Grand Designs – on Mini-bond Investors’ Money

Property guru and long-time presenter of Channel 4’s Grand Designs, Kevin McCloud, raised large sums of money by issuing bonds between 2013 and 2017 to fund his company, HAB, but now looks set to hand investors huge losses.

Investors in TV property presenter Kevin McCloud’s eco-friendly housing company HAB – ‘Happiness, Architecture, Beauty’ – now stand to lose nearly all of their money.

McCloud raised £1.9 million through equity crowdfunding, with promises of a future dividend of 5% from the end of 2016; in 2017 HAB issued a mini-bond offering a gross return of 8% a year over a five year period, raising around £2.4 million.

However, the company has run into significant trouble, and investors in both the equity crowdfunding scheme and the mini-bond are expected to take losses of between 74% and 97% of the principal amount invested.

This is just another example of companies raising money by issuing mini-bonds and the willingness of small savers to buy into such risky ventures due to the seemingly generous returns offered and perhaps the dearth of retail bonds coming to market.

‘expected to take losses of between 74% and 97% of the principal amount invested’

With interest rates stubbornly low, savers looking for income have been attracted to the seemingly generous yields offered by mini-bonds, often without properly understanding the risks; Mr McCloud’s celebrity and status as a property guru would have also drawn savers in to invest.

HAB issued a mini-bond, which are typically used to raise smaller amounts of money than a retail bond, and come with even more risk. Whereas retail bonds can be resold on the open-market via the LSE’s ORB and OFIS exchanges, mini-bonds must be held to maturity.

HAB’s bonds were slightly unusual in that investors had the option to withdraw after two years and see their gross annual return fall to 6%.

Mini-bonds are subject to less financial regulation than retail bonds; e.g. there is no obligation for issuers of mini-bonds to produce financial statements.

The FCA has previously warned of the ‘high risk’ nature of mini-bonds and has started to tighten rules around Innovative Finance ISAs – IFISAs- the tax wrapper through which many peer-to-peer (P2P) loans and mini-bonds are held by savers and investors.

Equity crowdfunding, is even riskier; unlike the P2P lending platforms, which offer monthly interest and capital repayments to those that lend their money to individuals or small businesses, equity crowdfunding requires investors to buy shares in the company, rather than lending money to the business in exchange for an income payment.

Investors don’t get a return on their money until the company attracts a bidder or reaches sufficient scale to consider an initial public offering.

‘I will of course do everything in my power to improve the current situation’

Mr McCloud told the Guardian: ‘I stand shoulder to shoulder with those who have lost money. I will of course do everything in my power to improve the current situation.’

McCloud set up HAB Housing in 2007 to challenge the way ‘identikit volume housing’ was built in the UK.

In 2013, HAB Housing reportedly broke the then world record for crowdfunding when 650 people contributed £1.9m.

In January 2017, his mini-bond scheme raised £2.4m for HAB Land when Mr McCloud personally encouraged investors to part with their money, writing: ‘Our investors will be able to see potential returns through social and environmental means as well as gaining a good financial return.’

He added: ‘Allow me to urge you to hurry and join our community of like-minded investors.’

However, these last  investors have now received a letter from HAB Land Finance dashing their hopes of an 8% yield, or even of seeing their original investment; it said that after completing projects at Kings Worthy, Hampshire, and Cumnor Hill, Oxfordshire, the net return for bond holders would range from £69,000 to £606,000 – equivalent to somewhere between 3p and 26p for every £1 invested.

As a result, the company has proposed a restructuring of the bonds whereby investors will not see any of their money back until at least 2024.

‘Unfortunately, there is no reasonable prospect of liquidity for these shares’

The letter says HAB Land cannot trade without further funds.

A separate letter from McCloud to the 2013 crowd-funding investors, sent last month, says: ‘HAB Housing currently owes just under £1.6m to HAB Land.’

The letter says: ‘We have fought to remain in business and to protect our investors’ interests. Unfortunately, there is no reasonable prospect of liquidity for these shares.’

McCloud said he was still convinced ‘in the vision of HAB” but said that he was ‘less experienced than many around me, and I wish I had been less reliant on the executive team over the years’.

McCloud said he is HAB Housing’s largest single investor and has supported the business financially for 12 years.

In the long-running TV series, Grand Designs continually highlights self-builders who have gone over budget.