The ISA market did not go untouched amidst the economic crisis caused by the Coronavirus pandemic, but in many respects, one ISA product fared better than others – the Innovative Finance ISA (IFISA).
With the Cash ISA facing low, non-inflation beating returns even pre-pandemic, the outlook for savers worsened further when the Bank of England dropped their base rate to 0.1% in March 2020 – where it still stands – sending interest rates plummeting.
And with the Consumer Price Index showing inflation at 2.1% for the 12 months up to May 2021, the value of the £50 billion subscribed to Cash ISAs in 2019/20 could in fact be decreasing.
Meanwhile, investors holding a Stocks and Shares ISA will have no doubt witnessed the volatile nature of the equities market, with both the US and UK markets seeing losses surpass £3.8 trillion in a single week.
But with the IFISA’s non-standard assets uncorrelated to both the Bank of England base rate and stock markets, and due in no small part to the strong performance of the housing market, prospects for experienced investors holding property bonds in their IFISA in particular were – and still are – positive.
An important addition to experienced investors’ ISA portfolio
For some time, the ISA market has left some investors feeling disillusioned – questioning whether an ISA is worth adding to their portfolio at all. Both the rock-bottom Cash ISA rates on offer, and the intense fluctuations well-known to investors with a Stocks and Shares ISA, can make a change of view seem a necessity.
It’s for these reasons that both ISA products had seen subscriptions decrease in the past, with the number of contributions to a Cash ISA seeing a continuous decline from 2012/13 until a2018/19, whilst the Stocks and Shares ISA saw a drop of 15% in subscriptions in 2018/19 compared to the previous year.
In comparison, the IFISA has been on an upward trajectory. In 2019/20, investment into an IFISA exceeded £1 billion, with a 33.5% increase in the amount subscribed to the account – which enables experienced investors to hold peer-to-peer loans and debt-based securities – when compared to 2018/19’s figures.
And though the value of cash savings shouldn’t be underestimated – the Cash ISA is an important, tax-efficient consideration – experienced investors with the appropriate risk appetite could be missing out on the potential for higher growth when opting not to contribute a portion of their annual ISA allowance to ISA options with a medium–high risk profile, such as the IFISA.
This is true when looking at the current investment landscape in particular, as IFISA-eligible assets have strengthened whilst others have faltered.
One sector that proved resilient throughout the pandemic is the housing market. In April 2020 – at the height of the UK’s first Coronavirus-related lockdown – a report from the Office for National Statistics (ONS) found that 11 of the 14 service sectors experienced their largest falls in growth since records began. However, real estate services was not one of them, with the lowest fall – other than public administration and defence, which saw no decline – at -2.4%.
After this, in May 2020 when restrictions were lifted for the first time, a housing mini-boom emerged. And more than 12 months later, the market is still breaking records, with houses selling at the fastest pace ever recorded.
But this demand is undersupplied to a staggering extent. Rightmove stated that even the 145,000 new listings in April 2021 was not enough to cater for the amount of prospective home-movers visiting their site — which hit a record high of 9.3 million on 7th April 2021.
It’s here that the IFISA and property bonds become imperative in tackling the UK’s housing shortage, and their potential to deliver valuable returns – often between 4% and 8% – for experienced investors becomes apparent.
Providing small and medium-sized housebuilders with the alternative finance needed to deliver the right houses in the right locations at a time they’re needed the most, holding property bonds in an IFISA is an impact-driven investment option with demand that is expected to remain consistent.
Investing into property bonds with an IFISA
Though investing for impact is becoming increasingly important to investors, targeting returns that exceed the rising cost of living and investing into assets with potential resilience at such an unprecedented time will, for most, still be number one on the list of priorities.
And though the ISA market has been somewhat turbulent over the past 18 months, it’s important for experienced investors to remember there is much more to ISAs than the well-known Cash ISA and Stocks and Shares ISA – with the IFISA and many of its eligible assets proving their value at a time when the outlook for most investment vehicles was uncertain at best.