When it comes to estate planning, Business Relief (BR) services are a popular choice for investors who would like to retain control of and continue to grow their wealth, whilst mitigating against Inheritance Tax. And whilst these aspects of estate planning have been objectives anticipated by advisers for some years, increasingly there is an additional challenge. Environmental, social and governance (ESG) factors are an ever-rising priority for many clients, especially as significant wealth is transferred to a younger and more socially conscious generation.
One investment strategy that can offer compelling returns for BR investors is secured lending to the real estate sector. Through investing in portfolio companies that provide senior, asset backed loans to developers on a project-by-project basis, investors have achieved steady returns with low volatility in a challenging investment environment. The real estate sector is not often considered to hold any ESG credentials, due to the perceived environmental impact of construction. However, in parts of the market, a focused investment strategy, construction reforms and Government initiatives can make for a more socially conscious investment opportunity than may present itself at first.
There is a longstanding, structural shortage of affordable housing in the UK, leaving huge pent up demand in communities across the country. Without alternative lenders funding development projects across a diverse range of locations, this is set to worsen and could push affordability further out of the average household’s reach. The supply deficit has been recognised by Governments for several years. In response, a raft of policies have been enacted, for instance, Help to Buy, that has enabled many, often first-time buyers onto the property ladder at a more affordable level than would ordinarily be possible. Whilst this makes for a compelling investment opportunity, it also means investors can make a real social contribution by supporting the Government’s objective to build more affordable housing.
However, the pressing issue of the environmental impact within residential real estate investment remains and if we are to meet the nation’s Net Zero 2050 targets, the construction industry must play a big part. Currently, according to the UK Green Building Council, the total built environment accounts for over 40% of the country’s carbon emissions, with half of that coming from the construction and operation (such as heating and cooling) of buildings. If the UK is to meet its commitment to become carbon neutral within the next 30 years, a fundamental shift is required in the delivery and design of new developments.
In September 2020, Ingenious became the first alternative investor to become a member of the UK Green Building Council (UKGBC), signing up to its mission statement to radically improve the sustainability of the built environment, by transforming the way it is planned, designed, constructed, maintained and operated.
At Ingenious, we are committed to financing more sustainable developments and we have ambitious targets to increase the portfolio’s exposure to them in 2021. An example of the developments we will support as part of this effort is the Climate Innovation District (CID) in Leeds. In January, Ingenious completed a £19 million deal to fund the second phase of this development, which will ultimately become the UK’s largest urban sustainable development1.
The developers, Citu, are committed to building sustainable homes that people want to live in. The structural frames, built in a factory local to the development, are made from timber, which is carbon negative. Windows are triple glazed for maximum efficiency and the houses are so energy efficient that the roof mounted solar panels create more energy than is required by the buildings, so it can be sold to the national grid. The MVHR heating system provides fresh air circulation while keeping heat within the building. In the communal areas, there are green walls, sympathetic planting to encourage bees and butterflies and even an otter house at this riverside location.
Combining the social impact of the contribution towards building affordable housing and the environmental impact of driving more sustainable practices within the construction industry, loan finance for real estate development projects can not only be an effective investment to grow wealth while mitigating IHT, but is an increasingly valid option for ESG conscious investors.
1Citu & Knight Frank, Climate Innovation District Information Memorandum, 2020
First published: FT Adviser
Article by Matt Dickens, Senior Business Development Director
Later life planning has become more topical than ever over the past year as our whole industry has worked hard to absorb the changes brought about by the pandemic, progressing financial planning to meet the “new normal”. This article explores three of the greatest challenges later life planners currently have to consider and prepare for, tax changes, market volatility and the cost of care, and shows how a comprehensive later life plan, delivering more than just estate planning for inheritance, is increasingly important.
In 2019, the new Conservative Government, facing the challenge of delivering an orderly Brexit, but not yet dealing with the impact of a global pandemic, promised there would be no changes to Income Tax, National Insurance or VAT. Eighteen months on, they find themselves in an unprecedented economic scenario, with a deficit of £394 billion1 (19% of GDP), its highest level since 1945. While commentators remain focused on the ongoing pandemic and its impact on both lives and livelihoods and when it might come to an end, they also have one eye on the issue of paying for the extreme lengths the Treasury has gone to, to keep the country financially afloat. Likewise, investors are equally mindful of this issue – if the Government needs to balance the books through fiscal policy, how will any decision made now fare in a post-pandemic financial future?
For advisers, there are two clear ways to approach this planning dilemma.
Firstly, one could attempt to foresee the future and plan for the measures that might be implemented in the coming months and years. The problem with this approach is that one would need a crystal ball.
Secondly, one could accept that there is no way to predict the measures that will come into effect and wait until there is some form of clarity. But herein lies the problem of delay in the face of continued uncertainty. For almost a year now, many have held off on vital long-term plans due to the fear of the unknown, yet they need to accept that another year or more of inaction due to the potential of further uncertainty comes with its own real risk. And the longer it goes on, the more risk they are taking.
The simple answer to this conundrum is to embrace a strategy which remains flexible to any possible changes, but in the meantime delivers on the key outcomes the client requires. Any financial planning strategy needs to stack up in line with the wider objectives of the investor, such as achieving investment growth, rather than focusing purely on the tax advantages of a particular strategy, as these could change or even disappear. This is why I believe advisers should be developing a wider later life planning proposition, and not just narrowly focussing on estate planning.
Here is an example of a desired outcome of someone planning for later life;
To invest capital in a way that maintains flexibility throughout later life to pay for any unplanned needs, but also consider any potential care needs that might be needed, knowing that their wealth has been successfully grown up to the point of death, so maximising the legacy that will be passed onto the chosen beneficiaries.
Breaking it down into individual objectives:
Note the desire to reduce any IHT payable is deliberately last on the list of desired outcomes. The danger of focussing on the estate planning part of these objectives is twofold. Firstly, the threat of impending tax changes, or tax relief changes, causes uncertainty as to the efficacy of any purely tax-focussed strategy. And this remains the case whether one feels they can predict the future or not!
Secondly, the danger of ignoring the other higher priority objectives, as many tax-focused strategies are a one trick pony and restrict the potential for wider benefits. In this case, the investor may have to forgo any long-term investment growth, or the flexibility to easily and predictably access the investment to pay for care, for instance.
So, when considering the threat of tax changes to later life planning, the approach should always be to allow the investment rationale and wider utility of the service you recommend to lead the planning decisions, rather than just narrowly focusing on the tax benefits.
Another challenge that is particularly unwelcome in later life and particularly visible in the current environment is the potential for continuing investment volatility. In this phase of their lives, investors are unlikely to have the flexibility to “time the market” when they want access to their wealth. For instance, making a withdrawal to help family members in need, pay for care requirements or ultimately passing the investment onto beneficiaries upon death. These are not predictable events. Reflecting upon the volatility of markets in 2020 and the uncertainty of 2021 and beyond, investors may well be minded to forgo any potential upside of an investment, perceiving them as too risky.
However, an alternative, as many asset managers have been doing over the last decade, is to look to private investments that are not exposed to market sentiment in the same way as listed investments are. While on the face of it this sounds riskier, certain investment strategies can provide investors with an appealing level of security and predictable returns. One way to do this is via private companies that engage in secured lending. By their nature, loans carry lower risk than equity investments as they do not fluctuate in value over time. Senior, asset-backed loans provide the investor with additional protection against any loss in value. Executed within sectors that are demonstrating strong resilience to the pandemic and any ongoing Brexit effects, these loans can provide an attractive return with low volatility. Such companies are common investments for Business Relief qualifying services where services should be valued on their “fundamentals” not reliant on positive investor sentiment.
In the same way that the increasingly maturing cohort called the baby-boomers have recently come under detailed discussion by advisers with respect to their intergenerational planning needs, the same level of consideration should also be given to their increasing need for long-term care. During the pandemic, the importance of and reliance upon the UK’s care system has become very clear, yet there is an insufficient level of planning taking place to ensure that people are prepared. Research shows that the majority of family members who have experience of a loved one being in care were not satisfied with their experience. One of the factors that can surely make this unfortunate outcome more comfortable is being prepared, both financially and through being armed with knowledge or advice on this complex sector.
This is why it is more important than ever to flexibly have access to one’s wealth in later life. It is impossible to predict what any one person’s needs are going to be in the future and so separating money to prepare for care and to prepare for estate planning is futile. At the same time, perhaps the need will not arise and so the money could be contributing to the investor’s other objectives rather than being held back from an investment. So, undoubtedly a flexible posture to later life planning is key and if the investment can gain value over time to contribute to paying for life’s needs then all the better. The final benefit that could assist with this challenge is a specialist care advice service, which is included for all Ingenious Estate Planning (IEP) investors. As well as advising clients and their families on the vagaries of the UK’s complex care system, the IEP Care Service helps investors to make decisions in a time of need and stress. Specialist, independent advisers give individuals and their families invaluable support, liaising between the NHS and care providers to achieve the best possible care outcomes.
2020 brought several challenges faced by later life planners into sharp focus. The pandemic made us far more aware of our mortality and the importance of planning ahead. The next 12 months should herald an opportunity for wealth managers to scrutinise the later life services they offer to see if they really deliver on the outcomes and needs 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. 2021 should be seen as a great opportunity. Only by considering any changes to the legislative landscape, delivering consistent and attractive risk-adjusted returns and considering any future needs and costs of our clients, can we deliver a truly robust and value-adding financial later life plan for investors who need it.
1Office for Budget Responsibility, Economic & Fiscal Outlook, November 2020
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
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
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.
Ingenious Media is proud to announce that three films produced by investee companies managed by Ingenious have been selected for the Venice and Toronto Film Festivals.
In 2012, a charismatic former music industry executive named Kevin Osborne came to see Patrick McKenna, Founder of Ingenious, about an idea he had developed for establishing a new business and talent incubator with a particular focus on the BAME community. Kevin had previously run an award winning enterprise called Tribal Tree in north London from 2000 to 2007. This local authority supported project had provided music industry related training and skills classes and, most importantly, a safe and supportive playing and learning environment for hundreds of participants, helping artists like Plan B and N-Dubz to launch their careers and achieve number one hit records.
With his MeWe360 partner, Ameet Shah, an experienced entrepreneur and telecoms executive, who at the time was head of strategy at BT, Kevin proposed to set up a new social enterprise venture with a greater focus on identifying and incubating untapped creative business talent from the BAME community. He had secured some funding from the Esmee Fairbairn Foundation and conditional funding from Arts Council England (ACE). The ACE money was, however, to be conditional on MeWe’s being able to find matching private sector support. That’s where Ingenious came in.
Over the course of the next few months Kevin and Ameet met on numerous occasions with Ingenious’ Patrick, Duncan Reid and Martin Smith, together with ACE, to work up an agreed business plan. Ingenious committed £100,000 plus a large amount of additional in-kind help, ranging from office accommodation to free consultancy. This was to be a unique public/private partnership – part philanthropic but commercially framed – and was highly innovative for the time.
MeWe has gone on to achieve considerable success in helping its members to establish and fund new businesses, mainly (but not exclusively) BAME led. It has provided desk space for countless aspiring entrepreneurs and organised scores of music and business development events for its members and supporters.
Kevin has recently written an account of his personal journey as a Black entrepreneur in an article for the Clore Leadership Programme, a government supported leadership development programme. Amongst other things this piece is highly topical in the age of Black Lives Matter.
Ingenious commercial director Duncan Reid stepped down from the MeWe board last year after serving a seven year term. Martin Smith acted as policy and PR adviser throughout this time, linking MeWe into the Ingenious network of contacts in business and academia.
We are proud of the role that Ingenious has been able to play, initially in getting MeWe off the ground and subsequently helping it on its challenging route to significant achievement and social impact. This achievement is now celebrated each year through the Deutsche Bank Creative Enterprise Awards (DBACE), which are administered and promoted by MeWe for the Bank. More information can be found here.
Further information about MeWe can be obtained from Martin Smith; martin.smith@theingeniousgroup.co.uk
