This article is for professional investors only, and not intended for retail investors.
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a period of low volatility since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. While Coronavirus has not been a threat isolated to the UK, the global impact on stock markets is making it harder than ever for UK investors to find an investment with low volatility and the prospect of growth. Across world markets, both developed and emerging, we are seeing drops in company valuations, recessions, poor jobs data and rock bottom consumer confidence.
However, Ingenious Estate Planning has been operating an alternative investment strategy in real estate lending for several years and over this turbulent time, it has continued to produce a steady return, with low volatility1. The strategy invests in experienced, unlisted property developers that possess little correlation to the main listed markets2 and there are promising signs that certain areas of the UK property market are showing sustained resilience to the global pandemic, as I discuss further here.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction.
Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Proposed relaxation of planning laws, a stamp duty holiday and extension of the Help to Buy scheme, coupled with changing consumer demands for more outdoor space has left the confidence in the housing market at a four-year high3. Both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors. While it may be questioned whether this is a short-term reaction, Savills recently revisited their 5-year house price forecast in the wake of the pandemic, but made no change to their predictions of a 15% rise across the UK as a whole by 20244, as fundamentals remain.
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a housebuilder, developer or single property, a portfolio-based, secured lending model has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns, given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid and repayments of the loan begin as soon as discrete units of a development are sold, creating liquidity for the fund and diversification benefits for investors. Upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
IEP Private Real Estate utilises this secured lending investment strategy, which has continued to deliver a consistent level of activity during the Covid 19 pandemic. Residential asset values and transaction volumes have held up well throughout the portfolio, across varying locations and price points, as evidenced through recent successful exits of projects in Southend-on-Sea, Bristol, Slough, Southall and Motspur Park through a combination of sales and refinancing. We have also seen partial repayments from completed projects in Rugby, St Ives, Bushey & Kingston at values that underline the performance of our portfolio of investments.
The Business Relief- qualifying service is commonly used by clients planning for later life, because after 2-years the Shares should be exempt from paying Inheritance Tax. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from Inheritance Tax.
For more information on Ingenious Estate Planning Services, contact our business development team at firstname.lastname@example.org
1Ingenious, June 2020
2Ingenious, June 2020
3Royal Institute of Chartered Surveyors, August 2020