Property Partner Stabs Their Small Investors
Avid readers of my blog will know that Property Partner has been one of my favourite real estate crowdfunding platforms at the hand of retail investors, offering access to equity real estate investments in the UK and allowing individuals to invest small sums of money in large property acquisitions.
However, Property partner made important announcements on 15th of July that have changed the scenario, and therefore my opinion, broadly.
In my personal review, I shared my concerns about their balance sheet and loses, together with the uncertain outlook for the UK market.
Besides that, I was happy with other important facts that matters to me, like transparency, punctuality on payments or returns above the average UK property market.
Now the rules of the game have changed and that obviously have consequences, which in this case are negative.
Please note that onemillionjourney.com blog is NOT affiliated with Property Partner introducer program. In this post you will find my honest thoughts. Bear in mind that I am neither a financial advisor nor a professional investor, so please take that into account. Investing is a passion of mine; I enjoy writing about my experiences and learning from them.
New Property Partner CEO and Fees Structure
Investors received an email on 15th of July to inform us that the Board of Property Partner had recently appointed Warren Bath as CEO, taking over from
Warren Bath was introduced together with some “welcoming” news – a remodelled Property Partner’s fee structure which will start applying from 5th of August 2019. All of this without any previous consultation with current investors.
The core changes include an annual Assets Under Management (AUM) fee of between 1.2% per annum on portfolios valued up to £25,000 and 0.7% on the portion of portfolios valued over £25,000. This includes investments in property equity but excludes development loans.
Since you must be a sophisticated investor in order to invest in development loans on Property Partner, and I am not, all my investments are equities, having to pay AUM fees out of rental yields.
Small investors like me have been stab in the back.
Furthermore, a £1 + VAT per month Account Fee was also added.
These fees come on top of Property Partner’s existing transaction fee (2%) and sourcing fee on new listings (3.0% + VAT), both are one-time fees.
Since I read the John Bogle’s book “The little book of common sense investing” (amazon affiliate link) every time I hear about fees reminds me how much return investors lose for the mere fact of paying fees in an on-going basis.
On this video of 76 seconds, John explains how much we (investors) lose in paying fees. He talks about the stock market, but the concept also applies to any investment service that charges on-going fees.
My take away from the video:
- We put 100% of the capital.
- We take 100% of the risks.
- But, we get about 30% of the markets long term returns.
One-time fees are acceptable, but high on-going fees are destructive over the long term.
Besides the new fees structure, the creation of a property portfolio ring-fenced central fund was also announced, which will provide interest-free capital to SPV that are experiencing a short fall in their properties. I think this is a good move as it could buffer a rental yield decrease in a case of unexpected events – as the one explained on my June update.
Why have these fees been introduced?
According to Warren, the company is trying to make the business more durable, or in other words, profitable. Property Partner lost 6 million Pounds in 2017 according thelast full accounts public update.
Apparently, on their previous business model, Property Partner’s revenue had been sourced almost entirely from upfront fees on new listings.
Brexit has worsened the property market outlook in the UK and that has decreased the number of new listings. Some of them weren’t even funded successfully and had to be removed from the platform, making the whole process just a waste of time.
The new fee structure seems to be an emergency survival move from management. Even though I prefer this than a sudden bankruptcy that would block my money for an indefinite period, I think that setting a consultation with all investors would have been a much better way of doing things.
In my previous review I mentioned how happy I was with PP management. Unfortunately, I didn’t consider that management can be changed overnight…
How did investors react in front of the news?
A sudden cut on investment returns doesn’t make investors happy. My first reaction after reading the news was a feeling of indignation and frustration. I was not conscious that an FCA regulated platform can change the CEO, its general terms and conditions and raise fees up that much overnight without a previous consultation.
The big picture would be different if they applied the changes only to future new investors or new listings.
But these new terms and conditions will have to be signed off the 5th of August if we want to continue using the platform.
This has added pressure on the average share prices across the Resale Market, which have decreased by 6.4% at the time of writing, meaning that if I want to exit now, I need to sell at a loss. Not fun.
Before the news, the company was rated as excellent on Trustpilot. Two weeks after the exciting news, the rating is average.
This is an example I pick:
My plan for now on
My initial thought was to sell my shares on the Resell Market and cancel my Property Partner account ASAP, but after some considerations I rather wait before actioning.
The newsletter also informed that any shares owned on 5 August 2019 that we sell on the Resale Market before 5 February 2020, will automatically receive a rebate of the AUM fee.
That gives a few months to think deeply on what to do, at least until the share’s prices have stabilised.
My current average rental yield is 5.36%. I expect the new fees to lower my returns by 1.4%, resulting in a new rounded yield of 4%.
The UK may get into an economic recession with the current Brexit outlook, which will affect property valuations negatively.
On the other hand, most of my equity property investments are PBSA (Purpose Build Student Accommodations). These are rented out to students, who are mainly internationals. An economic recession in the UK may lowers the value of the Pound, increasing the number of students consequently. The UK hosts some of the best universities in Europe and the world, and a recession shouldn’t change this fact from my view.
A drop on the share prices across the resale market means that yields are higher for new buyers. If current investors overreact and prices keep falling there may be good buying opportunities ahead.
Some people argue that Property Partner will fail as a business, as it has lost credibility and trust among investors.
Property Partner argues that fees from that point will go down and not up. Trust could change and increase the shares value again over the long term.
I will be studying other investing possibilities over the next few months and take a decision on whether I will leave the platform or not.
Some of these possibilities may be the purchase of UK REITS ETFs holding PBSA or overseas real state.
For now, I can confirm that I won’t be investing in new properties or add capital to my account. I was lucky that one of the properties on the funding process was stopped, retuning 500£ which I have happily withdrawn.