For many investors, investing isn’t solely about building wealth. Whilst generating an attractive return will naturally be the priority for most, it’s increasingly evident that investors are also looking for investment opportunities that have a positive impact in a societal, economic or environmental way.
Research by Research and Markets found that the global impact investing market grew from $420.91 billion in 2022 to $495.82 billion in 2023, and is expected to grow to $955.95 billion in 2027.
And a survey by Butterfield Mortgages conducted in 2021 even saw 30% of investors asked state they are willing to accept lower returns on an investment if it has a positive social or environmental impact.
However, it’s not always necessary for investors to choose between the two. In particular, experienced investors interested in the ever-popular asset of property and willing – and able, from a risk perspective – to consider increasingly popular property bonds as their method of investment could find themselves targeting inflation-beating returns whilst supporting the provision of much-needed housing.
The role of property bonds in aiding SME housebuilders and increasing housing delivery
For decades, there has been a significant gap between housing supply and demand in the UK. We simply haven’t been building enough houses.
The Conservative Government set a target of 300,000 new homes to be built per year by the mid-2020s, a target that has been consistently unmet, with 252,000 homes completed in 2022 according to Savills.
Whilst this is the second-highest figure since the global financial crisis, it remains a notable way off the target, and even further from the 340,000 new homes per year that research for Crisis and the National Housing Federation by Heriot Watt University found was the number actually required.
What’s more, Prime Minister Rishi Sunak recently softened the Government’s commitment to building 300,000 new homes per year from ‘mandatory’ to ‘advisory’, a decision that many experts believe will have a negative impact on housing delivery.
And as highlighted in the May 2023 research briefing Tackling the Under-Supply of Housing in England, when people are unable to access suitable housing, it can result in overcrowding, impaired labour mobility – making it more difficult for businesses to recruit staff – and increased levels of homelessness.
To help tackle the ongoing housing crisis, it is widely acknowledged that small and medium-sized housebuilders must be able to re-enter and/or further establish themselves in a market in which “most of England’s new housing is built by a small number of large firms”, and investment into property bonds can be a significant boost in enabling them to do so.
January 2022’s Meeting Housing Demand reported that in 1988, SME housebuilders developed 39% of new homes, whereas this number had dropped to just 10% in 2020. The House Builders Federation (HBF) and The New Statesman suggest that “returning to the number of housebuilders operational in 2007 could help boost housing supply by 25,000 homes per year.” They also point out that not only is it significant for the housing market, it would also have a large impact on the economy, generating “a further £4.2 billion in economic activity and almost £700 million investment in affordable housing.”
Investment into property bonds provides regional, SME housebuilders – those looking to build a “diverse range of types and tenure of housing, and those using innovative modern methods of construction”, which 2020’s Planning for the Future white paper reiterated the need for – with the finance required to enable them to build the right homes in the right locations at the right time.
As well as delivering much-needed housing, this also helps to revitalise areas and communities – something benefited by regional housebuilders’ superior knowledge of the needs of local areas – provide local jobs and in turn boost both the local and wider economy.
For investors, this clearly makes property bonds an important consideration when looking to invest for impact. But they also have the potential to deliver attractive target returns in a tax-efficient manner, whilst gaining exposure to an asset that is consistently resilient.
Property bonds often target inflation-beating returns in excess of 9%, and can be held in an Innovative Finance ISA (IFISA), shielding returns from income and capital gains tax, an action which is more important than ever in the aftermath of recent tax changes.
To better understand the power of the IFISA in maximising target returns, it’s worth noting that the Gross Equivalent Return of 9% outside of the IFISA’s tax wrapper is 16.4% for additional-rate taxpayers.
Investing into property bonds
Property is a long-standing favoured asset for investors thanks to its continued high demand and history of strong capital growth.
And for investors wanting to invest into property for both impact and to generate attractive target returns, property bonds are certainly worth the consideration.