April 2009 sees the launch of the first IPIN SES (Secure Exit Strategy) product in the UK. This is exciting for various reasons not least that it now means investors who like the SES model are now able to invest in sterling and have the ability to hedge currencies by using multiple SES vehicles.
At a time when most investment related products are suffering from a major downturn created through a combination of severe liquidity shortage and loss of confidence, IPIN´s SES model is seeing exciting growth. In fact March 2009 was by far the most successful month in terms of SES investment IPIN has experienced and with the launch of the UK application we expect April to bring significant additional growth.
I thought that it would be prudent to take just a little time to discuss the concept of the SES and explain how and more importantly why it works and then look at the current (UK) application and analyze the terms of the specific (UK) investment looking at the security in place for IPIN members and the returns that this application offers.
The Secure Exit Strategy (SES) Concept
Experience has shown us that there are 2 potential barriers that prevent IPIN members from moving forward with an SES investment.
1) Its a non-standard investment concept and can be perceived as complicated, some investors do not fully understand it
2) It appears too good to be true, people are sceptical of the terms that have been negotiated for IPIN SES investors
Both of the above points are very valid and I can fully understand either or both of these preventing an SES investment. In order to fully understand the SES model and how we are able to offer the terms that we do to our investor members its important to understand the background to the model. Armed with this understanding I think you will agree that this investment strategy is simply offering a much needed commodity to the construction industry at a time when it is in high demand, these factors allow IPIN and its investors to create such a favourable investment environment.
Construction Finance
In the past if a developer was looking to construct a €1bn project he would visit the bank and request a construction loan. Typically the bank would agree to a loan of €800m subject to the developer achieving €800m worth of pre-sales (off-plan) contracts. The bank would usually require the contracts be sold to individuals to reduce credit risk and the developer would be required to cover the remaining €200m. The developer would typically seek to cover the required €200m by providing the bank with proof of unencumbered equity, usually land and then cover any additional shortfall with a mezzanine finance loan.
The typical situation above would ensure that the bank is first in line for repayment and so assumes the lowest risk, followed by the mezzanine provider and the developer is exposed to the highest level of risk but also enjoys the highest returns.
Since June 2007 construction finance has experienced a huge 90%+ decrease, meaning that large volumes of developers throughout all project types and geographical locations are finding it very difficult to raise required construction finance to complete projects. This has created a very exciting window of opportunity for investors to provide liquidity to the construction industry and to negotiate terms that would previously not be possible, essentially the SES allows IPIN investors to benefit from equity returns that are usually associated with the highest risk and enjoyed only by the developers with the lowest (senior debt) risk typically only achieved by the lending banking institution.
With the high volume of developers and projects requiring alternative construction finance solutions IPIN and its partners are able to be very selective and only work with projects and developers that fit firmly within a strict selection criteria and on very favourable terms. IPIN SES investors are able to invest with ultra low or zero risk exposure to capital and enjoy exciting annualized returns of 25%+ without the risks and costs associated with owning a property or having to negotiate a resale to realize profits.
Flaxby Country Club (UK)
The Flaxby Country Club is already a well know investment opportunity in the UK. It is important to remember that IPIN is the ONLY company able to offer the SES investment terms and so makes this an entirely different investment proposition than any other company is able to offer.
The Flaxby Country Club itself fits within the SES target criteria due to its positioning as a luxury 5 star hotel within a strong metropolitan location (UK). There is already a fully functioning Golf course at the site that has recently been endorsed by Lee Westwood. The project is located in North Yorkshire and will consist of 300 hotel rooms, spa, restaurants, bars and shops.
Flaxby Country Club - SES Investment
IPIN investors have the opportunity to place a 10% deposit into a secure escrow account that cannot be accessed by the developer or any other entity unless an approved insurance bond / policy is presented that protects 100% of the investors capital. The invested 10% is the maximum capital requirement, the developer may not request the investor to close on the unit.
The developer is contractually obliged to resell the SES investors unit(s) before any non SES investors units and at an agreed premium. This premium increases every 6 months ensuring a 30% annualized return to the investor, the developer is motivated to ensure a timely resale to minimize expense. Should the developer not resell the investors units within 36 months they are required to repurchase the units at the applicable spread which in this instance would relate to a 91% return on invested capital or 30.3% annualized. Failure to comply with these terms results in a default situation which ensures that the investor is covered in all eventualities.
Additional security is offered to the investor in the form of "Price Protection" which means that the investors margin is maintained if the developer is forced to sell units at a lower price due to falling market conditions. The SES strategy has been stress tested over several years in all market conditions and IPIN is proud to claim that in all its applications (over $450m) with IPIN and its partners not a single investment has resulted in capital loss.
Again, I understand that this strategy is not as simple as some but with the complexity comes security and I believe that it is currently the most interesting real estate related investment opportunity available with such low entry levels. The current interest in our SES applications shows that investors who have traditionally been interested in unit purchases are now seeing the SES as a way to achieve similar upside without the risk exposure that comes with many traditional real estate purchases.
I hope this article helps to give you an understanding of our Secure Exit Strategy, if you have any questions please feel free to e-mail info@ipinglobal.com
This article was written by Danny Bance, managing partner of IPIN.