This is a review of my Property Partner investments so far. The property market has been hit by coronavirus and Property Partner is no exception.
I first wrote about Property Partner in 2018. Since this is a new breed of platforms I thought of starting with a capital of £10,000 and topping it up every year.
I always liked Property as an asset class. UK property owners have done very well in the past 40 years. I doubt things will look as rosy in the future but I still want part of it despite the challenging environment.
I certainly don’t want to be 100% stocks/bonds which is why I consider property to be a good alternative.
The reason I invest through Property Partner is simple. Diversified property portfolio across different UK areas with no hassle of managing tenants or sourcing properties. I guess you can do the same with REITs but they focus on commercial properties instead. I also don’t like the fact REITs are highly correlated with my stock investments.
Some history to where we are now
Things started very well with Property Partner. I started investing in 2018 and I was really happy with the fee structure. Basically, a one-off fee on the way in. That was too good to be sustainable.
Then Property Partner increased their fees substantially for smaller investors. From mid-2019 on, you pay 1.2% fees up to £20k portfolio and 0.7% after that. As I reported last year, my personal returns were 6.5-7% before fees but 5.67% after fees in the first 12 months of investing.
Higher fees dropped the appetite and brought dissatisfaction and a feeling of mistrust to investors. I judge from the conversations I had with many of you. Of course, you have the option to sell in the secondary market, but this dropped after the news.
Property Partner wouldn’t exist as a company anymore had they not increased their fees. So I totally get it.
I decided to stay the course because property values hadn’t been impacted so much. It’s frustrated investors who want out that drive the market prices – and that’s understandable.
Just when PP tried to re-build its branding and attract new investments COVID hits. The forced shut-down meant that 8.4m people are under the UK furlough scheme. The government pays 80% of their wages – IF they are not made redundant. I’m sure some people lost their jobs and didn’t get a penny. Others in the gig economy (think your Deliveroo driver) can’t take advantage of the government pay.
Eat or pay the rent?
I’m also sure some people are trying to take advantage of the situation. They ask for rent holidays or reductions without being affected. Like my friend who got a 50% rent reduction for 2 months while still working full-time from home. And which landlord would want a vacant property in this climate?
I’m not sure what to believe though. One report saying that rent arrears have only increased by 3%. Then Citizens Advice found that 2.6 million private renters have already missed, or expect to miss, a rent payment due to the crisis (1st May ’20). And here’s Property Partner’s rent arrears stats as posted in their latest post:
PP has suspended dividends in all properties to make sure each property can pay its mortgage now that so many properties have reduced rent. Suspending the dividends is also a condition by the banks if you want to freeze the mortgage.
Initially, this was only up to March 2020. But now they’re extending it to September 2020. This doesn’t mean that tenants don’t pay the rent. The rent payments for the 70% who’re not in arrears accumulate in each property.
Net income that is earned in the next 3 months will accumulate within each property’s bank balance, for the benefit of that property’s capital reserves and that property’s investors.Property Partner on the property webpage
Rent accumulates inside each property fund but is not paid out to us.
Suspending the mortgage payments means that the outgoings are also very small for us, investors.
In this climate, landlords get a mortgage holiday for 3 months. Which is also what Property Partner said they’re doing. They have agreed to a mortgage freeze with the banks for the past 3 months and are trying to extend it for another 3 months.
But this is on the condition that the rent is not being paid out to equity holders – us. In other words, the bank says: You can’t pocket the rent while having spare money around.
So how are Property Partner investments performing during the pandemic?
COVID hit the Property Partner marketplace by 12% from peak to trough in late March. This, in combination with the previous fee sell-off, results in the market trading at a -18% discount to the property valuations reported late March.
Coincidentally, this is roughly how much the FTSE 100 is off from its February highs. -16% as of 4th of June that I’m writing this.
Property Partner haven’t given us a clear picture of how much rent we’ve lost per property during coronavirus. Also, what does rent arrears mean? How much “reduced” are we talking about on average across all properties?
If this is a 6-month freeze both in rent and mortgage payments then the PP market sell-off is not justified. The market is overreacting. But if tenants don’t pay the rent at all later on, then things are getting worse.
Rent payments aside, what about the damage to property prices due to COVID? Guardian/Nationwide wrote on June 2nd: “The annual growth rate slowed to 1.8%, down from 3.7% in April and the slowest since December.”.
You’ll need to read behind the title: “UK house prices fall at fastest rate since 2009 amid coronavirus crisis”. Only to find out what they mean is: “Property prices are rising slower than before.”. Is this because of all the gov support and the money printing? I don’t know. But if it’s true, it’s definitely better than I expected. Maybe we haven’t seen the full impact yet.
This is why investing is hard
You have to always weigh risk vs reward. I can imagine people in 2022 saying one thing or the other:
- Things looking good:
Of course, Property is back up now that we’ve got the vaccine. Did you really have to sell at a loss? You’re not meant to be a property investor.
- Things not looking good:
You should have sold when it was only 10% down. What were you waiting for?
Right now, investor’s psychology is at an all-time low. Unemployment at an all-time high, rent arrears left and right, people not spending much fearing they will contract the virus, etc. When things are rosy, people are overexcited and happily pay a 25% premium for owning fancy fortress properties.
This is also another challenge when investing in property crowdfunding vs traditional Buy to Let. In good times, you have the option of selling at a click and cash in your chips. But unlike BTL, in bad times, you can actually see the loss right in front of your eyes.
You can’t easily find out your BTL value. Unless you sell. And nearby comparables can only tell you so much. It’s also a hassle to do the research. So you presume that the property present value probably hasn’t changed much. Or you make stories in your head that it has even increased. Since this is a long-term investment, you’ll sell it when it’s time.
But being able to sell and buy at a click comes with behavioural costs!
My portfolio and what I am doing
Some of my holdings are purpose-built university accommodation (PBSA). 30% of my portfolio to be exact. I believe these are in worse condition because if there’s no campus, there’s no student and no rent.
But at the same time, I’m not willing to sell at a 20-25% loss! I think if these traded at a 10% loss I would be selling. I’ll keep an eye on these ones. There’s just too much uncertainty around the new operational model for universities.
Someone is willing to buy from me at this price and I don’t think it’s worth giving them an opportunity for a ~10% yield down the line.
Because I am investing through my limited company, university accommodation has an added tax benefit. Rent is paid out as dividends and is tax-free. This is how taxes work in Property Partner. PBSAs represent about 30% of my property portfolio. Pre-COVID I was comfortable with this allocation, now I’m not.
My non-uni properties are performing much better. One of my favourites, The Warehouse in Chester, is down just 8% from its latest valuation of late March.
Does the secondary market expect property prices to drop 8% in the next valuation round?
My favourite type of properties are in the Northwest where prices are not crazy high (yet) , yields are >= 4.0% and where there is room for price growth. Solid properties with good fundamentals. I’m not selling those.
My development loan in Epsom, Surrey yielding 9.5% is probably not going to be ready by November 2020.
As I’ve previously mentioned, property makes up ~12% of my portfolio. I’ve always liked property and would like to get more exposure, up to 1/3rd of my net worth. But too much GBP exposure during coronavirus doesn’t make for a good night’s sleep. So I’m not adding any more money just yet.
On other news
The 5-year exit plan of properties is on hold. They’ve started a new capital discount investment plan where you purchase properties that are selling at a -15% discount or more. If properties bounce back after coronavirus there’s money to be made. But will they?
We should expect to hear next from Property Partner on the 31st of July. Until then, keep calm and carry on 😉
I’m interested to hear from you.
Those of you who run your Buy-to-Lets, have you frozen or reduced the rent? And those of who are renting, have you asked for a reduction from your landlord?
- Coronavirus Special: Investing during a pandemic
- The Property Partner Experiment – Q4 2018
- Property Partner Returns: How much can you really make?
Disclaimer: This is not financial advice and you are liable for any losses. As always do your own research!