Property-backed IFISA Q&A with Simon Lenney, Craig Peterson and Simon Walker

As property developers and house-builders restart work on developments and house-buyers are once again able to move home, the housing sector appears to be taking the first steps to getting back on its feet after several weeks of uncertainty. 

On the day the property market reopened, Rightmove reported that sales enquiries doubled over 24 hours and renters made the highest number of enquiries since September 2019. This evidenced pent up demand is reassuring, as the development of property - particularly mixed-tenure (to rent or to buy) residential housing - continues to be vital on both a societal and economic level as the UK begins its recovery in the wake of the current pandemic.

It’s expected that alternative investment products - such as the property-backed IFISA - and the alternative finance sector will be crucial in supporting house-builders in driving economic growth, just as they were in the aftermath of the 2008 financial crisis. 

In the following Q&A session, Chairman of CARLTON Bonds, Simon Lenney, is joined by members of the CARLTON Bonds advisory team Craig Peterson, Chief Operating Officer of Growth Capital Ventures and Non-Executive Director of CARLTON Bonds and Simon Walker, Managing Director of Homes by Carlton.

They share their views on what is in store for the alternative investment and alternative finance sectors, why asset-backed property bonds might be an attractive investment opportunity, and give an overview of the CARLTON Bonds deal origination process and what is in the pipeline for 2020. 

Q1. Now the UK is tentatively emerging from COVID-19 restrictions and the economy is looking to begin its recovery, what is in store for the alternative investment and alternative finance sector?

Craig Peterson: We have already seen a number of peer-to-peer lenders receive accreditation from the British Business Bank (BBB) in order to participate in the Coronavirus Business Interruption Loan Scheme (CBILS). This is evidence of the continued and growing importance of alternative finance, and its role in the recovery of the UK economy. 

As every impacted industry attempts to navigate their way through the COVID-19 crisis, the alternative investment and alternative finance sectors will become more valuable than ever. 

Historically, small house-builders were a critical part of the supply market, with 40% of new homes built by regional house-builders in the late 1980s - a figure which is now closer to 12%. 

Alternative investments such as asset-backed property bonds - which can be accessed through the IFISA - have meant that the likes of high-quality, regional house-builders have access to the alternative finance needed to pursue development projects and provide residential housing at a time when the UK needs it most. 

Simon Walker: It’s well documented that the UK has a chronic housing shortage, and this continues to be a major issue. The only way to tackle it is from the continued contribution of experienced SME house-builders in the delivery of new homes - and with banks expected to tighten their purse strings even further in the aftermath of COVID-19, alternative finance and non-bank lending will remain crucial in this process.

Simon Lenney: A continued period of conservative bank lending, where regional house-builders faced constraints when trying to access development finance, has restricted the delivery of new homes, and in turn opened up a gap in the market which - as previously mentioned - alternative finance and non-bank lending can fill. 

Through the CARLTON Bonds approach, there is the opportunity to address this while having the potential to provide a better risk adjusted return for investors through a portfolio of secured lending transactions across the residential property sector.

Q2. What is the attraction of asset-backed property bonds for investors in the current climate?

Simon Lenney: Generally, experienced investors find asset-backed property bonds to be an attractive investment opportunity because they are typically secured by way of a first or second charge over the underlying asset. This means there is an element of downside protection for investors. 

As well as this, targeted returns of between 4.75% and 7.75% from CARLTON Bonds - which are completely free from income and capital gains tax when investing through an IFISA - are particularly attractive to experienced investors against the current backdrop of low interest rates. 

Read more:

Property-backed IFISAs are uncorrelated to the Bank of England (BoE) base rate and the stock market - both of which have been greatly impacted by the COVID-19 fallout. 

The market value of ISAs is currently sat at £608 billion, with almost half (44%) being held within Cash ISAs. As the BoE have announced they are considering negative interest rates for the first time in their history, it is unsurprising that the popularity of alternative investments such as the property-backed IFISA continue to grow.

Simon Walker: It’s also important to note that within the housing market, demand is still very much there. Wherever the market picks-up first - housing sales or rentals - residential developments have the ability to be agile when it comes to tenure, while investors can receive the same benefits either way. 

Craig Peterson: Before COVID-19 hit, house values were increasing - with the March 2020 UK House Price Index showing average house prices in the UK increased by 2.1% over the year to March. And though past performance isn’t an indicator for future performance, property has in the past proved itself to be a resilient asset.

Q3. How do CARLTON Bonds generate returns for investors?

Simon Lenney: First and foremost, the experience of the CARLTON Bonds team and our strategic partner Homes by Carlton means we have the knowledge to recognise and select the highest quality property projects that help to drive innovation and regenerate communities while targeting strong returns for investors. 

Combined, the CARLTON Bonds team have over 100 years of lending and property experience and have successfully structured and delivered over £300 million of property transactions. 

We make secured loans to finance UK property developments that meet our strict investment criteria.

Craig Peterson: Returns are generated by charging interest and fees on the loan, and the loan will generally have a first or second-ranking security on land, property and applicable assets of the borrowers.

Q4. How are CARLTON Bonds’ deals originated and structured?

Craig Peterson: Growth Capital Ventures work closely with our appointed regional residential building partner Homes by Carlton to originate residential development opportunities. We undertake thorough due diligence, with opportunities screened by both Growth Capital Ventures and Homes by Carlton before being presented to the CARLTON Bonds investment committee. 

Simon Lenney: As Chairman of CARLTON Bonds, I head up the investment committee. We review the opportunities presented, ensuring they fit within our lending policy.

Q5. What is in the pipeline for CARLTON Bonds in 2020?

Simon Walker: We have identified four projects for the immediate pipeline comprising over 200 homes. We are looking at these on a mixed-tenure basis, with some for sale and others to rent - potentially in partnership with well established housing associations.

We’re pleased to say that an offer has been accepted on a scheme of 40 units in County Durham. This scheme will comprise a mix of 50% affordable housing and 50% private sale, which provides tenure well-suited to both the area and the current climate.

Infrastructure work on our new build housing development at Thorpe Paddocks in Thorpe Thewles has also already commenced, and we’re preparing for full mobilisation towards Q4 of 2020.