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We understand that one of your main concerns when considering working with us is the quality of our rental guarantee to you. We have carefully developed our business strategy to effectively manage the risks associated with renting. As a result, Spaces Property represents a conservatively structured vehicle that enables you to achieve superior returns while simultaneously experiencing a lower, more diversified level of risk, together with a reduced probability of the risk materialising in the first instance.
We have outlined the key areas of our business strategy herein, along with a selection of vital statistics about our historical performance and our ability to insulate you from rental voids.
Lower risk than renting direct to end-users As your rent is guaranteed and paid by Spaces Property, the risk of non-payment to you is dependent on the strength of our cashflow. Our cashflow is determined by our pool of tenants, so the risk is spread over our entire portfolio, rather than just the occupants of any one specific property. This means that the impact of any tenant defaults is absorbed across our portfolio and has a marginal impact on our ability to meet our guaranteed rental commitments.
With a traditional managing agent, you enter into a tenancy agreement directly with the end-user tenants. If any of the tenants in your property default, under pay or otherwise fail to meet their monetary contractual commitments, this translates immediately into a loss sustained by you. For example, assuming you have a mortgage of £500 per month and a rental income of £1,000 per month; if a tenant defaults on 10% of the rent and pays only £900, you have a direct hit of £100 to your cashflow. The rental loss is transferred directly to you in full. Further, the impact on your actual margin is far greater: at full rent you would receive a £500 profit margin, but the £100 loss is a cut of 20% to your margin for that month. Your rental returns are volatile and left exposed to the full extent of tenant default risk.
With Spaces Property, the situation is very different. We can sustain a 35% loss on our rental income and still continue to meet all of our guaranteed rental commitments. That means that even if 35% of our tenants fail to pay any rent whatsoever, our cashflow remains strong enough to pay your guaranteed rent in full for an unlimited period of time. There is no loss to you and your rental returns remain robust and consistent, with zero volatility.
The default risk you face with us is therefore considerably lower than the exposure you face if you rent directly to tenants or via agents.
Risk is more diversified and less correlated Our pool of tenants spans a much broader range of categories than is possible to achieve with the occupants of any one individual property. For example, renting directly to a group of young professional sharers represents a less diversified risk because tenants who live together are likely to be working in similar industries that are often impacted by the same macroeconomic factors. Hence, if one of the group loses their job due to the impact of a recession, the correlation between industries means it is more likely that other tenants in that group will also lose their jobs. Furthermore, behavioural characteristics of tenants within a group tend be similar. That is, if one tenant leads a lifestyle conducive to mismanagement of personal finances, we assess there to be an increased chance that others in the group will share the same trait.
Diversification reduces the impact of the factors outlined above. The pool of tenants across our portfolio is incredibly diversified. We have tenants working in industries such as healthcare, the civil service, banking and law. We also have carefully vetted students who obtain income from the government in the form of student loans, who are additionally backed by screened guarantors, themselves being from a range of industries and including directors of established companies, successful entrepreneurs and more. International tenants who stay with us are required to pay rent a clear three months in advance.
Spaces Property provides an innovative vehicle allowing you to minimise default risk by diversifying the end-user tenant base and lowering correlation between tenants. Combining this with our ability to sustain rental losses makes a compelling proposition:
* The high level of tenant diversification results in lower correlation and a lower probability of default * Even if defaults occur despite the increased diversification, we can sustain a 35% rental loss each and every month without impact to you
Over the past 24 months, we have experienced a 0.08% end-user tenant default rate. We can sustain a 35% default rate and continue to meet our guaranteed rental commitments without requiring additional funds.
Generous cash reserves maintained Spaces Property has a very conservative cashflow management strategy. In addition to our 35% buffer on rental income, we have structured our finances to ensure that, at any given time, we have a generous pool of cash reserves.
We currently hold enough cash in the business to meet all guaranteed rental commitments for a period of three months, assuming that we have a 100% default rate amongst our tenants. Factoring this capital into our buffer, we can then sustain a 45% (up from 35%) rental loss each and every month with zero impact to you over a 12 month period.
We also have other sources of finance available to us should we require them which, in aggregate, increase our rental loss buffer up to 55%.
The sources of our capital are, broadly, as highlighted below:
* Tenant deposits Where tenant deposits are protected using an insurance-based protection scheme, Landlords are permitted to make use of the funds providing they make provision for the return of monies to tenants when required. We operate on a precision-calculated reserve ratio which enables us to utilise our tenant deposits, while being able to meet tenant commitments as they arise. In addition, we typically sign new tenants before old ones leave, which means our capital requirement for tenants is lowered further.
* Bank finance We have an on-demand debt facility in place with our bank as an emergency backup measure. Repayments on this facility are fully flexible at our discretion and we incur a negotiated interest rate of base rate plus 4% for monies borrowed using this facility.
* Other sources of funds include capital invested by our management team and retained profits held in the company
Vacancy rates below market rate The Association of Residential Letting Agents (ARLA) in their ARLA Members Survey of the Private Rented Sector for Q3 2009 state that the average vacancy rate in the prime central London market is 7.69% or 4 weeks in the year.
Over the past 24 months, Spaces Property has experienced a vacancy rate of just 0.81%. We have excluded from the calculation planned vacancy periods which occurred during property refurbishments.
A combination of our tenant screening process and vacancy management strategy has enabled us to achieve consistently low vacancy rates. By aligning tenancy renewals with peak rental periods, we are able to secure new tenants very quickly and in most cases before the current tenancy ends. This means we often have back-to-back tenancies with zero vacancy on many of the properties in our portfolio.
Our occupancy rate was further improved over the last peak rental season as approximately 40% of our tenants opted to renew their tenancies by signing new 12 month contracts.
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