We’ve partnered with development finance platform CapitalRise and its founder, Alex Michelin, to discuss the challenges of the development finance market.
Having founded Finchatton and now CapitalRise, you’re a well-known name in property design and development. What was it that lead you to a career in creating luxury property?
Before heading down the avenue of development finance, I was working in investment banking but found it to be too one dimensional. Most of the large banks just pigeonholed you into doing one thing for them – such as deal-modelling or origination say, and then after three years of doing that thing, you might move on to something else. There was so much bureaucracy that I felt I just had to get out and do something new.
My great friend, Andrew Dunn, who I went to school with and have known since we were 13 years old, was working for a property developer and said to me “we can do this better than him” and that was the start of it really. We wrote a business plan and raised some money from angel investors – the next day I handed in my notice and we started our first project on development finance.
You’ve been involved with so many stunning projects, are there any which really stand out to you and make you particularly proud?
We’ve been very lucky to have developed some great buildings in London, but there are two that really stand out for me. The first was our first multi-unit development called Montpelier Hall, located on Montpelier Street in Knightsbridge. It’s a beautiful red brick building which had previously been a hall of residence for Imperial College students. It was just so run down and terrible inside when we purchased it – but I saw great potential. We managed to get consent to demolish it behind the wonderful façade and create six luxury lateral flats over 40,000 sq ft, which was really special. At the time, they achieved the record prices in Knightsbridge.
The other development I’m particularly proud of is our current flagship scheme at 20 Grosvenor Square. Previously the home of the US Naval Headquarters in Europe, it’s a wonderful building on the most famous garden square in Mayfair, right next to the US Embassy. We’ve obtained planning to demolish the building behind the retained facades to create almost 40 flats across 250,000 sq ft to include a 25m swimming pool, gym, spa, cinema, creche, wine rooms and business centre. It will set a new standard for luxury residential in London and will be complete in 2018.
Tell us about Capital Rise, when did you set it up?
I had the idea for CapitalRise in 2015, but it took us a while to find the right person to lead the team and so officially the company started in mid-2016.
What was it that encouraged you to set the business up, was there a gap in the market for development financing?
As a property developer, I knew very well the pain developers and property investors go through to raise finance for their projects. I felt there just had to be a better way. I noticed banks starting to retreat from the market because of all of the new regulations and capital adequacy requirements and felt that so many everyday investors out there would love to be earning something on their savings with UK based rates so low. CapitalRise was set up to put the two together and to give investors access to these great property investment opportunities, where they could lend money to the developer and earn some exciting returns. It also gives property developers and investors an alternative, and much more stable, source of funding: millions of individual investors across the UK.
How has your experience at Finchatton shaped the proposition of Capital Rise?
At Finchatton, we’ve always been involved with very special real estate in the most prime locations. We want to bring these incredible locations and projects to everyday investors. Typically, you had to be a High Net Worth person to access these kinds of investment opportunities with a minimum investment amount of at least £1m. CapitalRise is disrupting the old way of doing things.
Now, through our platform at CapitalRise, everyday investors can have access to these exciting investment opportunities for as little as £1,000. You can also invest using your ISA to get the returns tax free. CapitalRise, like Finchatton, is only going to offer people the very best real estate in the most prime areas – this makes is unique.
What’s your plan for Capital Rise, where do you see the business in, say, five years’ time?
I would hope in five years’ time we will have grown the team considerably and be funding over £350m per year in real estate investments across the UK.
What do you see as the biggest challenge for property developers today?
Raising development finance! Without a doubt, the single biggest impediment to development today is the lack of decent funding options for developers and investors. There are lots of good projects out there, and this is a good time to be buying real estate as the market has had a correction so there is good value around. But banks don’t want to lend to real estate development because of their capital adequacy requirements and all the slotting rules that regulators are imposing. In simple terms, these mean if a project does not tick absolutely every single box, banks just can’t really finance the project as the regulator is making them hold so much capital against the loan that their returns on equity are too low.
That is why we see this as such a large market opportunity.
If you could offer one piece of advice for a prospective property developer, what would it be?
I have two bits of advice;
- Don’t overpay! This is so fundamental, and yet so many developers get carried away by a good market thinking it will never end, or by the heat of the deal, and overpay. You have to be completely un-emotional about real estate. It is a numbers game and if you overpay, it’s very hard to make things work.
- Get a really great financing package. So many developments fail because of their financing. Often the fundamentals of the development proposition are sound and the real estate is sound but developers over lever and/or obtain funding at much too high a price. They think that the deal is going to go perfectly. When it doesn’t they come unstuck. That is why at CapitalRise we offer such competitive pricing – the business was conceived by developers……we feel their pain!