With the rise of ESG (Environmental, Social and Governance) funds and the popularity of the term ‘impact investing’, the opportunities are now numerous. From backing projects – or businesses – working to provide renewable energy, affordable housing or access to education and healthcare, investors can look towards how they make a clear, positive impact whilst targeting an return on their capital.
Yet although phrases such as ESG and impact investing may be somewhat new (ESG’s roots can be traced back just 15 years), the concept of investing to have a genuinely positive impact isn’t, especially when we look towards property investing.
In the UK, property remains one of the most popular assets with investors. Having been accessible in a variety of ways for decades, from shares in housebuilders who have floated on the stock market to direct buy-to-let, it’s through property-backed Innovative Finance ISAs (IFISA) where attention has focused as of late.
With its ISA status allowing for up to £20,000 to be invested and any returns realised tax-free, through such a vehicle, experienced investors are today able to use an IFISA to invest for impact in property, whilst targeting tax-free returns often between 4% and 8%.
Supporting regional housebuilders with the finance they need
When investing into a property-backed IFISA, the alternative finance generated is often used to support small and medium-sized regional housebuilders in delivering much-needed housing.
The UK has, for some time, been battling an ongoing, chronic housing shortage. The Government’s annual target of 300,000 new homes per year has consistently been unmet. In 2019, just 161,022 were registered to be built, and the Coronavirus pandemic – and subsequent lockdown measures, where all construction was halted – meant that only 15,950 dwellings were completed between April and June 2020, a decrease of 62% when compared to the previous quarter.
A collaborative approach by all involved is undoubtedly required to tackle the shortage, but the role of regional house builders in helping to rectify this should not be overlooked. In the late 1980s, around 40% of new homes were built by small house builders. Now, the figure is closer to 12%.
Due in no small part to a lack of access to development finance after a period of conservative bank-lending, this opened a gap in the market for products to fill, which the IFISA rapidly established itself within as a vehicle with which investors could provide the necessary finance to the experienced housebuilders.
Environmental and societal benefits of investing via a property-backed IFISA
Investing via a property-backed IFISA, and in turn backing regional housebuilders, is not just beneficial for aiding in the delivery of more homes, but for ensuring those homes are built in an innovative and environmentally-friendly manner that also benefits surrounding communities.
The re-use of brownfield land – land that has previously been developed but is not in current use – is crucial in meeting the UK’s need for more homes, while protecting the beautiful countryside.
However, these sites are often overlooked by larger housebuilders, simply because they usually do not provide the desired scope and size.
On the other hand, regional housebuilders - housebuilders whose developments are frequently smaller and more bespoke than their national counterparts - are often able to better make use of this land. They have a greater understanding of the locality and the needs of those who live within the area.
With this also comes societal benefits, as revitalising brownfield sites – which can often look run-down – contributes to transforming local areas.
As well as this, forward-thinking, agile small and medium-sized housebuilders are able to be flexible in the tenure of their developments. Having capability to offer both houses for sale and to rent, alongside schemes such as rent-to-buy and shared ownership, not only provides much-needed affordable housing options, but ensures the right homes are built for the right audience.
Property investors’ role in the bounce-back of the UK economy
Back in July 2020, Rishi Sunak, Chancellor of the Exchequer, highlighted the importance of the housing market in aiding the UK’s economic bounce-back in the wake of COVID-19.
The Chancellor reiterated that housing development is ‘one of the most important sectors for job creation,’ with house building supporting almost 750,000 jobs and the construction sector alone adding £31 billion per year to the UK economy.
It is clear the UK is facing a period of uncertainty amidst – and after – COVID-19, resulting in sectors such as property being more vital than ever. They need the financial support to ensure the very positive outcomes – the job creations and the economic contributions – are maintained, if not exceeded.
From this understanding alone, it’s clear why property is a focus for many today. Investors can directly help regional housebuilders provide local jobs and drive money back into the economy – a process that is more important than ever.
Using a property-backed IFISA to invest for impact
The IFISA is arguably the least well-known of the products within the ISA wrapper, but that status is largely unjustified. When it was introduced in April 2016, it was used by many providers for the purpose of peer-to-peer lending. Today, it offers the ability for experienced investors to very clearly invest for impact through exposure to the property market.
And, most importantly, to the part of the property market where the funds are needed most.
Investments into property-backed IFISAs don’t simply result in homes being built. These are the right homes, in the right locations, built to the needs of the market to which they’re targeted.
These are the homes that create jobs, support local supply chains and drive innovation, innovation that in many respects sets out to reduce carbon footprints and provide more environmentally-focused production processes.
These are the homes that drive money back into the local and regional economies.
Whilst the IFISA may not be the only option for experienced investors when it comes to investing for impact in property, the available tax reliefs (given its ISA tax wrapper) and the hands-off nature many property bonds afford make it a very enviable product for experienced investors to consider within their portfolio.
The CARLTON Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).