Frequently Asked Questions
For your convenience here is a series of answers that help a lot of our joint venture partners to understand the deal further.
Q: How can you secure 100% capital?
Q: How can you offer 15% returns per year?
Q: How do I know my money is safe?
Q: How long do the joint ventures last?
Q: Can I re-invest at the end of the term?
Q: How many deals have been completed successfully?
Q: What happens if Castle & Gatehouse can't sell any houses?
Q: How can you secure 100% capital?
Our joint ventures are a very prescribe, tight investment. All monies agreed to Castle & Gatehouse are held by you, the JV partner. Piper Smith Watton LLP solicitors oversee all transactions made on our behalf and it is highly recommended that partners gain their own legal representation as well. From this basis, capital can only be requested in accordance with the JV terms and conditions which stipulate that funds can only be used to purchase property and pay associated costs. On the day of legal completion a charge is arranged to secure the full amount invested. Upon its sale, the original funds are returned to the JV partner, along with their profit share.
The renovation adds value to the property meaning that at the end of the cycle the asset is worth significantly more than the cash sum invested. We can be so confident in our returns because at no point do we hold the money, so it is either in the JV partner's account, or in a discounted property worth significantly more that the cash invested.
An important part of the design is that all property is held for a short period, due to the fact that Castle & Gatehouse pursue a trading strategy rather than holding our assets longer term. We sell the property comfortably around 6 months after property purchase. This offers a protection from movements in the market as we are not ebbing and flowing with the general market. For our 3 year JVs we can use dozens of assets with the cash moving securely from our partner's accounts to property ownership and back to their accounts several times.
Q: How can you offer 15% returns per year?
Our margins are excellent and because we actually offer 50% of profits from a JV partner's money, 15% is a figure we believe we can comfortably offer and expect to exceed. Property is a profitable business but the bottleneck is in the financing, which is where our JVs come to the fore and allow fast transactions.
Each advance is a stand-alone deal that works irrespective of any other. Whether we do 1 or 1000 deals, each one stands on its own merits with one secured legal charge making up the bulk of the repayment. Our profits from our funds, rental incomes and mortgaged deals then provide the surplus if needed. We consistently achieve the return in a highly robust, structured way. We are also fortunate to enjoy a variety of exit strategies giving us several options at the back end of the deal.
The term is agreed and we then use the money to buy, renovate, let and sell properties using our established student property model as well as the general residential property market due to the high profitability. The assets we create are student properties with 10%+ yields and we collect that income on a number of deals over the year. This gives excellent debt coverage of the interest payments. We then sell a proportion of the assets, along with the other residential properties, to increase cashflow and offer further cover of the interest. Castle & Gatehouse have spent years perfecting an in-house supply chain that allows us to consistently deliver returns year by year.
We can also leverage mortgage debt across a number of the deal at 50-60% LTV which releases capital to repay capital. There are a number of options and the percentage chance of all exits not working is very minimal. This model worked well even at the height of the credit crunch.
Q: How do I know my money is safe?
Your capital is 100% protected at all times, with tangible debt free assets as cover. We have considered every step of the process and selected the best, most secure option to build safety into the core mechanism. This meant opting for a strategy where our JV partners hold on to their own money until it is required and requested upon by our solicitors. Only once the property meets the solicitor's strict criteria are funds requested to buy and renovate it to leverage current market conditions.
The account has set criteria and covenants meaning the money can only be used for asset purchase, associated costs and renovations. This ensures the cash is spent where it should be and physically cannot move otherwise. The invested capital is separated so that even in the event of insolvency, it cannot be requested to pay the partnership's creditors. Due to the structure, we believe this to be one of the safest uses of capital on the market.
We enjoy being a highly profitable company, and so only make money if our JV partners do. The relationship is based upon mutual respect and ambition, to which we always maintain high values.
Q: How long do the joint ventures last?
The terms range from 12 months to 3 years. We listened to hundreds of investors, IFA's and Institutions which highlighted that people are looking for two major things; security and flexible timescales. That's why we secure our product and it's also the driving factor behind setting the term at 1-3 years. At the end of each cycle, the partner's money is returned along with their profit share. This gives the product great flexibility and opens up plenty of opportunities for the joint ventures through a variety of channels; private, corporate and institutional.
Q: Can I re-invest at the end of the term?
Yes. Subject to demand and timing, you can opt to re-invest. Preference is given to existing investors ahead of new.
Q: How many deals have been completed successfully?
We have bought, renovated, let or sold well over 200 properties. This is an established model that works through any part of the property cycle. The volume of deals done is adjusted in accordance with the market, but because the deal is stand alone and does not require any mortgage lending to work.
Q: What happens if Castle & Gatehouse can't sell any houses?
A good part of the debt cover comes from the cash flow generated from selling assets. This makes it important that we are able to effectively market our product and keep sales high month after month.
If we are still in possession of the debt-free asset on the due date of the JV, we will first look to repay the capital from our profits on other JVs, funds and joint ventures. Should that not be possible then the JV will continue to accrue interest at the agreed rate until the asset in question can be sold. This means the main default risk on the JVs is not that the capital stands to be lost, but rather its repayment delayed until the sale of the underlying asset.
The high likelihood is that in any circumstance the asset will be worth considerably more than the capital value of the JV due to discounted property purchase and subsequent renovation. While the property is sold, the JV will continue to deliver its headline return until the capital is repaid. As a fallback position it is very reassuring to know that the capital is still backed by an asset even if the due date is missed.
Fortunately demand is not, and never has been, the problem during the credit crunch. The availability of finance is the stumbling block for most, not the willingness to buy. Our existing high net worth investors have continued to buy throughout the recession and demand looks to be increasing as we end the recession and begin the recovery.
There is also a 'safety in numbers' element to our business. It is true that if only one deal was done then the sale of that one property would key to achieving the return. However, as the volume increases then the effect of a particular house not selling is minimized. If one particular deal were to falter then we can use the profits from other deals to correct the situation. Mathematically we would need the majority, and a significant majority at that, to falter in order to run into problems. At present all major house builders are reporting returns to healthy sales which offers further comfort in this post-credit crunch era.
It's a natural question that most ask, but experience tells us that a well presented property tailored to its target market will sell within a 2 month timescale of taking it to market. Add to this the returns that each asset generates in terms of yields, and we trade in a very saleable commodity. Average houses sell in around 5-6 months at present; we sell exceptional buy-to-let advances as well as high end residential properties, and so we sell them ahead of the normal residential market.
There is also the income from lettings and, if it is the preferred option, we also have the ability to acquire mortgage debt. Remember that, even considering all this, each investor has an asset backed guarantee covering the entire capital advance.
Q: What does the ownership aspect mean?
A big part of the design has been to take a considered look at the recourse available to each partner should the deal not go according to plan. We have engaged with investors and industry professionals alike to listen to their experiences and incorporate the solutions into this product.
One of the most common reason property companies fail is to do with the guarantees they offer. Guarantees are made which only fit a certain point in the cycle, and when the market naturally moves on the company folds because the guarantees no longer fit the market. Guaranteed rent is the most common example of this.
When such companies collapse, the guarantees prove worthless because they were dependent of the companies being a going concern. This common problem can be designed around by taking the unusual step of securing the advance against an asset. This gives the guarantee substance beyond Castle & Gatehouse.
Each JV partner has the security of a separated, stand alone asset that they are the sole claimant to if the security ever needed to be enforced. As part of the Joint Venture deal we cannot raise mortgage debt ahead of an investor, so the investor is always first in line. You have the confidence that all aspects of the deal have been well-designed, even the parts you should never have to see but can if you so wish to. 100% capital secured means exactly that.
Q: Who does the renovation work?
Through our consistent requirements for renovations at a consistently high standard, we have strong relationships with contractors throughout the North of the country, who are constantly bidding for our business which helps us keeps costs low, along with economies of scale.
A renovations team will be assigned to each property on an individual basis as and when they are required.