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Pendulum Swings

Veteran international investor John Corey offers his latest thoughts

Last month I wrote that the fundamental drivers of the UK housing market are not going to change a great deal even with the
present Brexit uncertainty. People need a place to live. At the same time, it is also fair to say that people will delay major decisions if they have a choice. So, changing homes and the related purchases might be put on pause unless family or life events force them to act now. We will see more people favouring renting while they decide what to do rather than buying before the summer. Others will stay in the home they own rather than trade up or down. If there is a storm on the horizon and you do not need to go out, why do so?

In the past two weeks I have been spending a lot of time with investors at two ends of the property investment spectrum. The common thread was how can they raise more equity within FCA regula-tions. Financial promotions, collective investment schemes and similar topics. Raising Funding Le-gally is what I call it. They need a guide for raising the equity and that is what I am good at. Let me share some insights drawn from the conversations.

Debt Is Easy
I met with four businesses. They are operating in different regions in the country. Debt is not the focus. Debt is easy to secure when you have lots of equity. For some situations or businesses, it is best to avoid debt so you have more control. You are more nimble when you do not need a lender to sign off. Just because a lender is offering debt does not mean the savvy investor will accept the offer of debt.

Two of the four businesses are trading focused. Buying for immediate resale. Finding the motivated seller, agreeing a deal and moving on to the next deal. True hunters. The businesses use equity to hold stock and they turn over the stock to release capital. Most of the owners selling to the traders are people who have reason to sell now, which exceed the need to wait for the absolute maximum price. The current owners have a higher or more pressing need to complete the sale. Generally, a life event which is more important than their building’s economic value. Or, the seller is a devel-oper who has run out of time on their construction financing. Wolves at the door comes to mind.

At the other end of the spectrum are the ‘buy for yield’ investors. They are buying for a 20-year to 100-year time horizon. You could say this is ‘buy to rent’ rather than build to rent. They have much less interest in chasing a bargain. They want an asset which will be efficient to operate over a long period. Location, materials, and design become more important than today’s price. Being savvy business people, they do not over pay. However, paying a cheap price on the way in is not always a useful indicator of long term success.

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