Charlie Cunningham, CEO of affordable property developer FreshStart Living, believes that many developers and investment companies are using high return guarantees, which are unsustainable in the long term, in order to entice investors to pay over the market value for properties.
These guarantees only last between one and two years and after the guarantee period is up, the investor is often left with a useless property which doesn’t guarantee income and is therefore also difficult to sell.
Cunningham said: “Many developers are enticing investors to buy overpriced properties by advertising high net yields for just one or two years. But those guarantees are rarely sustainable, meaning that investors are often left with a useless property from which they will not only struggle to generate a reasonable level of income but they will also struggle to resell.
“There is no way that a student pod which costs an investor £50,000 can continue to generate a net yield of 10% past the first year. As tuition fees are rising, students will become a lot savvier about how they are spending their money. So these student developments which charge students upwards of £100 per week will inevitably see a drop in demand.”
“It is no small issue, the internet is full of these types of Ponzi scheme style investments and thousands are being sold to investors every year. They are ploughing money in to overpriced properties and it will eventually contribute to the next recession, whilst just a few developers prosper. The Advertising Standards Authority need’s to do something about it.”
Many student investment opportunities on the internet have high initial purchase prices. They are however drawing investors in by advertising high net yields of 10% for two years. Mr Cunningham feels that these yields can’t be realised past the guarantee period and the investor will lose out.
Cunningham is calling for the ASA to monitor how the properties are advertised, and that if a rental guarantee scheme is on offer, the developer should not only clearly indicate how long the guarantee is for but also go on to substantiate how the investor can continue to achieve yields after the guarantee period is up.
For example, FreshStart Living offers a rental guarantee scheme for up to 10 years on all its investment properties. The company can offer guarantees of 8% net, 7% net and 6% net depending on if the investor signs up for two, five or 10 years.
FreshStart offers the guarantee scheme as many overseas investors are looking for hands off investments and are grateful for having someone else manage the property. However, Mr Cunningham believes that investors can still ensure that they achieve the yields after the rental guarantee scheme is over.
Cunningham said: “The reason our investment properties offer longevity to investors is the low purchase price. Our development process allows us to sell all of our properties below the market value; this allows investors to charge below market rent which ensures demand from tenants.
“All our guarantee schemes are formulated using below-market rent and the investors can be confident that there will always be people looking for cheaper rent, so they will continue to generate the high net yields long after the guarantee period is over.”
FreshStart Living’s developments are valued using their residual value formula as opposed to market valuations. This formula uses below market rental income to establish a real value for the property.