis they could justify spending over 40% of the funds received from buyers on sales and marketing commissions.."
At least three other developments by the Pinnacle group have faced problems. Last month the company set up to develop the Quadrant student accommodation in Liverpool fell into administration after running out of money, and investors in the Paramount and Spectrum developments in Liverpool and Sheffield have alsocomplained of delays. Student flats firm goes into administration leaving investors fearing for their cash. Alistair Houghton, Liverpool Echo, Jan.31.2018.
Absolute Living Developments
Police in Hong Kong are reported to be investigating Absolute, which marketed at least three off-plan property opportunities to investors before falling into liquidation in 2016. Police investigation into developer Absolute Living Developments' controversial collapse grows in scale Claire Wilde, The Telegraph & Argus, Oct.21.2017.
Key Homes Group
In 2014, Key Homes, which marketed at least six developments off-plan to overseas investors, also fell into administration.
- Mar.12.2018: Promises v reality: how the schemes were sold – and what they look like now. Property developments that have either stalled indefinitely or collapsed outright, leading investors to ask where their money has gone. Most of these apartment schemes were sold off-plan to buyers in Asia, who paid substantial deposits of up to 80% with the promise of lucrative returns on their investments. But the projects have since ground to a halt, leaving unfinished eyesores and a trail of angry buyers believing they have been the victims of fraud – allegations that have been fiercely denied by the developers in question. David Pegg, Oliver Wainwright, The Guardian.
- Mar.11.2018: Revealed: the collapsed UK property schemes luring small investors. More than a dozen property schemes in the north of England that were promoted to investors in Asia – in one case by former chancellor George Osborne – have either stalled indefinitely or collapsed outright. Hundreds of investors claim to have lost money to an increasingly popular property model known as "buyer-funded development". In these schemes, rather than go to banks, developers finance projects using multiple small investors’ deposits – which can be up to 80% of the value of the unit. But, according to some investors, money has been taken without the units being delivered. Some describe losing their life savings and say they have approached police for help recovering their funds. Others say they believed the developments were somehow state-guaranteed because they were promoted as investment opportunities by officials from local or national govt. City of London police said they received more than 800 complaints of fraud involving property between 2015–2017. Overseas investors had reported losses of more than £10m. The same developers and contractors appear in a number of the schemes, which between them promised to construct almost 5,000 homes or student rental units in cities across the UK. David Pegg, Oliver Wainwright, The Guardian.
- Apr.08.2018: The Billionaires Behind Lego Are Shopping for London Real Estate. Lego fund CEO says long-term view helps him look past Brexit. The $16 billion fund is also looking at Swiss, German markets. Christian Wienberg, Bloomberg.
- Jan.08.2018: London Beats New York Among Foreign Investors in Real Estate. Peter Jeffrey, Bloomberg.
- 2018.01.08: During the Tory/LibDem coalition years, housebuilding fell to its lowest level since the 1920s. Measures such as the “Help to Buy” scheme, aimed at first-time buyers, focused on subsidising demand rather than increasing supply. Property ownership among the over-65s rose between 1997 and 2016, and fell among 16- to 34-year-olds from 54% to 34%. Osborne’s favoured combination of monetary activism (ultra-low interest rates and quantitative easing) and fiscal conservatism (public spending cuts and tax rises) kept asset prices high and housebuilding rates low. In "The Pinch", David Willetts charted how the old were hoarding the benefits of a market economy (property wealth, generous private pensions) while the young were left with its burdens (expensive housing, job insecurity, student debt, inadequate or non-existent pensions). The problem, however, is not merely one of housing supply. Paul Johnson, director of the Institute for Fiscal Studies (IFS): "10% of people have two or more homes. And all those young people are living somewhere and, on the whole, they're renting off older people." New Statesman, George Eaton