Before COVID-19 hit, the UK was already battling an ongoing housing shortage, with the government’s annual house building targets continuously failing to be met.
Though the number of new homes registered to be built in 2019 hit a 13-year high at 161,022 (still far below the government’s 300,000 annual target), a further decline in housing delivery is expected in the aftermath of the current pandemic.
This presents an attractive opportunity for the Innovative Finance ISA (IFISA) and asset-backed property bonds to provide highly experienced SME house builders with the alternative finance needed to tackle the crisis.
The importance of alternative finance and regional SME house builders to UK housing delivery
The UK’s housing shortage - where up to an estimated 345,000 new homes are required per year in order to meet demand - means that throughout the current pandemic (and beyond), house building will remain a priority. Property development will also be vital in driving economic growth as the UK navigates COVID-19’s financial implications.
This was evidenced as the housing market was one of the first industries to be reopened by the government as restrictions began to ease. House builders big and small were able to restart construction, and house-buyers and renters were once again able to move home.
In order to continue and escalate the much-needed development of new homes, alternative finance and non-bank lending will become a crucial part of the funding mix for regional residential property developers.
A long period of conservative bank lending in the wake of the 2008 financial crisis has, for the most part, left regional house builders with limited access to the property development funding they need.
In the late 1980s, approximately 40% of new homes were built by SME house builders. Now, that figure has slumped closer to 12%.
It's widely recognised that SME house builders generally place greater emphasis on individuality - building more bespoke, high-quality homes that attract buyers searching for distinctive features and a higher specification.
As well as this, the development of residential properties by regional house builders doesn’t just provide much-needed housing, it has many positive social and environmental impacts. This includes the creation of jobs for local people - from construction, to real-estate management - and often more innovative, sustainable methods of development.
As the number of new homes completed in the year ending December 2019 was just 178,800, it’s clear that alternative methods of finance are imperative in supporting the delivery of new residential property projects. It’s no longer enough to rely solely on the traditional funding methods.
The IFISA allows investors to invest into asset-backed property bonds - which are a type of alternative investment - while their returns are shielded from income and capital gains tax under the ISA tax wrapper.
For investors who want to reap the benefits of investing into property without the hands-on nature of buy-to-let or the volatility of purchasing property shares, property bonds are a powerful, often high-yielding alternative.
With target returns of between 4.75% and 7.75% from the CARLTON Bonds IFISA, the option to receive returns quarterly or upon maturity, and the opportunity to do well by doing good through impact-investing, the property-backed IFISA can benefit both the housing market and experienced investors.
Can the property-backed IFISA weather the COVID-19 storm?
Almost every aspect of life has been affected by COVID-19, including both the housing market and, in many cases, the health of investments.
It’s worth noting that the property-backed IFISA is largely unaffected by the Bank of England (BoE) base rate, which was slashed to 0.1% in March 2020 (down from 0.25%), with the BoE Governor Andrew Bailey recently confirming that negative interest rates are under review for the first time in the Bank’s history.
Asset-backed property bonds and the IFISA are also uncorrelated to the stock market and its volatility. Those holding shares in large house builders including Barratt Developments and Taylor Wimpey will have felt the effects of COVID-19 on the stock market first-hand, as their share prices decreased by almost 50% from 25th February to 25th March.
As Rightmove stated that their sales enquiries doubled over 24 hours on the day the property market reopened - with their busiest day on record taking place on Wednesday 27th May with over six million site visits - it’s clear that the residential housing market’s demand is still very much there.
And wherever demand picks-up first - housing sales or rentals - agile, forward thinking SME house builders have the ability to be flexible when it comes to tenure. This is especially true for those with strong relationships with housing associations, and investors through a property-backed IFISA will receive the same benefits either way.
While IFISA property bonds are an investment product (and as with all investments, your capital is at risk and returns are not guaranteed), their asset-backed security (where property loans are typically secured by way of a first or second charge over the underlying asset) lends an element of downside protection that many investors may find comforting. This can be particularly beneficial when compared to other types of IFISA where the underlying asset is unsecured consumer or business loans.
The CARLTON Bonds IFISA
The CARLTON Bonds IFISA targets attractive tax-free returns of up to 7.75% per annum for experienced investors by addressing the aforementioned market need.
With the team’s combined property and lending experience of over 100 years, CARLTON Bonds are able to structure and originate deals and provide high-quality SME house-builders with development finance to fund well-researched property projects that help to drive innovation and regenerate communities.
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).