First published: FT Adviser
As we begin a new year, we should reflect on the short-term impact the pandemic has had on investors and what we can learn to take forward.
For advisers and wealth managers that are planning for their clients’ retirements and later lives, there are some new, and some not so new, challenges to face up to. Later life planning has become more topical than ever and advisers and wealth managers need to absorb the seismic changes we have just witnessed if they are to be in a position to modify their propositions and meet their clients’ needs in the new world.
Maintaining a reasonable level of income in retirement has been the key to allowing people to pay for life’s needs for generations. Whilst this is not a new challenge, securing a reasonable level of income in the current environment, without taking on unpalatable levels of risk, requires renewed thinking.
The combination of economic pressures brought about by COVID-19, Brexit uncertainty and ongoing geopolitical insecurities has made the search for income from traditional assets harder and harder. Annuity rates, interest rates and fixed income yields are all at notable lows and dividends from listed shares are disappointing on a historic basis. Whilst taking some growth from an equity portfolio could offer better returns, the level of volatility and the risk of drawdowns associated with these investments makes many investors understandably nervous. In addition, these investments are all listed and therefore exposed to market uncertainty and investor sentiment, which has been swinging wildly over the last few years. Increasingly, wealth managers are turning to areas that avoid this but offer the opportunity for significantly improved growth or income prospects, such as unlisted or private investments.
With government borrowing already sharply up and the potential for long-term lingering economic effects from COVID-19, speculation about tax rises is mounting. The Treasury has a whole armoury of potential policy responses available to it, monetary as well as fiscal, so tax rises are definitely not certain, but they are possible. If we assume for a moment that some areas of taxation will harden, then the question to ask is where? And of course, two areas of legislation that always come up for discussion that are directly relevant to later life and estate planning are Inheritance Tax (IHT) and Business Relief (BR).
The Treasury normally follows a process before considering tax changes, firstly reviewing the policy, its costs and effectiveness, before then making any specific recommendations. Conveniently, the Treasury commissioned the National Audit Office (NAO) to look at the impact of general tax relief policy and published their findings in February this year1. The report categorises the c.1,200 current tax reliefs available. Two thirds are structural reliefs and apply to all people, or companies, such as income tax bands. The other third are non-structural reliefs (or ‘tax expenditures’) and are designed to promote or support certain sectors or specific agendas. Tax expenditures cost the government a total of £155bn in 2018/19. In the NAO’s report, all tax expenditures were assessed to establish both how much each area costs the government and how effective they appear to be at achieving their intended outcome.
Logically, one could deduce that any tax relief that is identified as being of high cost but producing little positive effect would be the obvious place for HM Treasury to direct further scrutiny. The reassuring news is that both IHT and BR do not feature particularly prominently. In the area of IHT policy, the top relief is the current exemption on inter-spousal transfers on death, which itself only comes in at number 20 on the list of top costing reliefs (at £1.9bn), way behind the exemption from CGT on the disposal of a primary residence, for instance, at £26.7bn. Indeed, in the area of IHT, tax expenditures have actually fallen significantly over the last five years, so are probably of less concern. On this basis, even if we were to have sweeping changes to fiscal policy, the government might be minded not to start in this area.
However, after a year of unprecedented events and with no existing rule book for recovering from a deficit of this scale, no one can predict what the future holds. That is why leaving clients flexibly positioned to deal with any future changes by not making any irreversible decisions, is a maxim worth remembering.
The arrival of the pandemic brought with it an immediate focus on the nation’s health and mortality. In the peak of lockdown, demand for will writing increased by 75%2, indicating a sense of ‘panic planning’ from those who might not have previously considered later life planning as something that was a priority to them. There was also an increased focus on the UK’s long-term care system, its strengths and weaknesses and how fundamentally important good care is to quality of life for so many of the population. We hope that this spotlight will drive continued positive planning behaviour in this area and wealth managers realise they can play a crucial role. The later life planning services advisers are advocating should encompass clients’ investment needs, their tax-efficiency but also well-being enhancements, such as having access to independent, specialist care advice.
Another challenge that has gained pace over the last year is the intergenerational transfer of wealth. £5.5tn is expected to change hands by 20553, and sadly this has accelerated due to the number of additional deaths recorded in 2020. Whilst there is the initial planning requirement to help your clients manage the transfer of their wealth in a tax-efficient manner, so up to 40% of the clients’ assets aren’t lost on transfer, there is another additional challenge that wealth managers need to face up to. That is the reluctance of the next generation to use a professional financial planner in favour of apps and other digital platforms, as they have yet to fully understand the value that these professionals can bring.
However, later life planning can provide an invaluable opportunity for wealth managers to engage with the wider family and demonstrate that value. Investors should be encouraged to discuss their financial plans with their beneficiaries and in turn, this exposes the invaluable work of the financial adviser. This conversation might even open the door for wealth managers to meet directly with beneficiaries, discuss the planning in place and offer some options for future wealth management.
Planning for well-being and care can provide a similar opportunity. Any care advisory service put in place by the wealth manager should be discussed with the wider family, making them aware of the provision, especially in times of crisis or diminishing responsibility.
Through these simple steps, all advisers can improve on their chances of retaining clients at such a vital time.
Having considered the shifts we have noted in 2020, what are the crucial elements to later life planning?
First, all advisers should focus on the client’s intended outcome. This will normally be to preserve their wealth and enable it to steadily grow, whilst retaining optimum flexibility in case their life circumstances change – for instance long-term care. This means that any investment solution will need to produce a meaningful long-term real return after charges and volatility should be mitigated as a priority, as in the decumulation phase of clients’ lives it is a corrosive force to both their portfolio values and their well-being.
Many clients may also then want to consider engaging in estate planning, ensuring the maximum amount goes from their estates to their chosen beneficiaries. There are two major factors that need to be considered with all estate plans. Firstly, how can we deliver the largest estate before, or on, the death of the client. Secondly, how can we minimise any losses arising due to the death of the client, specifically from IHT.
There are several techniques employed to achieve these outcomes and all must be assessed against both criteria. An outright gifting strategy for instance will attempt to be fully IHT effective after seven years, but will not promote any further growth. By contrast, a life insurance policy may deliver a large lump sum on the death of the client, but it doesn’t actually reduce their IHT liability, it typically just pays for it. Also, both these techniques offer little flexibility and are effectively irreversible strategies.
By contrast, BR-qualifying investments can reduce the impact of IHT to zero after two years, whilst also allowing the potential for consistent growth. For instance, Ingenious Estate Planning Private Real Estate targets long-term growth of 5-7% per annum from an unlisted investment. Investors stay in control of their money and insurance can be taken out to cover the value of IHT that would be payable on the investment if the investor dies before the two-year qualifying period. The service also comes with complimentary access to a care advisory service.
2020 has brought several challenges faced by later life planners into sharp focus. 2021 should herald an opportunity for wealth managers to scrutinise the later life services they offer to see if they really deliver on the outcomes that their clients are after in the light of the future issues they may face. If there was ever a reason to adapt to changes in the external environment it would be now, before risking losing touch with those who do.
1NAO, Management of Tax Expenditures, February 2020
2DeVere Group, April 2020
3Kings Court Trust 2018 – assets to pass between generations in the UK
Article by Matt Dickens, Senior Business Development Director
Accenture (NYSE: ACN), the global professional services company, has today made a strategic investment in Reactive Technologies, an Ingenious-backed company since 2018, that provides power and grid technology to help utilities accelerate the transition to low-carbon energy.
Reactive Technologies implements innovative technology solutions to address the energy industry’s greatest challenges. The firm offers unique measurement and analytics services for grid operators, an energy optimisation platform for corporates and an Enhanced Power Purchase Agreement for renewable generators. Reactive Technologies’ innovative services enable corporates, renewable energy generators and grid operators to actively mitigate rising energy costs, optimise their renewable assets in a non-subsidy environment and gain unprecedented real-time grid visibility, allowing for faster and more cost-effective decision making.
Ingenious’ investment in Reactive Technologies in 2018 was the first for its highly active Infrastructure Ventures EIS Service, which has recently fully deployed with seven subsequent investments in two years following the backing of Igloo Vision, Elmtronics, Shoreline, TeraView, 3D Repo, Winnow and Over-C.
Marc Borrett, CEO of Reactive Technologies, commented: “Through unique measurement technologies, the fundamental challenges of managing grid stability with ever increasing amounts of renewable energy being deployed can now be solved. Through GridMetrix®, critical grid parameters can be captured accurately and continuously for grid operators, transmission or distribution, national or regional. This will enable them to be properly equipped to better manage grid stability risks, save money, invest smarter, and integrate more renewable energy in the power system. Working with Accenture helps us to operate on a global basis with a local presence and support our offering with their full suite of technical and commercial delivery capabilities.”
Commenting on the investment, Neil Forster, CEO at Ingenious, said: “Today’s announcement clearly endorses our investment strategy. We have been delighted to support Reactive Technologies in providing world-leading innovation over the last two years. Reactive Technologies has developed and commercialised a number of compelling solutions for the evolving energy sector and has built a strong intellectual property portfolio. We remain focused on continuing to implement the necessary solutions required as we transition towards a lower carbon energy future.”
Stephanie Jamison, a senior managing director who leads Accenture’s utilities business, said: “As electricity production from wind and solar continues to grow, the share of variable renewables in the production mix is likely to present stability challenges for utilities to balance their grids. We believe Reactive Technologies’ innovative technology solutions can help improve critical decision making by moving from models to measurement. Coupled with Accenture’s experience in the utilities business, our Industry X business’ focus on grid-balancing expertise and our global reach, these services can accelerate the creation of the utility of the future. This type of collaboration is key to helping our clients achieve their sustainability and business goals.”
Reactive is now part of Accenture Ventures’ Project Spotlight, a deeply immersive engagement and investment program that targets emerging technology software businesses to help the Global 2000 embrace the power of change and fill strategic innovation gaps. Project Spotlight offers extensive access to Accenture’s deep domain of expertise and its enterprise clients, to harness human creativity and deliver on the promise of new technology. Through the program, Reactive Technologies will co-innovate with Accenture and its clients at its Innovation Hubs, Labs and Liquid Studios, working with subject matter experts to bring solutions to market more quickly and more effectively.
Reactive Technologies is the latest addition to the investment portfolio of Accenture Ventures, which is focused on investing in companies that create or apply disruptive enterprise technologies.
Savills currently forecast a 4%1 growth in UK house prices in 2020 and the latest data from Nationwide shows that they grew at an annual rate of 6.5%2 in November, the fastest rate since January 2015. As the sector seems to be shrugging off the lockdown conditions, we are often being asked if we believe the market is overheated and we are in for a torrid 2021.
Ordinarily, economic downturn and spikes in unemployment, would drive house price falls, but the impacts of this pandemic are more complex. They are expected to be relatively short term and not structural in the way the Global Financial Crisis was, for instance. In addition, huge numbers have been motivated to consider their living conditions and move up the ladder or locations. The house price data therefore takes into account areas where price growth has been higher, for instance family housing outside city centres, as well as where prices have fallen, such as Prime Central London.
Earlier in the year, the Government was swift to act to support the housing market through the pandemic. Construction work continued through both lockdowns, SDLT has been suspended on the first £500k for owner occupiers and a short extension to Help to Buy has been introduced to sustain the market, in addition to further reductions in Base Rate. This stimulus, combined with pent up demand from the first lockdown has played through to rapidly recovering transaction volumes throughout the second half of 2020. Latest data shows that sales agreed were only down 8%3 on last year in September underlining the resilience of the market.
Whilst house price rises are unlikely to be sustained throughout 2021 and some heat is likely to come out of the market, data does not point to a crash or correction. Knight Frank (KF) forecast a 1%6 national increase and Savills forecast prices to flatten across 2021. Only 8%7 of surveyors anticipate any price rise next year. Looking further ahead though, KF and Savills anticipate a cumulative increase of 15% and 20.4% for the 5-year period from 2020-2024.
Crucially for us as lenders to the development market, a national average can mask underlying trends, and geography and price point will show variations in performance. However, the UK’s structural shortage of housing at the affordable end of the market remains. Through active management, to an extent, we can manage economic risks. We are avoiding certain areas of the market and diversifying investments to maintain a balanced portfolio, including developments that are intended for long-term rental and locations where there is a balanced economy.
1Savills, Revision to our mainstream residential market forecasts, 30.11.2020
2Nationwide House Price index, November 2020
3Savills, November 2020
4Capital Economics, UK Housing market update, 4.11.2020
5ONS, Employment in the UK: October 2020
6Knight Frank, UK Property Market Outlook: 7.09.20
7RICS Residential Market Survey, October 2020
Article by Tom Brown, Managing Director of Ingenious Real Estate
First published Today’s Conveyancer
Ingenious today announces that its Infrastructure Ventures EIS Service has invested £750,000 in award-winning electric vehicle (EV) charging company, Elmtronics, a leading independent provider of charging points. The funding forms part of a £1.5m investment alongside the North East Venture Fund (NEVF), which is supported by the European Regional Development Fund and managed by Mercia. The investment will be used to step up the roll-out of Elmtronics’ charging points across the UK.
The investment follows the announcement that the UK government is to ban the sale of new petrol and diesel cars from 2030 and will allow Elmtronics to step up its work in underserved UK regions. Elmtronics has developed its own software – Hubsta – which is installed on the charging points and measures customers’ electricity use, allowing them to manage their account and pay for charging services. The funding will not only enable it to further enhance the software but also support the creation of 19 new jobs around the country in the next three months, almost doubling the size of its workforce.
Elmtronics was established in 2016 by former electricians Dan Martin and Anthony Piggott. Based in Consett and with offices in Bristol, Manchester and London, the firm supplies and installs public charging stations as well as those for homes and businesses. Its clients include Nike, the NHS, National Grid, FedEx, Taylor Wimpey and a number of city councils.
Neil Forster, Chief Executive Officer at Ingenious, commented: “We have been following the progress of Elmtronics for some time and are delighted to back a company that aligns strongly with our investment strategy as it is well placed in an under-served market, made all the more relevant by last week’s news of Government action to promote the use of electric vehicles. We are very much looking forward to working closely with Dan and his team.”
Dan Martin, Chief Executive Officer, Elmtronics, said: “The latest Government announcement is another big step forward on the ‘road to net zero’. However, despite the growing popularity of EVs with consumers and fleet users, a lack of charging points continues to deter many from making the switch. This funding will allow us to step up our activity to help build the all-important infrastructure. We hope to make Elmtronics a key player in the roll-out.”
The transaction represents the eighth investment round from the Infrastructure Ventures EIS Service in the last two years, following the backing of Igloo Vision, the Shropshire-based immersive software and technology company that can take any digital content and put it into a shared immersive space; Shoreline, the intelligent field operations management software start-up; TeraView, pioneer and leader in terahertz technology and solutions; 3D Repo, the cloud-based digital platform design pioneers; Winnow, the technology company behind Winnow Vision, the artificial intelligence tool helping chefs cut food waste in half; Over-C, an analytics company focused on operational performance in the workforce management market and Reactive Technologies, a technology platform facilitating the transition to a low carbon future.
Ingenious today announces that its Infrastructure Ventures EIS Service has invested £787,000 in Igloo Vision, the Shropshire-based immersive software and technology company that can take any digital content and put it into a shared immersive space. The funding will be used to continue the build-out of Igloo’s software suite and accelerate the production of its recently launched Igloo Immersive Media Player.
The Igloo Immersive Media Player is designed to bring immersive technology easily into the reach of companies globally, with a user-friendly, plug-and-play, off-the-shelf solution. It offers any organisation the ability to retrofit any meeting room into an immersive workspace. Igloo software has also been integrated with video-conferencing platforms, like Zoom and Microsoft Teams. This immersive video-conferencing solution has been used by Igloo clients in the enterprise and education sectors adapting to the pandemic, for example by allowing onsite teams to connect with working-from-home colleagues, and by enabling teachers to deliver lectures to remotely-based students.
Early buyers include one of the world’s leading management consultancy firms, one of the world’s largest logistics firms, and one of North America’s leading utilities players. The firm’s technology is well-suited to training, simulation, visualisation, and education, as well as events and experiences. Long-term clients currently include Accenture, Microsoft, WarnerMedia, NTT, and AECOM, many of which are using the technology to adapt to the COVID-19 pandemic.
The investment from Ingenious will not only accelerate the production of the Igloo Immersive Media Player, but also the ongoing development of Igloo’s broad existing software suite.
The transaction represents the seventh investment round from the Infrastructure Ventures EIS Service in the last two years, following the backing of Shoreline, the intelligent field operations management software start-up; TeraView, pioneer and leader in terahertz technology and solutions; 3D Repo, the cloud-based digital platform design pioneers; Winnow, the technology company behind Winnow Vision, the artificial intelligence tool helping chefs cut food waste in half; Over-C, an analytics company focused on operational performance in the workforce management market and Reactive Technologies, a technology platform facilitating the transition to a low carbon future.
Neil Forster, Chief Executive Officer at Ingenious, commented: “In the current environment, it is the companies that effectively support collaboration and communication between multilocational teams that will thrive. Igloo Vision is certainly one of those companies as is demonstrated by their extensive client list which includes some of the world’s leading brands, software companies, and utilities. The deal aligns strongly with our investment strategy and we are looking forward to working closely with Dennis and his team.”
This is Igloo’s second investment round since the onset of the COVID-19 pandemic. Back in April 2020, it secured £435,000 from a range of EIS investors. Since then, the valuation of the company has seen an annualised 12% increase.
Dennis Wright, Chief Executive Officer at Igloo Vision, said: “This latest investment, along with the ongoing increase in the valuation of Igloo, is a reflection of the significant progress we’ve made, irrespective of a global pandemic and recession. Sales have remained buoyant and we have been able to penetrate new geographies, with Igloo technology now used in 39 countries. The new funds, like the previous investment round, help us to fast-track our global growth.”
In a challenging year, and with a record-breaking number of award entries, Ingenious has secured a spot as one of the finalists in the Best BR Investment Manager – Unlisted category of the 2020 Growth Investor Awards, hosted by Intelligent Partnership. Now in their sixth year, the Growth Investor Awards are a landmark event in the investment calendar. With the support of investors, businesses, government and industry bodies, they celebrate the companies and individuals who go above and beyond to support the UK’s growing businesses, and in doing so create jobs, boost economic growth and support innovation.
Sponsored by Exact Libris, The Best BR Investment Manager – Unlisted award is open to leading investment managers specialising in non-Aim-based investments qualifying for Business Property Relief. Ingenious will compete for the award alongside six other impressive finalists: Blackfinch Investments, Foresight Group, Octopus Investments, Puma Investments, TIME Investments & Triple Point and in true 2020 fashion, the winners in all categories will be announced during a festive virtual Event.
Matt Dickens, Senior Business Development Director, said: “The Growth Investor Awards celebrate companies that go above and beyond to support investors and the UK’s growing businesses and we are very proud that our extra performance and utility has been recognised for in our nomination as finalists in the category of Best Unlisted BR Manager.”
Commenting on the 2020 Growth Investor Awards, Guy Tolhurst, Managing Director of Intelligent Partnership, said: “This has been an exceptional year in so many ways, and, as every finalist can confirm, success has come from being able to adapt and keep moving forward. I’m delighted we can host these awards as an online event, and continue to recognise the investment providers playing such a crucial role in giving the UK’s smaller companies the growth capital and expertise they need.
I would like to congratulate Ingenious – because to reach the finalist stage in such a competitive field of entrants in this category is a huge achievement.”
Award submissions will now move to a second round of judging from an independent panel of judges. All scores are collated to determine the winner and runners-up, with all finalists receiving a tailored feedback and benchmarking report offering expert insight about areas for improvement.
For further information, please visit growthinvestorawards.com
Financial planners and wealth managers strive to deliver on the needs of their clients by always providing the most suitable and effective advice. But as with any service, this advice should also be delivered at the best possible value for the investor. Value can be simplistically defined as the service that delivers the most benefit, balanced against the financial cost, but in the estate planning space, how do you assess what good value is?
Product fees are guaranteed to negatively impact returns, so it is important to minimise their impact when looking to gain the best value from the investment. Some managers report little or no fees paid by the investor to the manager, but instead charge the company or investment service itself. While this might initially be seen as better value for the investor, it is not as simple as that. Investors in unlisted BR services become a shareholder of the portfolio companies, so the reality is that any fees paid by the companies are effectively being paid by the shareholder (or investor). Therefore, both investor fees and company fees will both negatively impact the final return and must be considered together.
Analysis of what a manager is paid by the investor and by the company over a significant period will enable an adviser to conclude if the manager is offering good value, or if a disproportionate amount of fees is going to the manager at the expense of their investors.
Another key component of assessing value is what the investment actually delivers. For BR solutions, investors’ main objective is commonly to pass on the maximum sum possible to their beneficiaries upon death. This may lead to a conclusion that delivering Inheritance Tax relief at the lowest possible cost is the primary driver of value. However, especially for clients with longer time horizons, the one-dimensional goal of avoiding a potential 40% Inheritance Tax bill can easily over-shadow the equally important goal of aiming to steadily grow the investment, preventing erosion by inflation, drawdowns and investment fees. Unlike some IHT-focused solutions, such as trusts or gifting, investors in BR services do not have to accept zero growth of their wealth from the point of investment. Instead, investors can continue to earn returns, either taking an income stream or increasing the final sum to be passed onto their beneficiaries, precisely in line with their original objective.
While most BR managers predict their ongoing returns at a certain level, those targets are not guaranteed and historic performance varies widely.
Given that the majority of managers in the BR space state their performance targets net of fees, to produce positive growth and achieve their target return, those managers must first earn back any fees they are taking. Let’s take the below scenario to illustrate this point.
 | MANAGER 1 | | MANAGER 2 |
| Annual performance target, net of fees: 3% | Annual performance target, net of fees: 4% | ||
| Annual fees: 3% | Annual fees: 1% | ||
| Gross performance target: 6% | Gross performance target: 5% |
Initially, it might appear that Manager 2 must be taking more risk to target a higher net return of 4% than Manager 1, who is targeting 3%. However, Manager 1 has to deliver an additional 2% of gross return than Manager 2, to make up for charging higher fees. Higher fees not only impact returns and value, but they can also mean greater risk.
In the Tax Efficient Review’s most recent analysis of Unlisted BR Services1, they released data that ranks services in the market in terms of both investor returns and total fees. IEP Private Real Estate achieved the top rank for returns delivered, with the second lowest total fees in the market, demonstrating that it represents attractive value for investors in comparison to other services.
If you would like further information on the analysis and the competitive set, please email us with your name and organisation and a member of our Business Development team will get in touch.
Past performance is not a reliable indicator of future performance. The value of an investment may go down as well as up.
1Tax Efficient Review, March 2020
Article by Matt Dickens, Senior Business Development Director
First published on Wealth Adviser
The macro-economic conditions of the last five years have presented a relentless challenge for money managers seeking to produce consistent returns. It seems an all too distant memory that UK markets were caught in a period of low volatility since the recovery from the financial crisis started in 2009. Enter 2016 and we have since found ourselves in an era of exceptional uncertainty. An acrimonious Brexit referendum and the following ambiguity, pressure on sterling, repeated challenges to the UK Government, a trade war between two of the world’s super-powers and now a global pandemic.
Under these exceptional conditions, many investment strategies have understandably struggled to sustain the growth that investors had previously enjoyed without taking on elevated levels of risk and experiencing greater volatility and its associated negative impact. While Coronavirus has not been a threat isolated to the UK, the global impact on stock markets is making it harder than ever for UK investors to find an investment with low volatility and the prospect of growth. Across world markets, both developed and emerging, we are seeing drops in company valuations, recessions, poor jobs data and rock bottom consumer confidence.
However, Ingenious Estate Planning has been operating an alternative investment strategy in real estate lending for several years and over this turbulent time, it has continued to produce a steady return, with low volatility1. The strategy invests in experienced, unlisted property developers that possess little correlation to the main listed markets2 and there are promising signs that certain areas of the UK property market are showing sustained resilience to the global pandemic, as I discuss further here.
The affordable end of the UK’s residential real estate market has proven to be extremely robust during the recent uncertainty. The market benefits from some core fundamentals that have assisted it withstanding a lot of the pressures experienced by other sectors. Firstly, a large and sustained supply deficit. In 2018 the UK built 80,000 fewer houses than the actual requirement of 300,0001. This strong, inherent demand poses a clear investment opportunity to investors who can fund construction projects in the safe knowledge that there is an established demand on completion.
Secondly, this supply deficit has been recognised by Governments for several years and there has been a raft of policies enacted, all supportive of building more houses. For instance, the Help to Buy scheme has enabled many, often first-time buyers onto the property ladder. This scheme means there is a well-established and subsidised group of buyers ready to buy whenever developers complete construction.
Thirdly, and more recently, the Government has acted quickly to identify the property sector as one that is key to the UK’s recovery from Covid-19. Proposed relaxation of planning laws, a stamp duty holiday and extension of the Help to Buy scheme, coupled with changing consumer demands for more outdoor space has left the confidence in the housing market at a four-year high3. Both the construction and sales market are being given valuable incentives that support an ongoing return for real estate investors. While it may be questioned whether this is a short-term reaction, Savills recently revisited their 5-year house price forecast in the wake of the pandemic, but made no change to their predictions of a 15% rise across the UK as a whole by 20244, as fundamentals remain.
Despite these positive forces however, there remain some risks with investing in the property market, so a conservative investment strategy is key to protecting investors. Rather than take a 100% equity, or ownership, position in a housebuilder, developer or single property, a portfolio-based, secured lending model has a number of clear risk-mitigating benefits. For instance, by lending to a portfolio of developers, carefully selected on a project-by-project basis, and by earning a fixed rate of interest, rather than taking equity risk, there is inherently lower volatility in returns, given the protection of a senior debt position on each development. Contracts set out clear loan terms meaning that regular interest is paid and repayments of the loan begin as soon as discrete units of a development are sold, creating liquidity for the fund and diversification benefits for investors. Upon final sale the repayment is made in full, all with the benefit of banking-style security protections. By contrast, equity investments and associated valuations can fluctuate over time as the asset price changes and so it is far more vulnerable to market conditions and sentiment, and ultimately any drop in value is suffered by the investor. In the lending model, any loss is initially felt by the borrower.
IEP Private Real Estate utilises this secured lending investment strategy, which has continued to deliver a consistent level of activity during the Covid 19 pandemic. Residential asset values and transaction volumes have held up well throughout the portfolio, across varying locations and price points, as evidenced through recent successful exits of projects in Southend-on-Sea, Bristol, Slough, Southall and Motspur Park through a combination of sales and refinancing. We have also seen partial repayments from completed projects in Rugby, St Ives, Bushey & Kingston at values that underline the performance of our portfolio of investments.
The Business Relief- qualifying service is commonly used by clients planning for later life, because after 2-years the Shares should be exempt from paying Inheritance Tax. As savers and investors reach retirement and decumulation, they present wealth managers with a unique set of investment problems. Without careful planning, the start of this phase for many could signal the end of any capital growth and herald their savings being eroded to pay for life’s needs. Any investment offering both high volatility and potential drawdowns may therefore become unpalatable. And while many would wish to gift savings to their children to mitigate the risks to their beneficiaries of paying a hefty inheritance tax bill upon their death, the thought of losing both control and access to these savings when they may still need them, means many feel uncomfortable in taking that step.
However, this does not need to be a fate accepted by savvy investors and planners who can utilise a proven trading strategy that continues to both carefully and predictably grow their investment while also providing potentially full relief from Inheritance Tax.
For more information on Ingenious Estate Planning Services, contact our business development team at investments@theingeniousgroup.com
1Ingenious, June 2020
2Ingenious, June 2020
3Royal Institute of Chartered Surveyors, August 2020
4Savills, 2018
As the residential property market sits in the wake of prolonged uncertainty from Brexit and the unprecedented blow of the Covid-19 pandemic, I hear many conversations that conclude London will never be able to recover and the population must be running for the hills (or the suburbs of nearby market towns). Covid-19 has undoubtedly had a negative impact on city centres and none more apparent than London, exacerbated by its over-crowded public transport network that people are understandably reluctant to return to.
But I think there is more to this trend than initially meets the eye. Consulting the data issued by Savills on the return of the housing market since lockdown, although central London is showing signs of weakness, the suburbs of London have fared relatively well in recent months. And it seems to me that in the longer-term, London’s status as an international hub for travel, entertainment and culture will support its resiliency. The major uncertainty remains the timing of this, as the pandemic is of course not over, but city-living will always offer a unique range of facilities and infrastructure that will prove resilient and attractive in the longer term. Of course, I acknowledge that remote working and significant amount of time spent in the home has led people to reassess what is important to them and going forward outdoor space and home office areas will be a compelling feature of any development. But I don’t see a world where the whole country moves to traditional housing in the suburbs and countryside. Instead, there are some interesting trends that could accelerate. For instance, an increasing amount of city living may be rental in tenure and perhaps favoured by younger tenants wanting to live near others their age and make the most of the lifestyle benefits of being close to a range of facilities such as restaurants and bars.
In addition, the government has clearly prioritised the recovery of the housing market post-Covid with an extension of Help to Buy and temporary reliefs from SDLT to all buyers. This will especially favour the higher priced London/South East England markets where a ‘discount’ of up to £15k is available to buyers of new and second-hand homes.
So whilst London may be seen as having the most to lose from the impact of Brexit and the pandemic, we believe that through watching market data and listening to the emerging trends, there is still a large amount of opportunity for experienced developers who are building appropriate property at the right price.
