The events of the past 12 months have been unforeseeable, unexpected and deeply disappointing.
In March we paused trading on our website platform while we evaluated the position of the London and Regional Capitals funds in light of the changes to fire safety requirements, and the Government’s evolving and inconsistent response to the funding of remediation costs, which has led to a significant negative impact on the funds’ performance.
Following our full and thorough review of the options available, we have concluded that it is in the best interests of shareholders to move forward with the sale of properties owned by the funds, return net proceeds to investors in a fair and orderly manner and then close them.
It goes without saying that we deeply regret the circumstances which have led to this outcome. Bricklane was created with a mandate to democratise property investment, using the Government’s REIT structure to offer tax-efficient solutions for all investors to access the property market. From the launch of the Regional Capitals fund to March 2020, (i.e. prior to the impact of the fire safety issues and Coronavirus, which has reduced demand for city centre flats), the fund had delivered an average annualised total return of +6% from rental income and capital appreciation. The subsequent devaluation of city centre flats during the Coronavirus pandemic and significant costs associated with the ongoing fire safety crisis, have significantly diminished the funds’ ability to deliver strong returns for their shareholders.
The fire safety crisis has been both an unprecedented and unforeseeable event for the industry, resulting in a scandal that is affecting vast swathes of the UK population, from individuals going bankrupt or being trapped in their homes, to retail shareholders’ investments requiring unforeseen remedial costs.
It is very disappointing that the same REIT fund structures designed to offer benefits to retail investors have now been penalised by the Government due to its interpretation of the new UK-EU trade agreement, with financial support being capped to de minimis levels. We have made this case in the strongest possible terms to the Government, including the Secretary of State for Housing, Communities and Local Government, but have received no further response during the period of our review.
In the following update and FAQs on our website, we set out more detail on the rationale for this decision; the context in which it has been taken; and why we firmly believe that this course of action is in the best interests of shareholders. We have set out the measures taken to assess options and, importantly, the details of the next steps, including how we intend to return net proceeds.
The Directors’ principal responsibilities are to fulfil the funds’ legal obligations and to act in the best interests of shareholders at all times. In current circumstances, this means we must:
Pay for fire safety remediation works in properties owned by the Regional Capitals fund pursuant to legislation imposed by the Government;
Ensure future compliance with the fund’s lender’s covenants, following increased insurance and waking watch bills; and
Take all steps to ensure that, if the funds were to continue, they would be sustainable, with ongoing demand to provide liquidity for existing shareholders looking to exit.
The recent review included:
i) liaising with lenders to work to remedy the covenant breach;
ii) seeking clarity from the Ministry of Housing, Communities and Local Government in relation to decisions made on subsidy control and the funding of remedial works, which should be reversed;
iii) analysing the likely extent of costs and investigating optimal options for each affected unit;
iv) investigating options to transfer the funds to third parties e.g. via merger; and
v) considering what measures may be available to create viable funds that would be attractive to new investors and provide liquidity for existing shareholders.
In light of the developments in Government policy, the ongoing fire safety issues and the increasing challenges they present to generating positive returns whilst also ensuring requisite liquidity in the funds, it is the Directors’ strong view that winding up the funds is now the best and most responsible course of action in the interest of shareholders.
No other option provides a satisfactory outcome for shareholders, making an orderly wind down the only available route forwards.
Although the London fund has so far been unaffected by fire safety issues, the viability of the fund has been severely impacted by the issues in the Regional Capitals fund. Investor confidence is key for the long-term viability of the funds, and demand for new London shares has been extremely low since the issues with the Regional Capitals fund came to light last year. We cannot guarantee that the London fund will not be affected by fire safety issues in the future, and the confidence of prospective investors is of paramount importance. In light of this, the Directors have decided that the London fund will also sell properties and return net proceeds to shareholders.
Therefore, the trading of the London and Regional Capitals funds through the Bricklane platform will be suspended with effect from today. We have corresponded with the FCA on this matter.
We remain fully committed to the fair treatment of our shareholders and have set out further details of the next steps below. If you have any questions with regard to your account, our customer support team remains available and can be contacted by replying to this email.
While this process is underway, the properties will continue to be income generating and we will restart paying dividends to shareholders. In managing the speed of property sales, our objective will be to maximise the sale value for the benefit of investors, while also being mindful of the need to return the net proceeds to investors as efficiently as possible.
Thank you for your support and understanding through this period. As significant investors ourselves, we understand that these developments are both unexpected and deeply frustrating. We have already begun the marketing of properties in order to maximise the opportunity for shareholders in light of the stamp duty holiday and we will continue to keep in touch with further information as required.
More information on how the wind down will work and details on returning capital to shareholders can be found on our website.