Property Ponzi Schemes

What does the future hold for property investment schemes?

by Simon Campbell

Our recent appointment over the Carlauren Group is the most recent in a string of property investment schemes that have fallen into insolvency; many would say they are doomed to failure from the start.

The basic blueprint of these schemes is utilising the national and international thirst for exposure to the UK property market, and the pressure of seeking returns on savings that beat a stagnant stockmarket and miniscule interest rates. Driven by the prestige and out-sized performance of the London property market over the last 30 years, UK property still has a safe and remunerative reputation.

The most successful part of these operations tend to be the internal sales teams or external agents who use sophisticated techniques to pull in large numbers of punters from south-east Asia and the Middle East particularly. These people fill the void for many projects that 15 years ago might have been funded by high-net-worth equity or, more likely, first or second tier lenders. The likes of NatWest and Lloyds have long since left the market; however, punters seem to assume that sophisticated and sizeable projects, adorned with similar promises and language must be led by safe individuals with the requisite expertise.

As well as the obvious, residential flats, we have come across student accommodation, Homes of Multiple Occupation, hotel rooms, holiday park chalets, nursing home rooms and even car-parking spaces, all unitised and sold as individual investments.

An initial 50% deposit will often fund the freehold purchase and an initial stage of the build; sometimes 80 or 100% goes in before it is admitted that the project is unfeasible. Often these monies fund substantial finders fees for agents and directors, or shortfalls on other sister company projects.

For those lucky enough to receive a completed unit, the promised annual 7-10% return often does not materialise. Directors set up complex corporate structures designed to protect themselves from legal recourse; large fees are drawn from management companies via charges for use of common parts and facilities or even furniture. Investors are sometimes offered restructures; in one egregious case, a group company was set up to buy back units at a discount from dissatisfied investors.

What to do about all this?  

Well, this comes in two broad stages for an insolvency practitioner:

Firstly, we try to optimise the position for investors once we get hold of the project. This is often complicated by not being in control of all the pieces in the investment. On a number of occasions, we have worked with the landlord, secured creditors, a new builder and the investors themselves to transfer the semi-complete building into a new corporate vehicle, controlled by the investors so that they had the confidence to re-invest and finally obtain a built-out property. This requires substantial co-ordination and a leap of trust for traumatised investors.

Secondly, we throw everything at a substantial investigation into the events that led to the insolvency, often involving hugely complex funding flows, requiring significant forensic and legal expertise. Claims can often be brought not only against the principals, but also against the solicitors and agents who have passively let these frauds take place or sometimes actively abetted them. This needs substantial support from weary investors, litigation funders and no small investment in timecosts from the professionals involved.

What does the future hold for these types of schemes?

Firstly, the question has to be asked where the authorities are in all this. Whilst there is nothing new under the sun, but aspects of all these schemes must be of interest to the Financial Conduct Authority; at present they appear blind-sided by the apparent novelty of these direct investments, presumably because they are property plays rather than standard financial instruments. I fully expect the stable door to be shut shortly.

Simon Campbell is a restructuring specialist; he works with directors, lenders and other professionals to provide considered opinion on the optimum path towards corporate recovery. Simon has led a number of large-scale and high-profile assignments this year which involved ponzi schemes. His sector experience includes property, technology, professional services and business services.