Key Terms: What Is ‘Capital Employed’?

The term ‘Capital Employed’ is one that comes up commonly in property investment. It is, however, used in several contexts, making it somewhat difficult to pin down a specific definition.

Essentially, ‘Capital Employed’ can be defined as the total amount of capital utilised for the acquisition of profits. It can also refer to the total value of all fixed and working capital assets employed in a business. Fundamentally, all definitions of ‘Capital Employed’ tend to refer to the investment and functioning of a business.

Capital Employed is a figure used by analysts in order to determine the subsequent Return on Capital Employed (ROCE). It is a form of probability ratio, which compares net operating profit to the Capital Employed sum, informing investors as to how much each £ of earnings is generated with each £ of Capital Employed.

Many analysts consider ROCE to be a better indication of performance or profitability over a long-term period than alternative figures of return on equity or return on assets. This is because it is believed that ROCE takes long term financing into consideration in a way that the alternatives.

How To Calculate Capital Employed

In simple terms, Capital Employed is a measure of the value of a business’s total assets minus its current liabilities. Rather than total liabilities, which may come to significantly more, a current liability refers only to the portion of debts that are required to be repaid within one year. 

In order to calculate the sum of Capital Employed, you’ll first need to calculate both your total assets and current liabilities.

In order to calculate Capital Employed from assets, add together the following:

  • The current market value of the assets
  • Investments into the business
  • All current assets (stock, bills receivable, cash in hand etc)

From the liabilities side of a balance sheet, add together:

  • Share capital, including issued share capital (Equity + Preference)
  • Reserves and surplus sums. Include in this:
      • Profit and Loss account
      • General Reserve
      • Capital Reserve
      • Debentures
      • Any other long term loans

Once you have calculated the sum of the current liabilities, deduct this from the total value of assets to determine your Capital Employed sum.

Similarly to the calculation of return on assets, investors use the sum of return on Capital Employed to give them an approximate figure for what their return is likely to be in the future.

What About Return on Capital Employed (ROCE)?

Return on Capital Employed is the logical next step calculation after you have worked out Capital Employed. It is calculated by dividing net operating profit (or earnings before interest and taxes) by employed capital.

Alternatively, you could divide the sum of earnings before interest and taxes by the difference between total assets and current liabilities.

There is also a separate financial ratio that you can calculate: the return on average capital employed, or ROACE.

ROACE: Return on Average Capital Employed

ROACE shows the value of profitability against the investments that a company has made in itself. It’s important to note that this is a different calculation to ROCE, and has a very different meaning, so be sure to understand the difference when making your calculations.

The Return on Average Capital Employed calculation takes the average of the opening and closing capital of a period of time, rather than just the capital figure generated at the end of that period.

The calculation of Return on Average Capital Employed looks like this:

ROACE = Earnings before interest and taxes (EBIT) / (Average Total Assets – Average Current Liabilities)

ROACE is a useful calculation to make when you are analysing a business within an industry that relies heavily upon capital, such as property investment can do. If a business is able to generate higher profits from smaller capital assets, they will show a higher ROACE, and thus more efficiency in their capacity to convert capital to profit.

So What Does A Good Return on Capital Employed Look Like?

As with ROACE, an indication of an efficient company is one that demonstrates a high value of Return on Capital Employment, in terms of, at least in part, its Capital Employment. A high value may also indicate a company that has a lot of cash to hand (because cash is included within the total assets figure).


We hope that this explanation of how to calculate these valuable metrics has been useful to you. Of course, if you have any further queries regarding this, or any other term you’ve come across, please do get in touch. We are dedicated to making sure you get the most out of your investment portfolio, so we’re happy to help you every step of the way.

You can find out more by registering as an investor on our website, which you can do here:

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Will President Trump Affect Property Investment?

Last week, the world looked on, gobsmacked, as Donald Trump became the 45th President of the United States. The economic policies Trump is expected to implement will have significant implications, not just for the US, but worldwide. Global markets are already meeting the news with some trepidation. So the chances are you’re probably also feeling a bit concerned about your investments. With that in mind, let’s take a look at how the election result, and the prospect of President Trump affect property investment.

Within hours of the result being announced, global stocks plummeted $3 trillion in value.

Throughout Europe, US Stock futures fell by around 4.5%. UK stocks have dropped between 4% and 5%. Within just 10 minutes of the result announcement, both Saudi Arabia and Dubai saw a stock market fall of 2.7%.

On 9th November, the FTSE fell by 2% in early trading, picking up a little during his victory speech. The Hang Seng index also fell, down 3.16%, and the Nikkei 225 index dropped 5.36%.

By contrast, it was expected that global stock prices would have risen by over 10% if Clinton had triumphed. The Trump effect appears to be quite the opposite.

That is one serious hit. Equity assets have been thrown into the unknown, with higher volatility hitting these assets hardest of all.

So How Will Trump Affect Property Investment for Me?

Well, the first step is to diversify your portfolio quickly. This will help you assuage the volatility of any assets that are set to feel the brunt of Trump’s foreign policy, and the market uncertainty it brings.

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Apart from gold, which is rising in value (up 4% to $1.316 an ounce), property remains a strong investment.

Property has a long track record as a ‘safe haven’ investment, a strong asset to hold in these troubled times. Whilst property in the US isn’t thriving right now, due to unreliability of returns, this bolsters things for the UK property market. Our strength and resilience in property, plus the renewed focus on the UK as the US flounders.

Even the new President is planning over £1bn worth of investment in the UK. Considering our status over the last few years, of significant discrepancies between demand (high) and supply (low), it’s a good call. This imbalance is placing upward pressure on property prices here, which is great news for investors’ capital gains, which promise to be both solid and strongly consistent.

OK, so I should invest in property now, but where?

London, whilst usually a good call has been experiencing a steady decline in prices at the top end of the market. However there may soon (some have suggested) be an increase in demand caused by Americans running screaming from their home country, hoping to relocate to the UK capital. Not sure about that but we’ll see.

But aside from London, there isn’t much of a change on the cards. The UK residential market isn’t really strongly affected by US foreign policy, nor equities, to much of an extent.

Nonetheless, Manchester remains the UK’s leading city for property investment yields, coming in at around the 8% mark. Manchester has one of the UK’s highest tenant populations. The demand for rental property here outpaces supply at a ratio of 4:1. And this is not likely to change due to Trump.

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Will President Trump Affect Property Investment By International Investors?

Chinese property investors have long been keen on the US cities of Los Angeles, New York and San Francisco. But the election result has injected a high element of risk into investment coming into the US, with the result that investor return is likely to be affected. As such, the UK property market appears an attractive, more stable, option.

What’s more, with the pound plummeting to a 31 year low following Brexit, opportunity here is knocking hard.

Despite Hong Kong’s Hang Seng index falling 749.14 points in late morning trade directly following the result, and risk of capital outflow from emerging markets, there is a bright side. The Federal Reserve is unlikely to hike up in December, and as such the economy and political environment is not likely to see a dramatic change.

As we’re all pretty much aware, Trump’s policies regarding the Middle East make for a poor relationship with the US. This will cause some real uncertainty for quite a while. Directly following the result, oil fell to under $46 a barrel, with the global benchmark diving nearly 4% to its lowest since August, though some of its losses were quickly recovered later on. Middle Eastern investors, therefore, should seek to diversify their portfolios, both with gold and – ta-da! – UK property.

Over in South Africa, the reduced likelihood of a December Fed hike is also good news. However, the rand lost 65c following Wednesday’s result, and an erratic, fluctuating rand is likely to come next.

Here in the UK, we know that if we trigger Article 50, equities are likely to be strongly affected. In fact, it’ll be a much more direct effect than the US election result. On the bright side, though, Trump advisors are expressing some early thumbs-up for trade deals with the UK. Well, they’ve said we won’t be ‘last in line’, so that’s hopeful. If these sentiments are followed through, this could give the UK economy a boost. The advice for UK investors is to keep focusing on those all-important property yields.

Property Crowdfunding Investment or Buy to Let?

As the UK Government sweeps in with more and more tax changes on the buy-to-let sector, property crowdfunding investment becomes an increasingly attractive option.

Jeremy McGivern, founder of Mercury Homesearch, has stated that he thinks that property crowdfunding investment is likely to represent the biggest change within the housing market over the next few years.

However, along with his comments, McGivern issued a strong warning that the rise of property crowdfunding investment could have a ‘catastrophic’ outcome. Whilst the general consensus is that the rise of the property crowdfunding industry is a positive development, in that it democratises property investment, McGivern thinks that allowing a wide range of people to access the previously out-of-reach property market could lead to irresponsible investment, as people fail to understand the risks involved.

Lee Grandin, of peer-to-peer lending platform Lend2Landlord, surprisingly concurred: “Any mechanism such as a P2P platform that engages a funder that is not able to make a sound decision on whether to lend its money is a total disaster.”

He went on to make the point that “…risky investment should be limited by your net worth but Brexit clearly shows you can’t dictate what people should or shouldn’t do so that is unlikely to ever happen.

“There is only ever one message you can ever say and it must be said clearly and concisely: Your capital is at risk; you could lose all your money.”

But are they right about property crowdfunding investment?

Whilst Grandin and McGivern do have a point about the risks of getting into P2P lending or property crowdfunding investment without adequate understanding of the risks involved, we would argue that the vast majority of investors are intelligent and informed individuals.

In order to pass the registration process, at The House Crowd for example, prospective investors must pass a test. They must show they understand what property crowdfunding involves, as well as its risks, before they are allowed to continue. Furthermore, FCA regulation holds property crowdfunding platforms to strict controls that must be legally adhered to. Investors must be ‘clearly and concisely’ (as Grandin puts it) aware of the risks, and we aim to do this at every opportunity.

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Perhaps McGivern and Grandin underestimate investors in property crowdfunding. We certainly see a wide range of benefits to the property crowdfunding and P2P lending model. At a time when the buy-to-let market is increasingly strangled off, at the same time as the number of renters continues to grow, the model provides a much-needed solution.

Of course, being absolutely aware of the risks, and exploring all avenues for investment before deciding on property crowdfunding is vital. Investing money is a serious matter, and not one that most people take lightly. And nor should you.

We continue to be fully in favour of the democratising force of property crowdfunding, and the continued flow of movement it gives the property market. In the North West in particular, increasing levels of property crowdfunding go hand in hand with the wealth of regeneration that is building a bright future for the region. There continues to be a real problem with shortage of affordable homes, and property crowdfunding might just be one of the solutions to that.

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Government Promises Investment in UK Property Development

Good News as Government Promises Heavy Investment in UK Property Development

The UK Government has recently announced plans to invest billions of pounds into the creation of new residential UK property development.

UK Property Finance, one of the UK’s leading Development Finance firms, is understandably excited by the news:

“With the Treasury itself providing serious financial support for those in the property development sector,” they state. “It seems that the disconcerting issue of the lack of affordable housing across the UK is finally being taken seriously by those in power.”

The investment plan is expected to assist in the creation of 225,000 new homes across the country, with at least 15,000 anticipated to be ready and habitable by 2020. There’ll be, it seems, a £3bn injection to the Home Builders’ fund, with a further £2bn going directly to residential property developments on public land.

Insufficient Funds for UK Property Development?

However, despite this news, there are plenty of voices in the property development sector who don’t believe the figures to be sufficient to overcome the extent of the housing crisis.

“Although the amount of suggested investment is significant,” UK Property Finance goes on to say. “It still seems to fall short.”

Whilst these steps by the Government are, of course, a step in the right direction, the extent of development simply does not match the volume of population expansion. This is particularly the case for affordable housing, as increasing numbers of people are priced out of the property purchase market altogether.

Without sufficient Government backing, some affordable financial backing tailored to the needs of each development is necessary.

Enter Property Crowdfunding!

Property crowdfunding and peer-to-peer secured lending may just be the answer. Allowing investors to build a diverse portfolio of property investments across a range of property types, as well as smaller financial input requirements, the alternative finance sector is promising. A more diverse variety of investors, from high net worth to private individuals can get together to fund development projects that will help towards providing some of that much needed new housing stock.

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Despite numerous setbacks, from Brexit to tightening on mortgage lending, the UK property market seems to be remaining buoyant, with optimistic reports for the future.

The property crowdfunding and peer-to-peer secured lending market is one of the major players making a significant difference in keeping the property market moving in the UK. It’s this kind of innovation, as well as the perseverance in the face of challenging times, that is key to building a successful future for the UK property market, and the economy at large.

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How Do I Diversify My Property Portfolio?

How Do I Diversify My Property Portfolio?

A diverse property portfolio is the absolute gold standard when it comes to a successful investment strategy. Cherry picking a healthy mix of investment types across the board, and taking into account your lifestyle requirements and risk profile, is key. You should also put in the time and effort to compare and contrast which investments are likely to generate the highest returns.

That’s just for starters. Let’s go into a bit more depth about what you need to know in order to create a fully diverse portfolio of property investments.

Why Should I Create A Diverse Property Portfolio?

It’s principally about not putting all your eggs in one basket. With diversity across your entire portfolio, you bolster yourself against any problems should anything come up to scupper any one investment in the portfolio.

What Criteria Should I Be Looking For?

Well, this is a subjective thing. In short, it depends what you’re looking for. There’s an array of factors to consider in order to nail down what exactly is going to be the right investment for you.

These include (but are not limited to) questions such as:

  • Are you looking for a short or long term investment?
  • Are you likely to need your money back quickly (i.e. how much liquidity do you need?)
  • Are you looking for income or capital growth?

What Options Are Available?

Again, depending on your criteria, you might consider:

  • The slow and steady traditional buy-to-let model
  • The fixed revenue of student developments (ensure that you’re able to exit easily, though!)
  • HMO (House of Multiple Occupancy) – a lucrative choice, but pretty management intensive

Alternatively, you could consider investing in:

  • Development finance
  • Hotel investments
  • Secured lending
  • Commercial property

Location, Location, Location

Another way to broaden the scope of your property portfolio is to diversify by location.

There is, however, a counterargument to this: whilst investing in property over several locations is a diverse-happy strategy, there’s a lot to be said for specialising in one or two particular areas. This is an option for those aiming to deepen their expertise in one area, and can also be argued to deliver better results.

That being said, when diversifying by location, here are some of the major factors to bear in mind:

  1. Promising Places

Look for towns and cities with projected increases in property prices. This can often be seen as a result of new employment opportunities being created by businesses opening or relocating to the area.

Tip: a term common in property investment circles is the “Waitrose” effect: price increases can sometimes be anticipated by the opening of a new Waitrose food market in the area.

  1. A Place In The Country

As the capacity for home working grows, more people are taking advantage of the chance to relocate to the countryside. Smaller villages in the outskirts of big cities, particularly those on good rail routes for commuters, are likely to grow in demand.

Demand

Both in the residential sales and rental markets, a key part of your research should definitely include knowing what is in high demand.

As the population of renters looks to overtake the number of homeowners, many investors are considering buy-to-let as a good option to add to their portfolio. Consider covering your bases with both buy-to-let and development projects for the sale market.

REITs and Crowdfunding

  • What is a REIT?

REIT stands for Real Estate Investment Trust. It’s a company that owns and operates income-producing real estate.

  • What is Crowdfunding?

Crowdfunded property investment involves coming together with a group of other investors, each putting in a sum towards purchasing a property.

What’s the Difference?

With models like property crowdfunding and peer-to-peer lending, there are fewer potential outgoings and a lot less hassle than when investing with a REIT. Nonetheless, by virtue of the crowdfunding model itself, sharing the investment with many other investors, you lose the control that you have with a REIT investment.

With REITs, however, there are typically lower rates of return to be expected. This is due to higher expenses, such as maintenance costs and fees. These kind of portfolios can be much more complex to manage. REIT investments are generally a better bet for a long term investment, typically spanning 10 to 20 years, whereas with property crowdfunding and P2P secured lending, you’re looking at a much shorter term investment, from as little as 3 months. Returns in crowdfunding and P2P for property are potentially significantly higher than REIT investments – up to 12% p.a. on some platforms.

Even if you don’t have huge sums to invest, both REITs and property crowdfunding are potentially good options, allowing you to create a diverse property portfolio more affordably.

If, however, you are leaning towards leaving your investment with the experts, rather than managing your portfolio yourself, you should still be sure to keep an eye on market conditions. Knowing when it’s time to review the ratio of your portfolio, and spotting signs that an investment could lose its profitability (meaning you should make a hasty exit!), is vital.

Conclusion

Spreading your capital over a variety of investment types is, inarguably, the most sensible course of action. REITs and property crowdfunding are both good options if you wish to add property to your investment portfolio, but don’t want the job of managing a property yourself, or wish to diversify as far as you can within your affordability. Whatever path you choose, don’t forget: diversity is vital.

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Why Foreign and Domestic Investors Love Manchester

It’s no secret that the Manchester property market is the centre of attention for property investors both here and abroad. In fact, it’s all across the news. Perhaps that’s part of what’s driving this attention: more and more investors are wising up to the possibility of great ROI in the heart of the Northern Powerhouse.

Money From Abroad Fuels Manchester Property Market

There is no signs that the flood of cash flowing into the Manchester property market, nor the city’s economy at large, is likely to slow any time soon. Manchester is now the largest economic area outside London: £56bn of gross value added. Germany alone is set to spend £200m in the city before the year is out, fuelled in no small part by the drop in the value of the pound against the euro.

Nonetheless, it’s not just Brexit that’s got Germany investing in Manchester. The Amazon distribution hub, a 280,000 square foot are at Manchester City Airport, was purchased for £35m by German investors Hansainvest, for instance.

So, why Manchester? Well, there’s all the rabid regeneration that’s transforming the city in so many ways. But it’s also the state of London’s property market.

Manchester’s Winning Property Prices

Knight Frank have recently released research findings demonstrating that London’s property prices are now so stupendously high, they’re starting to hit an affordability ceiling that threatens to smother the capital’s market altogether. As such, investors are looking elsewhere, and Manchester is where they’re feasting their eyes.

It’s a city that’s experiencing the strongest house price growth of any city in the UK. It’s been voted the most liveable city in the UK by the Economist Intelligence Unit’s Global Liveability Scale. Its student population is the largest in the UK, with student accommodating offering excellent ROI.

Student Property in Manchester

Student property is one of the investments tipped to be unshaken by Brexit. Demand for purpose-built units for this demographic are in chronic undersupply, meaning any rental development of this kind will be snapped up without hesitation by student tenants. The King’s Court development on Hyde Road, for example, offers a huge 8% net income guaranteed over five years: no development risk (as it’s already developed), and immediate income up for grabs.

The Manchester Property Market Rules, OK?

We’ve covered the subject of the Manchester property market boom, and corresponding regeneration, almost weekly over the last few months. And believe us, it’s not just because of our vested interest in the city: this is simply news that’s completely dominating the property investment space.

Compounding evidence that Manchester is pretty much the best place to invest in the UK right now is everywhere, with property experts across the board extolling the virtues of the Northern Powerhouse, and its strong potential for excellent returns for those willing to place their money here.

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Bridging Loans: What You Need To Know

A mixture of growing availability and booming housing market have made bridging loans an attractive choice for both individual property investors and businesses alike.

In spite of growing popularity, as more people become wise to the sheer flexibility that bridging loans offer, there are still plenty of potential investors who are still unaware of the benefits of bridging loans and how they can be used.

It is now possible to invest in products which deliver returns to investors by making bridging loans to borrowers. Once considered wholly a specialist product for high net worth investors and well-funded specialist finance companies, bridging loans are increasingly being used for a wider range of UK property investments. It’s now much more possible for lower level investors to take advantage of the benefits offered by bridging loans, particularly via development loans and P2P secured lending in property investment.

As borrowers begin to recognise the applications of the short term finance that bridging loans can offer, more are using the funding for their property investments or businesses.

Bridging loans can be used for a number of functions, including the support of residential or commercial property transactions, development or renovation projects, and also purchases through property auctions. Likewise, business buyers are using bridging loans when a quick cash injection is necessary.

What Are Bridging Loans?

Bridging loans are usually short term loans, generally 12 months or less. They can be used as a “bridging” solution until next stage or permanent funding becomes available, or until they sell a property.

Bridging loans are also, typically, quicker to secure, whilst retaining security and flexibility for the borrower. Where a quick financial boost is required, a bridging loan can come in very handy.

This financial option is used by businesses where short term funding is necessary in order to:

  • Raise capital
  • Settle tax liabilities
  • Deal with emergencies
  • Meet business obligations
  • Purchase necessary items

Where an investor is purchasing a property or raising funds for refurbishment, bridging loans come in handy.

They’re suitable for:

  • House Builders
  • Landlords
  • Home Buyers
  • Property Investors
  • Developers

How Do Bridging Loans Work?

The principal difference between a regular loan and a bridging loan is organisational time taken to push the funding through. With regular lenders, it can take months to complete, but with a bridging loan, the finance can be ready in 24 hours or less.

Why Use Bridging Loans?

Bridging loans allow property investors to take advantages of opportunities as and when they arise. For example, to secure property deals, like with discounted asking prices, and also in the resolution of emergency situations where the funds would not otherwise have been available.

On the downside, bridging loans have higher interest rates than on regular loans. That’s why they’re principally used as a short term solution.

Businesses may use bridging finance for:

  • Tax: if a tax demand is made, and the required amount can’t be accessed within the necessary timeframe.
  • Raising capital: where a company needs to raise a sum in a short timeframe, bridging loans can be secured against property or land.
  • Business Obligations: To overcome financial difficulties or meet obligations of the business, a short term bridging loan can provide a solution.

Property Owners/Homeowners may use bridging finance for:

  • Repairing a broken property chain: where a homeowner is at risk of losing the home they’re set on purchasing, if a buyer in the chain drops out.
  • Temporary Cash Flow: during a property transaction where a short term influx of cash is necessary.
  • Downsizing: for owners who are downsizing, and therefore don’t need a mortgage, a bridging loan can help them to buy before their existing property is sold. This allows them to move independently, and quicker than if they’d had to wait.
  • Quick securing of property: to prevent a buyer from missing out on the property they want to buy before their existing one is sold.
  • Building a home.
  • Property conversion: for those wishing to convert a barn or other property, or for developers looking to turn a profit.

Developers or Investors may use bridging finance for:

  • Development and renovation projects.
  • Fast access to funds (as above).
  • Un-mortgageable properties: for fixing up dilapidated properties for which a mortgage wouldn’t be approved, a bridging loan can give investors the chance to renovate and sell at a profit.

So How Much Could I Borrow With A Bridging Loan?

As with any loan, it depends both on your circumstances and on the lender themselves.

Generally, the minimum you could borrow would be about £10,000. At the upper end of the scale, the limit is usually £1,000,000, though some lenders can go significantly higher than the £1,000,000 mark.

Payments

The structure of bridging loans does differ from one to another. Some bridging loans allow the borrower to just pay off the interest each month, and repay the loan at the end of the term. This structure is generally most suitable for those who will have access to regular cash flow throughout the duration of the loan, enabling them to meet the monthly interest payments. Alternative options include retained interest or “rolled up” interest.

  • “Rolled Up” Interest

This means that, rather than paying the interest every month during the term, the interest is effectively “rolled up” and paid at the end of the term. This is an option usually considered by borrowers who won’t be able to make interest payments monthly during the term, until the lump sum comes in at the end allowing them to pay back the loan and interest in full. In this case, however, the interest is typically compounded, meaning the repayment at the end of the term will be larger.

  • Retained Interest

Sometimes, it’s possible for a borrower to retain an amount from the loan representing a number of monthly interest payments, to help them meet those monthly interest payments. This option allows the borrower to choose the number of months, dependent – of course – on their affordability criteria. As the retained interest is still a part of the capital loan sum, interest will be charged on this amount. Equally, the total loan must be within the loan to value figure.

By the time the loan is redeemed, if there remains any unused retained interest, the lender tends to offer the borrower credit for this amount.

Interest Rates

This, again, depends on the lender. The actual rate of interest a borrower will pay also depends on:

  • The borrower’s credit score
  • The Loan to Value (LTV) – typically 70% – 75%
  • Whether it’s an open or closed bridging loan (see below)
  • The type of security the borrower can supply

The reason that the interest rates on bridging loans are usually higher than on mortgages is that the lender engenders more risk through bridging loans.

Typically, you can expect to pay between 1% and 1.5% interest per month, plus a 1%-2% arrangement fee or broker fee.

The Process

Whilst the process of funding with bridging loans can take as little as a few hours, depending upon the circumstances, it usually takes between a week and a month. In the case of a complex development loan, for example, it could take even longer. This is because these sort of complex loans need to meet a number of conditions, which will have to be discharged by the LPA (Local Planning Authority).

Paying It Back

You will, as with any loan, be expected to pay it back by the end of the term. The interest payments can be paid in whole when the total sum is repaid, retained from the loan at the commencement, or simply made via monthly installments.

Bridging Loan Periods

As mentioned, bridging loans are usually lent over a maximum 12 month period. It’s more practical for these higher interest loans to be simply short term solutions. Nonetheless, you can usually pay it off at any time within the given time period, if your finance comes in sooner.

It’s important, with bridging loans, to look at the overall cost of the loan, including all fees, rather than focusing solely on the interest rate charged.

The Two Types of Bridging Loan

  • Open Bridge

In this type of bridging loan, the borrower is required to set out a proposed exit plan for the repayment of the loan, but at the outset there’s no definitive date set. With an open bridge, a cut-off point is defined by which the loan must be repaid.

  • Closed Bridge

As above, the borrower has to meet a set date for the repayment of the loan. If the borrower, for example, has already exchanged on the sale and has a fixed completion date. The bridging loan will be repaid by the sale of the property.

Will I Need Legal Advice?

It’s always recommended that, when instigating a bridging loan application, the borrower engages an independent solicitor before signing any legal documents. This will ensure that both you and the lender are protected.

Finding A Reputable Lender

It’s important to ensure you are dealing with an accredited, reputable lender when obtaining a bridging loan. Make sure that the one you choose is:

  • A Member of the Council of Mortgage Lenders
  • Is both authorised and regulated by the Financial Conduct Authority (FCA)
  • Has experience working on similar projects to yours
  • Has a proven track record in the field

Increasing numbers of property buyers and investors, both business and individual, are recognising the usefulness of bridging loans for short term funding. If it sounds like an option that might be useful to you, then make sure you do plenty of research before getting involved!

As always, don’t forget to check out our current investment opportunities, and register with us to find out more about investing with The House Crowd.

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Glossary of Property Investment Terms

There are a lot of terms unique to the investment world that will be new to those just embarking on building a property portfolio. That’s why we thought it would be very useful for you to have a thorough Glossary of Property Investment Terms to help you to thoroughly understand some of the finer points of investing. We hope you find it useful!

Glossary of Property Investment Terms | The House Crowd

A Shares 

A class of shares which have specific rights attached to them, as set out in a company’s articles of association.

Angel Investors

Investors who provide investment and other support to early-stage businesses. Traditionally angels are wealthy individuals who have a significant amount of entrepreneurial, industry or investment experience.

Angel Network (or Angel Syndicate)

A group of angel investors that pool together money and other resources to invest in, and provide support to, early-stage businesses.

Annualised Return

Average return each year over the minimum term, based on the total of rental income and estimated capital growth.

Find out more about Annualised Returns here.

Articles of Association

A company document that sets out its management and administrative structure.

The articles dictate the internal affairs of the company such as director and shareholder rights, the issue and transfer of shares, and the organisation of meetings.

Asset Class

A class of economic property that has similar characteristics. Listed shares, government bonds and real estate are all asset classes.

Glossary of Property Investment Terms | The House Crowd

B Shares

A class of shares which have specific rights attached to them, as set out in the company’s articles of association.

Below Market Value (BMV)

Properties are sometimes sold at below the market value, meaning they are offered at lower prices than comparable properties.

Beneficial Shareholder / Owner

An investor who owns the economic value and other shareholder benefits attached to shares, such as dividends and tax reliefs, but the registered title to their shares is held with another person or entity often for administrative convenience.

Bridging Finance

Bridging loans are a short-term funding option. They are used to ‘bridge’ a gap between a debt coming due – primarily for property transactions – and the main line of credit becoming available. Alternatively, they can act as a short-term loan in pressing circumstances.

Glossary of Property Investment Terms | The House Crowd

Capital Employed  

The sum of shareholders’ equity and debt liabilities; can be simplified as Total Assets – Current Liabilities.

Capital Growth

The increase in value of an asset or investment over time, measured on the basis of the current value of the asset or investment, in relation to the amount originally invested in it.

Convertible Equity

An equity investment where money is invested in a company in exchange for shares to be issued at a later date. The share issue is generally triggered by the company raising finance from other investors. In return for investing early, the convertible equity investors receive a discount on the price of the shares issued to the other investors.

Convertible Note

A debt investment where money is invested in a company with the expectation that the debt will “convert” into shares issued at a later date. The share issue is generally triggered by the company raising finance from other investors. Before the conversion, the investor is paid interest.

Crowdfunding

The funding of projects or ventures by raising money from a large number of people, usually online. The three main types of crowdfunding are equity, debt and rewards/donations.

Glossary of Property Investment Terms | The House Crowd

Damp Proof Course (DPC)

A barrier through the structure by capillary action such as through a phenomenon known as rising damp.

Debt

Money owed by one person/company to another. The borrower has to repay the money at a later date and generally also has to pay interest.

Dilution

A reduction in the ownership percentage of a share in a company caused by the issue of new shares.

Diversification

An investment strategy that involves mixing the amount, values and kinds of investments within a portfolio to spread risk and minimise losses.

Dividend

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.

Dividend Distribution

The distribution of a portion of a company’s profits to investors.

Drag-Along Right

A contractual obligation that allows majority shareholders to force minority shareholders to join in the sale of a company on the same terms, valuation and conditions of the majority shareholders.

Glossary of Property Investment Terms | The House Crowd

Enterprise Investment Scheme (EIS)

A UK tax scheme offering income tax and capital gains tax reliefs to qualifying private investors who invest in eligible businesses.

Equity

Shares or other securities that represent an ownership interest in a company.

Equity Crowdfunding

A type of crowdfunding that enables multiple investors to a buy shares, or other equity interests, in a company, usually through an online process.

Exit

An event when investors may be able to cash in and sell their shares, such as an initial public offering (IPO) or trade sale.

Glossary of Property Investment Terms | The House Crowd

FENSA Certificate

Documentary evidence that the installation work has been self-certified to comply with the Building Regulations

Financial Conduct Authority (FCA)

The financial services regulatory body in the UK, formerly called the Financial Services Authority (FSA).

Fully Diluted

All the shares of a company in issue, plus all shares which are the subject of options or other contractual rights to be issued in the future (regardless of whether the right has vested).

Fund  

An investment opportunity that seeks to raise money to be invested across multiple businesses. Fund campaigns are commonly used to invest in businesses participating in accelerator programmes and competition winners.

Glossary of Property Investment Terms | The House Crowd

Gas Safety Certificate

By law, landlords must have all gas appliances serviced regularly, normally once a year, by a Gas Safe registered engineer.

Gross Development Value (GDV)

The estimated value that a property, or new development, would fetch on the open market if it were to be sold in the current economic climate.

Gross Rate of Return

The total rate of return on an investment before deduction of any fees or expenses. The gross rate of return is quoted over a specific period of time, such as a month, quarter or year. It is often quoted as the rate of return on an investment in marketing materials.

Growth-Stage

The stage that a business is at when it has passed its ‘seed’ or initial stage and has established proof of concept and looking to grow.

Gross Yield

The yield on an investment before the deduction of taxes and expenses (such as management fees and maintenance costs). Gross yield is expressed in percentage terms. It is calculated as the annual return on an investment prior to taxes and expenses divided by the current price of the investment.

Glossary of Property Investment Terms | The House Crowd

High Net Worth Investor (HNWI)

A classification used by the financial services industry to denote an individual, or a family, with high net worth. If you earn more than £100,000 a year or have net assets of more than £250,000, you may qualify as a High Net Worth Investor.

HMO (House in Multiple Occupation)

A house occupied by more than two qualifying persons, being persons who are not all members of the same family. A “qualifying person” is a person whose only or principal place of residence is the HMO.

Glossary of Property Investment Terms | The House Crowd

Initial Public Offering (IPO)

The first time that a company’s shares are available for public purchase by means of a listing on a stock exchange. This process is also known as ’going public’ or ‘floating’.

Glossary of Property Investment Terms | The House Crowd

Know Your Client (KYC)

The regulatory process that financial services firms and certain other businesses must perform to verify the identity of their customers to help prevent against money laundering and other financial crimes.

Glossary of Property Investment Terms | The House Crowd

Loan to Value (LTV)

A term commonly used by banks and building societies to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property. For instance, if someone borrows £130,000 to purchase a house worth £150,000, the LTV ratio is £130,000 to £150,000 or £130,000/£150,000, or 87%. The remaining 13% represent the lender’s ‘haircut’, adding up to 100% and being covered from the borrower’s equity. The higher the LTV ratio then the riskier the loan is for a lender.

More on Loan to Value here

Local Housing Authority (LHA)

The main provider of social housing (or housing authorities) for people who cannot afford to buy their own homes. Local authority housing is allocated according to eligibility and need. Rents are based on the household’s ability to pay.

Glossary of Property Investment Terms | The House Crowd

Net Profit

The actual profit after deducting expenses, such as management fees, letting fees, maintenance costs which are were not included in the calculation of gross profit, have been paid.

Net Yield

Net yield is everything after expenses. It takes into account all fees and expenses associated with owning a property. It is a far more accurate way of calculating actual yield. It is also much harder to calculate as most costs are variable.

Nominee

A person or firm that holds assets, such as shares on behalf of another, enabling the nominee to handle complicated administrative matters.

Glossary of Property Investment Terms | The House Crowd

Open Market Value (OMV)

The realistic price that could be achieved for a property if marketed for sale.

Option

A right granted which gives the receiver an option, but not an obligation, to buy (or sell) shares in a company, or other securities, at an agreed price within a certain time frame.

Ordinary Shares  

Shares which represent normal equity ownership in a company. Ordinary shares generally entitle the owner to vote at shareholder meetings, receive dividends, and receive distributions on the winding up of a company, but do not carry preferential treatment.

Glossary of Property Investment Terms | The House Crowd

Pre-Emption (Also called Anti-Dilution)

A contractual provision which requires the company to offer its shareholders the chance to purchase additional shares to maintain their percentage of equity in advance of further shares being issued.

Portfolio

A group of financial assets such as shares, property or bonds, held by one person or entity.

Portable Appliance Testing (PAT)

The name of a process by which electrical appliances are routinely checked for safety.

Post-Investment

The period of time after an investment has been made in a company.

Preference Shares

A class of shares which have specific preferential rights attached to them, as set out in the company’s articles of association. Typically the preference will be a dividend paid in priority to other shareholders, or priority to distributions on the winding up of the company.

Professional Investor

A classification used by the financial services industry to denote an individual or family.

Property Yield  

A calculation to give an indication of annual returns based on the rental income against how much the property cost: Property Yield (%) = Rental Income/(Property purchase price + Refurbishment Budget).

Glossary of Property Investment Terms | The House Crowd

Registered Social Landlord (RSL)

Registered providers that own and manage social housing.

Return on Capital Employed (ROCE)

The return on capital employed is, considered by some, a better measurement than return on equity, because ROCE shows how well a company is using both its equity and debt to generate a return.

RICS Surveyor

Building surveyors, like all surveyors, inspect property or land. RICS (Royal Institute of Chartered Surveyors) is a professional body for chartered surveyors, which includes chartered building surveyors. RICS sets standards and guidance for surveyors and provides training and professional development opportunities for surveyors to comply with changing standards and legislation.

Risk

The potential for losing something of value. With equity investment the main risk to the investor is losing the money invested.

Glossary of Property Investment Terms | The House Crowd

Secondary Market

A market where investors purchase shares from other investors rather than from the company that has issued the shares directly.

Shareholder Agreement

An agreement between a company’s shareholders detailing certain rights and obligations of the shareholders.

Shares

An ownership interest in a company which entitles the shareholder to certain rights, for example a share of profits or dividend payments from the company. Shares are also referred to as “stock”.

Sharia Compliant

Investments that comply with Islamic law and principles, eg. ethical investments with no borrowing where investors share in the profits and losses.

Solicitors Regulatory Authority (SRA)

The regulatory body for solicitors in England and Wales.

Sophisticated Investor

A type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. This category is for people who have invested in shares in more than one unlisted company (including via The House Crowd) in the last two years or have been a member of a business angel syndicate or network for at least six months including The House Crowd’s Investor group.

Special Purpose Vehicle (SPV)

A Company set up for a particular purpose. In the case of The House Crowd, SPV’s are set up for the purpose of purchasing/owning a property on behalf of the investors.

Subscription Agreement  

An agreement between a company and investors purchasing shares in the company. It sets out the terms of the share purchase and details certain rights and obligations of the company and the investors as shareholders.

Glossary of Property Investment Terms | The House Crowd

Tag-Along Rights

A contractual obligation which gives minority shareholders the right, but not the obligation, to join a transaction where shares are sold by majority shareholders, on the same terms, valuation and conditions of the majority shareholders.

Term Sheet  

A non-binding agreement addressing the basic terms and conditions under which an investment will be made in a business. A term sheet often serves as a template to develop more detailed legal investment documentation.

Glossary of Property Investment Terms | The House Crowd

Unencumbered

An asset or property that is free and clear of any encumbrances such as creditor claims or liens. An unencumbered asset is much easier to sell or transfer than one with an encumbrance. Examples of typical unencumbered assets are a house without any mortgage or other lien on it, a car where the automobile loan has been paid off or stocks purchased in a cash account, rather than a margin account.

Glossary of Property Investment Terms | The House Crowd

Valuation

The monetary worth of a business or property as determined by considering both qualitative and quantitative factors.


We hope you found this useful. If you have any questions, then please don’t hesitate to get in touch with us. We’re always here to help you with anything you might want to talk about, so do drop us a line!

 

Annualised Return: What Does It Mean?

You may have heard the term Annualised Return come up in your research into property investment. And you’re not alone in wondering what on Earth it is.

With that in mind, we thought it’d be a good idea to give you a bit of an in depth look at what this term means, and how you can apply it to analysing your property investment portfolio.

What Are Annualised Returns?

An annualised return is the return that an investment provides over a period of time. It is expressed as a time-weighted annual percentage.

Annualised returns are calculated based on adding first year returns to the principal amount for calculation of next year’s returns, and so on.

The rate of annual return is measured against the initial investment amount. It is calculated as a geometric average to show what you, as an investor, would earn over a period of time if the annual return was compounded.

What is a Geometric Average?

A geometric average (or mean) differs from a simple arithmetic mean. A geometric mean must be used when working with percentages (which are derived from values), whilst a standard arithmetic mean works with the values themselves. In short, a geometric average simply means that, because investment returns are compounded, they are dependent on one another.

A simple arithmetic average just doesn’t do the job when it comes to calculating investment returns, because it doesn’t account for compounding.

Calculating a Geometric Average:

To calculate the mean of an investment over a period of years:

  • Remove any extraneous variables, such as mortgage payments, maintenance expenses, and so on.
  • Add 1 to the % returns for each calendar year (to get them all to be positive).
  • Then multiply them all together, and take the Nth root of the product of n numbers. (“N” depends on the number of years you want to annualise.)

So, a formula for calculating geometric average might look like this:

Year 1: Investment loses 37% of its value. The £1,000 you invested at beginning of year was only worth £630 by year end.

Year 2: The investment gained 26.5%. Taking into account the final value at end of Year 1, your 26.5% gain leaves you with £796.95.

Year 3: You gain 15%, but because you began the year with just under £800, you finish on about £920.

As such, your three-year annualised return comes to negative 2.86%

The sum looks like this:

(0.63 x 1.265 x 1.15)1/3 – 1

The factors in the equation are found by adding 1 to the yearly return % expressed as a decimal (so, 1 + (negative 0.37) = 0.63, and so on).

A geometric mean is sometimes defined as the “n’th root product of n numbers”, which – we’ll admit, does sound horribly complicated. Essentially, its main benefit is that the actual investment amounts don’t actually need to be known: instead, the calculation focuses on the return figures themselves, which allows you to draw direct comparison when looking at two investment options over more than one time period.

Find out more about Geometric Means here.

What’s The Difference Between Annualised Return and Cumulative Return?

A cumulative return demonstrates the aggregate effect of price change on the value of your investment, effectively telling you what exactly the investment has done for you over a period.

In order to calculate a cumulative return, you’ll need the initial price and the current price. Your formula will look like this.

Rc = ( PcurrentPinitial ) / Pinitial

On the other hand, an annualised return, expressed via a geometric average, tells you what the annual rate of return would be that would produce the same cumulative return when compounded over the same period.


Well, okay, that does all look pretty scary, but in practice you’ll find that calculating your annualised returns is quite a straightforward way of accurately monitoring your investment performance over time.

All handy stuff when taking control of your property portfolio.

Of course, as always, if you have any questions please do get in touch. We’ll happily talk you through any aspect of property investment that you might be unsure about. It always pays to know the ins and outs of what’s going on with your money, and we’re here to help you do just that.

 

How Brexit Is Affecting UK Property Investment

On October 4th, the pound dropped to a 31-year low against the dollar. This, of course, following Theresa May’s announcement that she’ll be invoking Article 50 and starting the Brexit process.

Shortly after this, on October 11th, the FTSE 100 hit an all-time high, trading at 7,129.83. What’s going on?

Foreign investors, prompted by the falling value of the pound, have moved in.

Most of the blue-chip companies listed on the FTSE 100 generate most of their revenues overseas, meaning that the index has been amongst the main beneficiaries of the plummeting pound.

It has, in short, never been a better time to secure assets in the UK. Investors are snatching up high returning UK real estate to add to their property portfolios. Construction companies report a 20% increase in interest for property after the Brexit vote, and house price sentiment has recorded its largest surge in 7 years.

These buyers are mainly Chinese cash investors, many of whom are hoping to profit from rental yields in northern cities like Manchester, where rental yields are highest in the UK. Areas undergoing regeneration, with links to good schools and transport networks, are getting the highest levels of attention.

How Brexit Is Affecting UK Property Investment For the Future

The latest UK property market outlook report by M&G Real Estate states that the UK’s property market is in a strong position to withstand short term economic uncertainties, much more so than during the financial crisis.

Lack of supply in many locations keeps occupier markets comfortable. Private rented residential and long lease properties remain attractive for institutional investors and pension funds, whilst a below average rate is holding up rental properties, at least in the short term, in prime locations.

Things are still uncertain, that’s for sure, and adjustments in property pricing are to be expected right now. But all reports remain cautiously optimistic that, despite some wobbles in the short term, property in the UK will remain a compelling asset class in the long term.