From banking to business

I've just started blogging for LSE. At the moment it's only available to current students, but there should be an external version in the pipeline. My first post:

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Moving from the big world of investment banking to the small world of startups is not what it seems. The challenges in banking are huge and varied, but there’s something about the industry that just doesn’t seem real.

Startup business on the other hand is very real. The anxiety you feel when you wonder if a deal is going to go your way is intense. It’s like being the star of a fly-on-the-wall documentary where you – and only you – determine the success or failure of your business. The adrenaline rush from closing your first deal as an entrepreneur gives you a high that makes you feel like you can take on the world.

Startup business is real business. It’s gritty and at times dirty. The challenges, the excitement, the sleepless nights – they all come as a package. I love it.

A little about me…

I set up the LSE Entrepreneurs society during the final year of my Economics degree. Following graduation I followed the status quo and went into banking. I had some great experiences there, and I’d certainly make the same decision again, but I quickly developed an allergy for the industry! I decided to step on to a different track and follow my passion for startup business.

...and my business

That was in April 2006. Since then I’ve grown my real estate portfolio which I’ll be further expanding as the economy continues to plummet. I’ve also innovated a yield-enhancing concept of serviced flatshares for professionals. I packaged this into a management company that enables investors to double their returns, and allows me to capture over 100% return on investment. With those companies nicely ticking over and quietly expanding, I’ve got a team together to create my next business: PortfolioExecutive.com.

Over my coming posts I’ll be following the progress of Portfolio Executive. Our first tool is due to come online very soon and we’re currently in the process of raising a round of seed funding. It’s exciting times. All the latest experiences (and no doubt some horrendous mistakes!) will be available right here.

Residential property derivatives

Derivatives allow investors to make financial gain from particular assets without actually owning said assets. They've been around for years, but recently they've made the cross over from more advanced commercial property structures into the realm of residential property deals being closed by Joe Bloggs buy-to-let investor. Well, not quite, but it's certainly getting there.

I'll be doing some comprehensive blogs on option structures packaged with leases and other bespoke agreements that allow investors to receive cash payments on entry, carry and exit - and all without putting a penny into the investment and never actually owning the property itself.

My background in investment banking has always given me an edge in structuring property deals, but it was really rammed home when I attended one the wealth events run by Tamkin Riaz and his TLC Entrepreneur group.

If you're keen, Google around or read the pig for some terms such as sandwich leases, lease options and rent to buy schemes.

Another great webinar was given by The Sophisticated Investor and you can download it for free from the site.

The economics of the property boom-bust cycle

Economic situations vary and there will always be factors unique to a given boom-bust cycle. There are however a range of broad principles that can often be observed over the course of the property cycle. The assumption is made that the economy starts from a stable equilibrium with limited infrastructure, which will of course not be true of all cycles. The boom-bust cycle can be split into five sections:

1. Start of the boom
2. Middle of the boom
3. Towards the end of the boom
4. At the peak
5. The crash

The boom-bust property cycle is directly related to:

• The general economy, because property is bought with money;
• Land values, because property is built on land.

1. Start of the boom
Assuming that the economy starts from a stable equilibrium, there are no rapid increases or decreases in prices, supply equals demand and price stability prevails. Population growth over time bolsters demand from businesses and individuals for commericial and residential property. There exists a disequilibrium in the market and either supply or prices (or both) need to change to restore equilibrium.

If supply increased to meet demand, prices would remain stable. Property density would increase (e.g. redevelopment of existing sites into more units); undeveloped areas would become developed; and infrastructure would increase to cope.

This does not necessarily happen. Landowners know that if they do not increase property supply, then prices must adjust in order to restore market equilibrium. That is, property prices are gradually bid up by the increased demand.

As a result, developments outside of prime central locations will occur, feeding through to an increase in infrastructure around the city centre. This in turn pushes up the value of undeveloped land in the city centre even further.

With undeveloped land values bid up, brownfield redevelopments become more attractive. Existing property is ‘over-enhanced’, for example by replacing an existing building with another of higher specification (more units).

As the limited supply of land drives price growth, it becomes just a matter of time before property speculators (novice investors) start entering the game.

2. Middle of the boom
Novice investors are mere speculators who believe property values can only continue to rise. They will therefore pay inflated prices for existing buildings, or buy new build property from developers also at inflated prices.

As prices rise, speculators spend more in order to gain a higher profit. Consumption in the economy falls as consumers use more income for property investment. The feel-good factor of boom time masks this fact and consumers often go a step further – making unsecured borrowings to finance further expenditure.

A paradoxical consumer position emerges: savings are increased in order to finance property investment, while consumption also increases as it is financed by unsecured borrowing.

3. Towards the end of the boom
With consumption fuelled by over-borrowing, the economy experiences a trade deficit. Domestic output also falls as money is withdrawn from the economy through consumer savings for property investment. That is, domestic output is unable to meet consumer demand and so imports increase to satisfy excess demand, and exports fall as more production is required for domestic consumption.

The resulting trade deficit must be financed and this is achieved through attracting inward investment into the domestic economy from abroad. Government gilt rates increase in order to attract foreign investors. This ultimately leads to rising interest rates.

4. At the peak
Investments are being made based on historical returns – speculators do not adjust their expectations to reflect the fundamental economics. Consumption continues to be fuelled by unsecured finance and second-charge loans. Lenders lend at higher valuations which are only the result of speculative excesses.

Investment, consumption, lending and borrowing are all in excess. Interest rates rise to cope with the trade deficit and consumer price inflation.

5. The crash
Higher interest rates curb consumer expenditure and help to bring inflation under control. Projected cashflows and present values of uncompleted capital intensive development projects fall. Investment returns look less attractive. The property development market slows...

...and so begins a chain reaction of events...



...the chain continues:



And so the market bottoms out and is ripe with opportunity for the professional investor.


Useful links:
* "Beating the property clock" by Ajay Ahuja
* Knowing where in the property cycle to invest