Malkit Purewal & Sanjay Kumar are multi-award-winning landlords & developers from Savoys Properties. The duo have been in property for over 20 years and specialising in HMOs for over 10 years. Here is their overview of this new offering, a game changer for new HMO investors, in collaboration with CPC Finance, Octane Capital and Ronald Fletcher Baker LLP.
Over the past 12 months, we at Savoys Properties have listened to investors, landlords and prospective investors. A common occurrence is investors finding deals where the investor will both recycle the majority of the money out of the deal once the development completes and not have huge funds invested from the outset to cover the refurbishment costs. What was clear was that people want to invest in properties, but their most significant barrier to entry was related to lending.
We list and explain the challenges investors are facing in their development journey:
1). A broker that understands an investor’s needs
When Sanjay and I started in property investing, we tried to avoid brokers as we assumed we would get the best deal on our own, whilst saving potentially on additional fees. As we progressed on our property journey, we realised how essential brokers were to us. It wasn’t necessarily about achieving the cheapest rate; it had more to do with the quickest access to funds as deals were often time-critical. We believe that an independent mortgage broker is likely to be the most important person in your property power team.
The most common responses from investors who have reached out to us were that they struggle to find brokers who can understand their needs and requirements and a broker who can offer them the personal service they require during the buying process. Sometimes the broker-client relationship can purely be a transactional one. However, from our experience, it adds a lot more value building a more robust understanding between you and the broker and aligning your long-term goals. This way, you can devise strategies to accelerate your growth plans when you are both working on the same page.
2). Lack of experience
Lack of experience is a straight “no” from all lenders where an investor requires finance even though the investor is using a developer with a proven record. For example, if you are an investor looking to develop your first ‘back-to-brick’ HMO refurbishment with significant works and alterations, i.e. adding space through extensions and loft conversions, the lenders will require you and your JV partners to have prior experience in similar projects. They will typically request a previous project list where you will need to detail (a) address of the property; (b) date of purchase; (c) purchase price; (d) details of works undertaken; (e) if planning permission was required; (f) costs of works; (g) end value after works & details if the unit has been retained or sold. Without this experience or lack of sufficient evidence to demonstrate your experience, most lenders will not entertain your application for this type of lending.
Previously, Shawbrook Bank offered a product where investors could borrow funds with minimal/no experience as long as they had a reputable and reliable developer. However, they removed this product from the market following the initial lockdown in 2020. This leaves investors in a predicament and a Catch 22 situation, as they cannot initiate their property development journey without the necessary experience required from lenders. On the other hand, they cannot gain experience as they have not been presented with a feasible financial option to start their journey.
3). Commercial valuation
When investors take short term or bridging finance, they want the Valuation Report to give the property’s current market value and a commercial Gross Development Value (“GDV”) rather than a bricks & mortar GDV to maximise the end value. A commercial valuation method is whereby the valuation surveyor assesses the income generated from the asset if it was fully let, with an allowance of expenses (typically 10-25%) multiplied by a yield the surveyor deems acceptable for the area. The yield can vary between surveyors as it’s derived from various factors, e.g., rental demand, transport connectivity, nearby amenities, etc. For example, with a valuation of an HMO, there are more things to consider and fewer comparables than a more “standard” property; therefore, a commercial valuation is ideal for the investor.
A specialist commercial valuation on an HMO will deliver an accurate market value for the property in its proposed use by factoring in all considerations mentioned above. This valuation method does come at a premium, with higher valuation fees and increased interest rates. For investors looking to build their portfolio as we have, it is paramount to get the correct valuation for your project. Therefore, the amount of money you can pull out of a deal outweighs the higher percentage of interest you have to pay back on it, as long as you use the funds you recycle to good use.
Our feedback from investors once they complete their HMOs is that they struggle to exit their short term or bridging finance. The main reason is that the lender they approach provides a bricks & mortar GDV rather than a commercial one based on the income the property is generating. As a result, the investor struggles to exit the deal or leaves too much money in, impacting further investments.
4). Lender & 100% build
We believe we will see a move away from traditional HMOs to more co-living properties. What’s the difference between HMO and co-living, we often get asked. By its very definition, HMO is about the property itself and the people who live in it; these can quite easily be developed as long as they meet the criteria of the local authorities you operate them in. On the other hand, co-living is more about the social and community in a shared house. It uses good design, quality craft and creative style to develop a co-living space, and the spaces tend to have all larger and en-suite rooms with a shared space for housemates to get together.
Our feedback from investors is that creating these types of properties requires a significantly larger pot/budget for the refurbishment which often makes it unfeasible. There are few lenders that, coupled with the above points, would lend the funds for the refurbishment to the investor. The ones that do will often require a large upfront deposit to spread their risk or have security in the uplift GDV from an initial valuation. In our experience, these refurbishment loans aren’t easily accessible even though they are widely advertised. They also contain many caveats and conditions in order to use them.
5). Reliable developer
To qualify for lending for more significant developments such as HMOs / co-living, you must employ a reliable developer to undertake the refurbishment works. The work involved in undertaking these projects requires far more skill and expertise. On top of that, you have the added time pressures to complete to ensure you don’t overpay on your finance costs. There aren’t many developers who are specialists in producing HMO / co-living projects. Generally, they rely on heavy input from various other parties, i.e. the client, architects and project management teams, to complete on time and within budget (if they are managed well!). It can be tricky ensuring you keep on top of each of your stakeholders as they are so many moving parts when you are in the construction stage of your project.
The feedback we received is that investors, in the past who have used “reliable” developers, perhaps focused on the wrong things, such as the lower price or were convinced with promises of completing in an unrealistic timeframe. The same investors were stung with either cost increases due to scope gaps and an undefined schedule of works from the outset or impacted with the quality of workmanship required in these specific projects.
6). Solicitor
Your solicitor can make or break your deal. Sanjay and I have used various solicitors since we started investing in property, with varying experiences, good and bad. We have had several sales that have almost fallen through because the solicitors have not been very good. In a recent issue, we wrote an article about the key criteria we set in selecting your solicitors, which were (a) they must be friendly and contactable with a good response rate; (b) proactive, rather than reactive, which is what most solicitors can be; (c) able to carry out all transactions over the phone and by email for speed, or proactive where this is not possible by booking in advance for in-person meetings; (d) able to collaborate well, with the other solicitors efficiently involved in the sale transactions; (e) cost-effective for the service they provide.
We received an overwhelming response from investors who have had bad experiences with solicitors. Many of the reactions were mainly on the subject of responsiveness and being contactable. When dealing with such high-value transactions, especially in auctions where you have a short period to complete, you need to have comfort that the solicitors you are dealing with are up to the task and can pull through when you need them. We received other responses based on dealing with the stakeholders, i.e., sellers’ solicitors, finance solicitors, and brokers. Again, the solicitors acting on your behalf must have the ability to work well with others and handle the relationships of each stakeholder well.
7). Guaranteed exit & low refinance fees
Various lenders in the market provide short term finance. Many fewer lenders offer specialist mortgages to the end product you have created, and there are even fewer lenders who allow you to term out on these specialist mortgages who also use the commercial valuation method we mentioned earlier. You can be nearing completion of your HMO / co-living refurbishment project and think you can quickly refinance onto a term mortgage. However, this can sometimes be tricky, and in some cases, not possible at all.
Sanjay and I opt for “bridge to term” products where we know from day one that the lender we chose our bridge product with will be the same lender we term out with. There are many benefits of having this guaranteed exit, as you go into deals with your eyes wide open and have no surprises when it comes to refinancing. There are many other added benefits of choosing the same lender to term out with, such as the valuation holding up for the term out, as long as works are done within a specified period (typically within six months or less), to the same standard as you proposed from the outset. Another benefit of this is that you will not be required to ‘double up’ on lenders’ legal fees by approaching different lenders at the beginning and end.
Feedback from our investors showed that they had funded their deals using a lot more of their own money to pay for the deposit on the property. They would initially take out a bridging loan and pay all of the associated fees, including arrangement fees, application fees and the lender legal fees. Once the works are complete, they would then revert to a different lender to term out.
Now it’s time for the Game Changer. After reviewing the many frustrations and concerns from investors, Savoys Properties have exclusively teamed up with our business partners CPC Finance, Octane Capital and Ronald Fletcher Baker in offering an exclusive product to the market that has never been available to investors before until now.
The Savoys team had countless responses from a wide range of individuals. The majority of them were new and potential investors of ours. We listened carefully, and as investors ourselves, we understood their concerns first hand and sought to find a resolution, which we now believe we have
Product Details
- Bridging loan with a 25% deposit for the purchase
- Up to 100% loan of the refurbishment
- No experience needed
- Commercial valuations on HMOs
- Guaranteed wxit
- Dedicated and exclusive power team including the Savoys Group, CPC Finance, Octane Capital & Ronald Fletcher Baker LLP.
From the seven challenges we listed, we will now provide the solutions to each of them with this new and exclusive product: –
1). A broker that understands an investor’s needs
We have teamed up with our business partner CPC Finance in bringing this new product to market. CPC Finance is a finance broker who specialises in sourcing property funding throughout the UK. This includes buy-to-let & commercial properties, auction investments, property developments and secured loans. Finding the right property finance starts with understanding everything about the application, from the amount requested to the assets and liabilities. They undertake an in-depth analysis of the funding available from a range of lenders and identify the best deal for your requirements. With a longstanding relationship with the lender of choice for this product, CPC Finance will be leading all new enquiries to ensure that our investors will have each of their property finance applications processed quickly and efficiently until the funding is in place.
CPC Finance is a member of the National Association of Commercial Finance Brokers (NACFB), the UK’s trade body for business finance brokers. The Association exists to establish measurable standards of professional practice among commercial finance brokers. This is not only in the best interests of brokers & SME customers but also vital to the integrity and future well-being of the industry. As a member of the NACFB, CPC Finance adheres to its Code of Practice, ensuring that it operates professionally and in the best interest of its clients. This means that you can rest assured that they will always be committed to providing high-quality services with transparency whilst following industry standards and best practices.
Karl Griggs, the director of CPC Finance, commented on the launch of this product “These types of products where an investor not only gets an initial bridging loan but a guaranteed exit with no experience required are unheard-of, that’s why we are genuinely really excited about collaborating with Savoys, Octane Capital and RFB Legal to introduce this product to newer investors.”
2). Lack of experience
One of the most exciting parts of this product is that even if you are a first-time buyer or just starting on your property investment journey, we have created a product that doesn’t require the investor to have any prior experience.
This is only available where an investor uses the Savoys Group through our development and management services in undertaking the project. With over 20 years of experience, we have built our own extensive property portfolio and have grown a team to help expand our investors’ portfolios.
3). Commercial valuation
Getting a commercial valuation is almost unheard of if you are undertaking your first project with no experience. We ironed out with our business partners that attaining commercial valuations is crucial for building a portfolio for investors. It allows you to effectively undertake the Build, Refurbish, Rent & Refinance (“BRRR”) strategy and pull out the majority of your funds, with the remaining funds left in the deal working hard for you.
4). Lender & 100% build
We have joined forces with a powerhouse lender, Octane Capital, to launch and deliver this unique “Game Changer” product to the market ready for investors. Launched in May 2017, Octane Capital arrived backed by years of experience. Octane has this year passed over £1bllion through 1,375 loans completed for their clients. We teamed up with them to talk about the issues from the feedback we received. Octane looks at each deal with a wide lens and holistically to come up with a bespoke solution. Rather than being constrained by a restrictive price to Loan-to-Value (“LTV”) matrix, they recognise that LTV is only one dimension. Every loan is different, so Octane does not have a product sheet. Instead, they look at all aspects to deliver the best solution for our clients and investors.
Mark Posniak, Managing Director; Matt Smith, Director of Credit and Risk & Justin Cooper, Senior Business Development Manager, spearheaded this exclusive product and were thrilled with its launch. “We are excited to team with industry-leading, disrupting and innovative partners with the Savoys Group and CPC Finance in introducing to market this exclusive product only available through them. We look forward to building a strong working relationship together and are excited to welcome new investors.”
5). Reliable developer
Consistency, quality and reliability are the primary responses from the feedback we received of what investors have lacked from their developers in the past. We all know how the build of a project can be a considerable obstacle. It is not easy to find the right developer with the right quality and relevant experience, especially when developing a premium high-end HMO. Fortunately for our existing and new clients, that’s where we come in. We at Savoys Developments refurbish and manage properties across the UK to provide high-quality homes for professional tenants. We specialise in setting up the property for you, so you don’t have to. We have developed the necessary experience, team and tools to execute projects effectively.
We will meticulously plan and manage the entire planning process from Prior Approval to a complete Planning Application on your project. Our specialist team can fully manage any project from start to finish, from a light refurbishment to an HMO conversion or commercial to residential. We have a vast amount of experience in designing and building all types of property projects, and with our expertise, we aim to maximise the end value. We source properties tailored to your specification, whether for an HMO property or a commercial to residential conversion.
6). Solicitor
Since scaling our own property business, we have built strong relationships in our power team. As mentioned above, one of the fundamental parts of our power team are our solicitors. In the launch of this new product, we have exclusively partnered with Ronald Fletcher Baker LLP. Ronald Fletcher Baker LLP has been providing expert advice from its offices in the City of London, the West End, and Manchester for over fifty years. They understand that their clients have built their reputation, and as such, they centre every aspect of work on their client’s experience. Foremost in achieving this are their three fundamental tenets always to be professional, responsive and competitive. Leading this exclusive product launch is Paul Cain, a Partner in the Real Estate department, a Legal 500 recommended lawyer for many years. Paul deals with all aspects of property work, including residential and commercial transactions, the acquisition of development sites and plot sales, the negotiation of leases, and advises clients on purchasing and selling property at auction.
On the launch of the product, Paul stated, “We have been dealing with Malkit & Sanjay and the Savoys team for several years now, and seen first hand the property transactions they have concluded for not only themselves but their clients also. When we were made aware of this exclusive product launch, it sounded like a complete no-brainer. You have some of the top people and companies in the industry delivering a product made for newer investors.
7). Guaranteed exit & low refinance fees
This product provides the complete package. An investor can take out a bridging loan and term out at the end of the loan with Octane Capital. This reduces the risk of finding another lender willing to provide a long term mortgage on your new development. Octane Capital will use the initial pre-commercial valuation from the beginning of the project as the basis for the valuation of the term product. Therefore, you benefit from not having to pay more fees on additional valuations. This process is much easier and cheaper, where the original valuation surveyor re-inspects at a reduced cost. Another fantastic benefit of this is that you will not incur additional legal and high refinance fees as the term product is through the initial lender, Octane Capital. Octane Capital provide competitive and bespoke long term products with 2, 3 and 5-year products with low ERCs and just a 3-year tie in for their 5-year products. Loans start from £150,000 up to £15m.
“With our flexible, interest-only Buy to Let products, we’ve removed the stress from Buy to Let by requiring just 100% rental cover. No stress testing, no stress.”
For further information about how you can access this exclusive game changer for new HMO investors please contact us at investors@cpcfinance.co.uk.
If you’d like to read more about it, you can in the September/October edition of HMO magazine.