A little credit can be a dangerous thing

UntitledA commercial property veteran told me a story about his investments, he started buying commercial property off the back of his main business.

He had been buying property profusely prior to the credit crunch. In a nutshell he would purchase and use only 20% of his own money with the rest provided by lenders. This is how with £20 you can do £100 worth of business, it’s called leveraging. When the value goes up they would then refinance and take out their deposits plus some more money.

He had built up several portfolios, to the tune of hundreds of millions, with only the bank’s money in the deal.

Many of his circle were into the same game of buying commercial property, but they took a far “less risker” approach, putting down generous deposits and ensuring their portfolios have a low gearing of 50-60%. Intuitively this seemed like a sensible approach.

When credit was crunched the property values went down, the lending covenants were breached, which means the value of the property fell below a pre-defined threshold, with many of the properties this meant the amount of the property was less than the actual amount owed to the bank.


It is said if you owe the bank a few hundred thousand pounds, or even a few million, you have a problem. If you owe the bank £50m plus, the bank has a problem!


Many of his properties went into negative equity meaning the amount owed was more than the property was worth. The banks who had lent the money understandably got very nervous.

What’s more is the investor as a principle did not give any personal guarantees. This was his saving grace. I have heard him say many a time because of this one principle he is still standing today. If you wish to take anything away from this article take this one point away. To date he gives no personal guarantees, opting to go with lenders who charge more rather than give personal guarantees.

Of course if you’re going to play the property game like a madman this is more relevant to you, not everyone wants to play with high stakes.

Push came to shove and the money was called in; so he sat down with lenders and empathised with them, understanding they have a problem, and even offering to help them out of their predicament.

No one knows the assets like he does and therefore he is best placed to deal with them rather than the open market.


So he offered a revised figure, based on fear driven valuations, and purchased the properties again right back from the banks with a large portion of the debt wiped off, using a fresh lender and a new pot of money. This same process was done for many deals he owned, and he managed to keep all the good assets with a large portion of the debt wiped off.


So the credit crunch was a good thing for him, why? Because it was not his money he was playing with, it was the banks’ money, and he gave no personal guarantees on any of his deals.

Conversely his friends who did the sensible thing, had issues as the banks were about to take their properties which had their hard earned money in there.

With BTL properties a personal guarantee is built into the mortgage deal, irrespective of which property you take the mortgage on; there’s no way out.  But with development and commercial deals you can find lenders who will lend without recourse. Some may say they do not, but often they only say this because they just don’t know you well enough.

With over sixty new lenders entering the London market, there is a lot of choice around, especially from the foreign banks which have come in, their war chests are full, and they want to do deals.

Another commercial guy whom I met last week, also had some pearls of wisdom. One of which is never to deal with residential properties. He even went so far as to suggest investing in residential cannot be called an investment due to the possible hassle factor involved. He does however invest in residential, but in a clever way, only off plan. This means the deal has a natural gearing, you only put 10-20% in the deal and then wait for the price to appreciate, always with a view of selling prior to completion. This way you avoid paying stamp duty, arrangement fees on a mortgage and worrying about any other issues. His residential investment is restricted to only these types of deals.


His other policy is never to sell, ever; he simply gathers property.  A few times companies track him down and ask him if he wants to sell. He says no, they persist as they have deep pockets and a bigger vision they wish to implement, he then gives a ridiculous sum, to which they agree and only under these circumstances he sells one of his commercial properties.


He never does any partnership deals, this is a lifelong principle he has followed, better to do less and do it yourself.

There is much to learn from older and much more experienced veterans, who have been in the field longer. But property is a game which can be played in many ways and it’s important to find a way which suits you.

The Real Deal

Kilburn, London, NW6

Purchase Price: £830k

  • A block with two large two bedroom flats in a very good location
  • Freehold
  • Requires modernisation
  • Properties in this location are being sold for around £850 per sq. ft. while this is coming in at around £570 per sq. ft.
  • Close to the open spaces of Kilburn Grange Park
  • Shops, restaurants and amenities of Kilburn and West Hampstead are also within walking distance
  • Very good buy and hold opportunity

Call us now if you would like to have a piece of the pie!

Suresh Vagjiani

Sow & Reap

A Property Investment Company


!Tips of the Week

Often people get carried away with terms like Below Market Value; remember this is not the main consideration, the potential for future growth needs to be there. A property may be cheap but that doesn’t mean it will increase in value in the future.

The money you invest in property will grow in direct proportion with the location you invest in.


Suresh Vagjiani
Suresh Vagjiani
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