Mariska and I had been living on Pantperthog Farm with six other people for two years when, just before Christmas 2009, our landlord announced that he was going to sell the farm and offered those of us living here first refusal. The eight of us explored various ways in which some or all of us might purchase the property so that we could continue to live on and improve the farm.
All of us felt that a co-operative would give us little incentive to invest time and our own money in improving the property. ‘Shared ownership’ had its drawbacks too. In particular, it might make raising the purchase price harder as would-be investors might worry that they would find it hard to sell their portion of the property when they needed to do so in future. Moreover, substantial decisions about how we should invest our time and money in developing the property would become very difficult.
So Mariska and I came up with a proposal that drew on Chris Cook’s ideas about equity partnerships and what we had read about Islamic financial structures such as that designed by used by Tarek El Diwany for the Ansar housing development in Manchester. This approach separates the investment element from the ownership and the management of the property.
Our idea was to form a Limited Liability Partnership (LLP) as I had the experience of forming two LLPs in the past. This would buy the property using money raised by the sale of bonds to Investor Partners. We would become the Managing Partner of the property and give the other tenants longer tenancy agreements than they had from the owner. We sent out our draft proposal to people we knew, asking for £400,000. We got a good bit of interest including two firm offers totalling £50,000 and the possibility of a further £100,000.
However, by August 2010, we had run out of time to raise the money. Our housemates were able to find enough finance from their families to buy the farm collectively and while Mariska and I don’t want to take on the risks of sharing the ownership with them, we will be able to rent our part of the farm from them.
The whole exercise has set us thinking about how we can apply the property bonds model elsewhere and Mariska and I are keen to find a home we can call our own. We are looking at how we can apply what we have learned to a smaller property, one that isn’t trying to accommodate so many people and also one at a lower price. ‘Smaller’ and ‘less expensive’ will make it easier to trial something new. Right now we are looking to see how we could apply a similar model to buying a houseboat. Mariska is Dutch and we may be taking a trip to Holland to look at their famous barges.
The main feedback we got from people who were interested in our proposal, but chose not to go ahead, was that they needed a clearer way to get their money out. With only one property’s worth of bonds, there would have been a very small market for them and investors would probably have had to find purchasers themselves even though, in the proposal, we had said that we would advertise the bonds to make the market work. The reality was, of course, that there was a risk that an investor wouldn’t find someone to buy what would have admittedly been a rather unusual investment product.
We think the lack-of-a-market problem would go away if lots of houses were financed with bonds. The Holiday Property Bond company has financed 1,300 holiday properties this way, and if there were a similar number of houses financed with Sustainable Property Bonds then there would be a liquid market in the bonds and it would be quite straightforward for someone to sell their bonds and get back their money.
We spoke to a few housing-finance organisations to see if they would be willing to take a risk on our property and guarantee to buy back any or all of the bonds in 5 years’ time at a price agreed today. We offered to pay the bank a fee for giving bondholders this option to sell up. We thought we could also invite a think-tank to study what we were doing and pass on recommendations to the housing-finance companies, so that they could learn from the experience and see if they would like to apply the model on a larger scale. This is something we are still exploring.
There are a few hurdles for a debt-free financing structure to jump but the potential is there for one to take root and challenge the idea that ‘mortgages or rental’ are the only options. We will continue to think about this and if we can pull it off, you will be able to find us at http://www.propertybonds.org.
Our hope is that this model can find application on a wider scale. Sustainable property bonds will enable the following:
Greening of the housing stock
Once purchased, the property will never again be sold, supporting good long-term planning and decision-making. Properties are held in trust and are managed in accordance with environmental objectives, enforceable by the Custodian Partner.
Resolves the’landlord tenant dilemma’
Tenants may themselves buy back the bonds from the initial Investor Partners, giving them a stake in the property and helping to overcome the’landlord tenant dilemma.’ Tenants can also invest time, energy and money in return for a larger stake in the properties bonds.
Removes inflationary pressure on the property market
By packaging the usage value of the property as a bond, and taking the property itself permanently off the market, upward pressure on property prices is reduced.
Robust during recession
Returns to bond holders are linked to an index of rental prices, ensuring returns can always be paid even during deflationary times. The mortgage industry by contrast is open to a spiral of defaults and repossessions undermining its usefulness during recession.