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Nara Autumn Conference 2021 Speaker Summaries: Dr Len Gibbs

Date: 26 January 2022

Nara Autumn Conference 2021 Speaker Summaries: Dr Len Gibbs

Tarrant Parsons

Dr Gibbs is a former housing association CEO who, two years ago, completed a doctorate examining the dynamics of private rental investment, looking in particular at the growth of high-rise student accommodation in the Liverpool area.

Initial research discovered around £1bn of stalled and phoenixed developments, with the highest concentration in Liverpool and the Northwest. In Liverpool alone there had been around 53 collapsed schemes, costing around £500m.
 
Behind them, Dr Gibbs found widespread use of Special Purpose Vehicles and thousands of shell companies, involved in the operation of schemes producing unfinished, sometimes dangerous, underperforming apartment blocks and student accommodation.
 
During the course of his research, there have been investigations into potential fraud and arrests, but one major investigation by the Serious Fraud Office has been dropped and to Dr Gibb’s knowledge, the arrests made have not led to any convictions. As a result of his research he argues for much tighter market regulation.

Appetite for investment

The main policy drivers of private rental investment appeared to be the tax system, which exempted purpose-built student accommodation from stamp duty and the freedoms around self-invested pension pots and pension lump sums.
 
In addition, Dr Gibbs said: “The quadrupling of student numbers and influx of foreign students, plus the planning system with its focus on build, build, build all helped explain the appetite for investment – but they shed little light on the failed developments.”
 
Bringing in the money
 
He found the main tool to attract initial investment was the fractional sales model – where investors paid around 80% of the cost up front, with buildings funded by the individual unit owners. This was followed with a promise of “guaranteed” rental yields of between 8% and 12% annually. In some cases, interest was paid up front to investors.
 
“Once the money was suckered in from individuals and often challenger banks and peer-to-peer lenders, it was then buried and swallowed up by Special Purpose Vehicles. These have been known to use misleading progress reports to pull in yet more money from punters.”
 
Seven steps to failure
  1. Investors – once planning permission was obtained, Dr Gibbs found marketers would court overseas investors, wealthy pensioners and naive high-net worth individuals, with promises of financial freedom and hands-free investments.
  2. Developers – almost always recently-formed Special Purpose Vehicles with no assets, no track record, no organisation of fabric and a “merry-go round of shared directors”. 1,500 companies were registered at five Liverpool properties, with one single property attached to 685 registrations, said Dr Gibbs.
  3. Seedcorn financing – needed to buy the site, obtain planning permission, prepare and execute a marketing campaign. Funds for this were sourced by crowdfunding, through previous or different developments or sometimes unlawfully.
  4. Marketing and sales – developer would use estate/letting agents and PR with media and politicians to promote scheme to target investors. Stunning visuals often used to share key messages about yields and growth potential.

    “What shocked me was the role of government and local authorities promoting these schemes. The failed new China Town scheme was included in the Government's Northern Powerhouse brochure, promoted by George Osborne, and a model shown to the Chinese Premier.”
  5. Legals (buyers) – marketer encouraged buyers to use a preferred service (linked to seller). Promoted as heavily discounted. Legal agreement would specify funding tranches linked to progress of development.
  6. Legals (sellers) – money channelled through these to developer and constructor. Accountants heavily involved here. Opportunities for fraudut over-valuing and false stage payments intensify.

    Some members of the legal professional then stepped in to act for the buyers and sellers of developments, offering cut price deals and badly drafted documents. Thankfully, the Solicitors Regulation Authority has now struck off some of these actors.”
  7. Construction Phase – key stage of the potential scam process, whereby certificates of completion were produced to trigger stage payments from funders. Back doors could be opened to drain finance from the scheme to contractor and developer.

    “In many cases, contractors and subcontractors walked off site because of non-payment and, in several cases, building progress certificates were falsified. The scheme would collapse half-built, some of which were partially occupied by foreign students.

    “The Special Purpose Vehicles would go into voluntary administration and the administrators’ fees swallow up even more investor money. The low ranking on the debt schedule of individual investors often meant that they would lose all their money. Some schemes were demolished, but many would then be phoenixed by new Special Purpose Vehicles – often with shadowy links to the previous ones.”
 Conclusion
 
“The mess at the end of these projects is costly, complex and callous. The only useful information in an administrator’s report was the breakdown of the eye-watering fees. None of the issues I've talked about, have resulted in any convictions and many of the actors involved are still busy setting up even more Special Purpose Vehicles. They may not be committing crimes, but there are pty of victims and the scars on the Liverpool skyline are there for all to see.”
 
As a result of his PhD research, Dr Gibbs advocated tighter and more enforceable regulation of building control, companies and finance to protect investors who he says often take comfort in false assumptions around regulation.
 
“It's still too easy to set up a company, too easy to walk away from failure, too easy to make promises and far too difficult to be held to account.
 
“The influx of higher high-risk investment is changing the skylines of many university cities. It's corralling our young people into purpose built exclusive zones, it's driving up house prices and developing high rise blocks with questionable long-term futures.
 
“It is time for a regulatory renaissance around building control, around financial instruments that escape regulatory gazes, and especially around the transparency of companies. Sadly, a shroud of secrecy still prevails.”

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