The city council has for years failed to effectively police the fractional property investment market, leading to poor quality developments and driving up land prices, according to a report.
The report by the Fractional Investment Scrutiny Panel to Liverpool City Council’s regeneration committee highlighted “grave concerns” over the lack of advice given to investors, and the paucity of regulatory oversight of the market. The buy-to-let funding model has “impacted…the reputation of the city,” said the scrutiny panel made up of councillors drawn from the regeneration committee. The panel has set out recommendations to fix the problem that they would like to see brought in by the end of October.
The 21-page report states: “The panel considered [the] lack of effective policing and lack of ability to hold developers to account to be highly unsatisfactory.
“Where investor expectations were not realised, particularly in terms of poor quality workmanship or failure to pay promised financial returns, investors might be persuaded to cut corners with a view to maximising return, for example on rental yields, meaning that the end occupier, usually a tenant, reaped all the disadvantages.”
Fractional ownership involves multiple unrelated parties investing in, and sharing the risk of, ownership of a tangible asset such as real estate. One driver for this type of investment is that it enables buy-to-let owners to share the costs of maintaining property that they will not occupy themselves.
The problem is that while the benefits of the investment are shared, so too are the liabilities, meaning that if schemes stall or go into administration, a large number of investors, who typically have paid deposits of up to 80%, have money under threat.
“The absence of effective regulation and the relative ease of marketing such schemes and of attracting potential investors might well have the effect of driving up land prices as developers compete for sites for developing such schemes,” the report said.
The study came after Cllr Richard Kemp, a city councillor for more than 30 years and leader of the Liberal Democrat opposition, wrote an open letter to Liverpool Mayor Joe Anderson last month calling for action, following the collapse of companies such as developer Signature Living Hotel, owing £10m to retail investors, and a string of problem schemes such as the New Chinatown project by North Point Global, which was endorsed by the council.
‘Council must be bolder’
Kemp told Place North West last month that much more needs to be done following a spate of apartment schemes funded by fractional sales that ended up stalling or going into administration, with investors counting the cost. Kemp said: “Liverpool became the epicentre of fractional sales and there has to be a reason for that. The law is the same in other cities, so why did it happen here? Fractional sales have [all but] disappeared now, but there are other ways for unscrupulous developers to gull the unwary out of their money. The council must be bolder.”
The report this week calls for greater transparency into how the council sells its land and property, and into the relationships between developers and the council.
The council does not have legislative powers over the fractional model or projects that use it.
The report explained: “Problems have arisen nationally and locally typically whereby development commences before all of the units are financed or if architects’ certificates (and thereby funding) is released too early, resulting in schemes not being completed and developers entering into administration. In such scenarios the investors’ money may be completely lost as they do not own a lease or other protected interest in the land before completion, and the development becomes stalled as the cost of completion exceeds the likely finance which would be available to any potential purchaser of the site from the administrators.”
The panel’s recommendations include:
- Code of conduct to deal with developers who approach council for endorsement or to accompany them to events
- Due diligence including proof of funding and use of an escrow account
- Ban disposals of council land for developments funded by fractional or similar models
- Seek government funding for a pilot project to increase inspection of building sites during construction
“The panel’s concerns were directed at the lack of effective oversight, manifested principally by potential abuse of investors, by the way that schemes are marketed, by the way that investors are advised, and the impact of poor regulatory and statutory oversight on the city’s social, environmental and economic well-being. The panel’s recommendations are targeted at better investor protection, particularly where investors are consumers, and better scheme evolution. Some recommendations require more effective regulatory oversight, others might require legislation.”
The report will go to regeneration select committee next week. The recommendations will be processed and could be amended up to 31 October, including by cabinet, following which there is expected to be a consultation up to the end of the year.