Monday 26 October 2015

Stand and Deliver

It has often been said of me that I am pessimistic about many things in life.

I admit that I am more of a "glass half empty than a glass half full type" of guy.

This is for no other reason than that in my fifty plus years I have just kept me eyes and ears open to try to filter out the truth from the opposite which is, frankly, bullshit.

You cannot really go very much wrong if you work to the maxim that "if it looks too good to be true then it probably is".

I hope that lessons will have been learned, albeit painfully by those drawn in, from the Investment scam enacted by the company known as Practical Property Portfolio (PPP)  a few years ago. The following is a broad summary of the scheme sourced and supplemented from the case study pages of the UK Serious Fraud Office.

"The purchase of a property ,not for owner occupation but to let under the now well known term Buy-to-let developed as an alternative to more conventional forms of investment in the years from around 2001.

Based in Gateshead, in the North East of England ,Practical Property Portfolio Ltd was one such business, attracting investors from around the UK through its national press advertising. Many aspiring to starting or expanding a personal portfolio of properties for a retirement fund or unearned source of income were attracted by adverts in such as the Financial Times which waxed lyrical about the money that could be made by purchasing cheap properties in the north of England. These,  the company would refurbish and let out to "social housing" tenants. The company would supervise all the refurbishment, find the tenants and even collect the rent.

Investors would sit back and wait for the money to roll in"

PPP sold around 4,000 residential properties in the north of England, taking in funds of around £80 million.  Though mostly from small private investors for single properties there were also some investment companies who would multi-buy.

The PPP scheme was that properties, typically urban "Coronation Street" type houses, would be offered at a package price of £25,000 to include refurbishment and letting to vetted tenants to provide rental income as well as profit on eventual re-sale.

On my own patch in Hull, East Yorkshire there was an upsurge in transactions in the lowest price range of housing, typically pre-war built 2 bed houses in tightly packed streets with front doors straight onto the pavement or in short off road blocks served by a shared footpath. A few property dealers were evidently out to source suitable houses for the PPP model. Deals were done on doorsteps with owners perhaps close to being repossessed or visited by the bailiffs pursuing debts.

There was a good potential pool in the inner city areas, somewhat run-down and poorly resourced and indeed large tracts were in the early consultation stages for Regeneration, a euphemistic term for demolition, clearance and redevelopment.

It appears that around 1000 investors subscribed to the scheme. What was promised was attractive with a comparatively cheap buying in cost, especially to those used to the much higher prices of the South East and London, a promise of some capital growth and a guaranteed return of 15%.

I spoke to one distant investor.

I had been asked by a mortgage lender to inspect and value a particular address with the access details being PPP in Gateshead. I pride myself on a good knowledge of Hull streets but could not locate the property from the details provided. In frustration at a constant engaged tone on the PPP phone line (they seemed very busy indeed) I opted to ring a contact number for the mortgage applicant. After a few rings a very posh voice answered. When politely asked about his investment property he replied that he actually had no idea as he had left all matters with the developer.

On another occasion a people carrier pulled up at an address to let me in for a survey and a bunch of burly Geordies wearing, one and all, silk backed waistcoats spilled out to let me into a semi derelict house. They gave a rather sterile, word for word spiel on what they intended to do by way of refurbishment but could not give me a definite time scale for this to be completed. The party left quickly, apparently on a tight time scale for similar viewings across the City on that day. I was left standing on the pavement trying to comprehend what I had just experienced.

However, what started seemingly as a genuine commercial venture sank into one of deliberate fraud and misrepresentation.

Buyers, many of whom did not inspect the properties were receiving some rental income but it was coming from new money put into the PPP scheme by other investors.  Properties were not being refurbished or let.

The shocking standard of some houses was filmed by an investor who had used her pension savings and wanted to see what she had bought.  Instead of an asset upgraded to provide her with an income she saw a burnt out derelict shell in a row of houses vandalised and graffiti marked.

Over successive years many investors received notification from Hull Council that their property (ies) were to be Compulsorily Purchased under the Regeneration Area. A derelict property would only be compensated to the sum of a few thousand pounds, in some cases perhaps representing about one fifth of their capital outlay.

Complaints led Northumberland Police and the SFO to look into PPP.

The investigation culminated in five people being charged in 2007.  When the case came to trial, all five pleaded guilty to conspiracy to defraud investors.  Investor claims when the company was wound up totalled £16 million.  It is thought that almost £65 million of funds was providing no real return on investment.

Some will have little sympathy for those who may have have lost their shirts because of the arguably highly cynical nature of the exercise.

Some of PPP's literature highlighted how increasing divorce rates and buyers being priced out of the market were driving up demand for rental accommodation, which it said was good news for investors.Many of the ads targeted investors in the south-east of England and claimed the north was "bursting with investment opportunities within the social housing sector".

The extravagant claims about just how much money people could make should have rung alarm bells.

One piece of PPP literature said that from a single investment of £24,000 to buy the first property, "your portfolio will grow over the next five years so that the investor will have a portfolio worth (big letters) In excess of £250,000".

The property market suffered a significant downturn under the credit crisis from 2009 which affected confidence levels for investment in that sector.

However, in the last 12 to 15 months there has been some resurgence in demand and values.The rental market promises good income to a landlord and  I expect to see, pretty soon, a rash of adverts in the Quality National Papers along the same principles as the above. If it looks too good to be true............

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