Andrew Lockley – Exponential Investor (United Kingdom) –
Property is one of the world’s most popular investment classes. A very large proportion of the world’s wealth is tied up in bricks and mortar. I say, “tied up” – because it’s very hard to get your money out. I know a large number of very wealthy property entrepreneurs – and many of them can’t get their hands on this cash. They’re basically pauper millionaires!
Wouldn’t it be nice, if you could access and monetise your property equity as easily as you can with other asset classes – such as shares, foreign currency, or crypto? Well, now that’s becoming possible.
To get our s around this brave new world of “blocks and mortar”, we set up an interview between HiP founder and CEO Kai Peeters and author of Planet Property and former editor of the Estates Gazette, Peter Bill.
Peter Bill: With HiP, the first obstacle is that the market you are looking at is deeply conservative. It will be an uphill struggle convincing people that property’s future on the blockchain is not just possible – but safer, cheaper and easier. So, who is your customer, who do you envisage actually using your product?
Kai Peeters: Originally we looked at a whole cross section of asset classes. From residential, buy-to-let, new developments, commercial refinancing and so on. And we are building an interactive debt and equity marketplace, which will provide benefits for each of those different sectors.
PB: OK, and what are they getting from you? Do they get debt or equity? Can they borrow money from you or can they release equity against their property?
KP: They can do both. That’s our USP – and there isn’t any else doing this yet.
PB: What advantage does it give them to come to you?
KP: Primarily, the way the debt and equity market operates currently in any property offering is a sort of reverse-engineered debt as, for example, with equity release. A debt you don’t essentially have to pay back, but you indirectly pay interest with your equity in a compounded fashion. With us, you don’t have to take on any debt. So, if you want to release equity, there is no debt involved and you still realise the exact sum you were intending to.
PB: You’ll have to give me an example of that. A £500,000 house, no mortgage on it. You want to raise £250,000. What do you do?
KP: You sell 50% of your property equity to our marketplace whilst still owning it.
PB: And who puts the money into the marketplace?
KP: Investors looking to get a return on a physical asset.
PB: OK, let’s say a guy wants to borrow £250,000. What you are competing with here is the ability to go to a mortgage company or a building society and borrow £250,000 at X%. Can you lend him the money more cheaply?
KP: Well, he won’t be paying any interest. He’ll simply be sacrificing 50% of any capital growth on his building – and rental income if there is any. Think of it as opportunity cost at a future point in time – rather than an actual cost, at that specific time.
PB: So essentially, he’s selling shares in his house? He gets the money and he only owns half the house. The person putting the money in, owns the other half of the house – in a pool of some sort presumably.
KP: Not quite correct, he stills owns the house – but only 50% of the economic benefit, giving investors the other 50% of the benefits.
PB: OK, I’m beginning to understand it. And on the debt side, let’s say he wants this £250,000 as debt. Can you service that as well?
KP: Correct. So, say his house is worth £500,000, he’s raising £250,000, he can take £125,000 in debt. He can release 25% equity in the building and raise another £125,000.
PB: What sort of checks do you have on them, to know they will pay it back?
KP: We look at the asset. This is another of our points of difference. So rather than looking at the individual, we look at the remaining equity in the building – and this is where the interactive debt and equity marketplace comes in. So, if I borrow £125,000, I have say 4-5% interest on that. If I decide I don’t want to pay the interest in cash, I don’t have to. I can just use my remaining equity to settle my cash transaction.
PB: So you end up with less of the house – but you have paid the interest.
KP: Correct, you could also sell a proportion of equity, and completely wipe the debt out.
PB: So, on one side, you’ve got a big pool of investors, who are putting in money for returns of just above local bank rate. On the other side, you have a pool of people with property – who need to borrow money, or release equity. One reason could be to buy more investment property. Can you just explain what the HiP product will look like, in a couple of years’ time – with this assumption in place?
KP: The framework that is in place at the moment suggests that in about two years, we will have a marketplace – and the physical entry points for people to get involved in that marketplace. A buy-to-let owner can upload properties to the platform, which will be a web-based and app-based solution. We’ve actually got a virtual world that we have constructed, so you can physically experience not just the area in which these properties are located, but where the nearest train station is, and how long it takes to get to London, etc.
PB: I can see you have done that, and it does look very impressive – but I own the property, so I know where it is.
KP: Yes – but the investors don’t. They need to know the areas, they need to see the properties around them – their history and value, the demand for buy-to-let in those territories, is it a commuter-belt territory, how quick is it to get into London, etc. We are essentially offering a sort of Bloomberg reporting tool in a real-time environment. How is equity being priced monthly, in the acquisition of micro-units of debt and equity, in a given area? What’s the growth rate? What’s the population growth rate? They can look at the virtual world, they can type in that they have £1million to invest – and they will get a proposed investment portfolio to choose from. Overseas money is also very attractive to bring into this environment.
PB: So you see the investor base as a global base?
KP: We will be reaching that global pool pretty much off the bat. This is one of the reasons for using cryptocurrencies. That enables the transfer of international money with ease and security, into UK asset classes – without using digital currency as an actual store of that wealth.
PB: So by using the blockchain, these overseas investors can quite quickly invest in UK property. This has not happened before, has it? Not on this scale anyway.
KP: Not on this scale, or with this level of efficiency and accuracy.
PB: But if I was an overseas investor, I would be getting a bit worried thinking, “They’re going to stop me doing this aren’t they?”
KP: We are an FCA authorised and regulated company in the UK and Europe. All investors will need to pass out KYC/AML [know your customer/anti-money laundering] checks before investing – but they can pay in cryptocurrencies, if so desired. We obviously need licences in Asia and America to conduct international transfers, but we have those discussions taking place now. Once that is set up, we follow the same process a bank would when we move money around. It is a very legitimate, regulated, managed process.
PB: So you are expecting to get money in from all around the globe into the UK property market, at a level which has not been possible before. Is that not the point? You don’t have to be a big player any more. Investors can come in via your site and invest quite small sums of money from anywhere in the world.
KP: Correct – and they can participate in the returns that the asset class gives, without having to go through the rigmarole of actually buying the property.
PB: How do you get the stock for them to invest in? How is that going to be worked out over the next two years?
KP: What we are offering to owners is what we currently call “property banking”. This is a way for an owner to upload a building into our property exchange. In there, we show them their disposable equity in their property which varies with the debt they hold. Let’s say it’s a million-pound property. They’ve got £250,000 debt which means they have £750,000 of disposable equity. Using our visual account dashboard, they could say, right, I want to raise some cash, say 5%. All they need to do is interactively increase the debt, or part-sell the equity – whilst still owning the property.
The idea is that an owner comes to the platform, and he can see how he can access the equity in his property without selling – or how his equity can help pay down his debt, or pay for his interest. Maybe there are no tenants in the building and he isn’t liquid enough to pay the debt? That’s fine – he doesn’t need to pay it for six months or a year. He can use his disposable equity. We’ll just trade out his equity every month, while also checking that he is not in default – ie, he still holds the minimum level of equity.
PB: Kai, I understand it a great deal more than when we first started talking. Thank you very much. I can see how you can get money from all around the world into property – UK property, at least. And I can see a way that UK property owners can either raise money as debt or raise money through equity. So thank you very much for that.
KP: Peter, I love your cynical, critical view. Thank you!