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
Ingenious announces that Ingenious Real Estate Finance has secured a £25m revolving credit facility from Shawbrook Bank, the specialist UK savings and lending bank, to support the growth of its development and bridging loan portfolio.
The wider Ingenious Group was founded in 1998 and is one of the UK’s leading private alternative investors, having managed the deployment of over £9bn across the real estate, infrastructure, media and education sectors.
Ingenious Real Estate Finance is focused on mid-market stretched senior and bridging finance on residential and commercial development projects located primarily in London, the South East and other major regional centres of England and Wales and their commuter belts.
The growth of Ingenious Real Estate Finance’s development and bridging finance portfolio is being supported by Shawbrook Bank’s Specialist Wholesale team. Shawbrook has provided a bespoke facility to meet specific funding requirements.
Howard Sefton, Investment Director at Ingenious, said: “Ingenious Real Estate Finance is delighted to announce this new key strategic partnership with Shawbrook Bank. The new term revolving credit facility will assist in funding further growth in our real estate backed development and bridge finance business in 2021 and beyond.”
Stuart Mogg, Corporate Finance Director at EY, said: “We are delighted to have supported the team at Ingenious on such an important capital raise. It has been a pleasure working with Tom, Howard and Wensde along with the rest of the Ingenious team. We look forward to working with them again in the future.
“Executing the deal under remote working conditions demonstrates our flexible approach and ability to adapt to a complex situation and help support our clients. I would also like the thank the teams at Shawbrook, Travers Smith and Ashurst for adapting their approaches during this challenging time.”
Warren Mutch, Structured Finance Senior Director at Shawbrook Bank, said: “Ingenious Real Estate Finance is a well-established lender that is expanding its footprint in the development finance market. We have been very impressed with their offering and management team and look forward to working with them. Equally, we continue to enjoy a strong relationship with EY’s Debt Advisory team as a regular introducer of funding opportunities and we are pleased to get 2021 off to a strong start with them.”
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
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.
The development in Norwood, South London is a GBP3.7 million facility to support a London-based developer known to Ingenious. The loan will fund the development of 15 new build flats and a ground floor commercial unit. The site is located near Norwood Junction station. The scheme will be registered for Help to Buy, which should increase demand and affordability from buyers, terms have been agreed for the commercial unit
Ingenious has also completed a GBP2.6 million loan in Cambridge to a locally based developer with a track record of delivering similar schemes. The loan will fund the development of ten new build flats. The site is walking distance from the city centre and station as well as the River Cam, open space and local shops. Again, the majority of units will be eligible for the Help to Buy scheme.
Tom Brown, Managing Director of Real Estate at Ingenious, says: “We are pleased to support good quality development projects as the economy begins its recovery from lockdown. While the return to normality may be slow as we emerge from the COVID-19 pandemic, we are cautiously optimistic about the prospects for the real estate sector, particularly the continued demand for residential space. There has been ongoing government support to meet the acute housing shortage in the UK and we are committed to providing flexible financing solutions for our clients’ developments to meet demand.”
Formed in 2013, Ingenious Real Estate focuses on senior development and bridging finance, targeting well-designed schemes in good locations across the UK with proven demand. Typical loan terms are 18-24 months, and the team has completed more than GBP450 million worth of transactions since inception. The current portfolio balance is weighted towards residential with the majority of Ingenious developments qualifying for Help to Buy.
UK High Streets have reached a ‘tipping point’, according to a recently published parliamentary inquiry report.
The shift to online sales (now accounting for 20% of all retail sales), the upward revaluation of business rates, previous planning policies, and local authority financing constraints are impacting retailers and high streets up and down the country, and across all sectors.
As concerns have intensified about the state of our high streets, the Government is slowly starting to take action. Urban regeneration is set to be a significant area of policy focus over the next few years, as the high street is rightly seen as a vital component of the UK’s economic and social fabric. In consequence, property investors should be seeing this as an emerging opportunity.
Housing needs in the UK are changing amid declining levels of home ownership and lifestyle shifts. Rather than the traditional ‘buy-and-hold’ model, residential housing needs are shifting towards developments that are built for rent and aimed towards a specific demographic who are at a particular life stage. As such, funding needs are changing to support these types of developments and this should lead investors to consider new ways of accessing the property market.
For many years, the typical approach to property investing has been through longer-term investments in buy-to-let and equity. While this ‘bricks and mortar’ approach has worked well for many investors, a fully-valued market in both the residential and commercial sectors means that capital appreciation opportunities are now looking limited. Instead, investors should be looking to work their property assets operationally through shorter-term loan opportunities, which are used to fund the development or redevelopment of buildings in niche areas of the market. By viewing property investments as operational assets, investors can access a growing market opportunity that offers the potential for greater long-term reward.
We are delighted to have been shortlisted for Residential Financier of the Year at the RESI Awards 2018, alongside major household names including LaSalle Investment Management, Investec Bank and NatWest. The nomination comes after an excellent year for the division, in which it completed its two largest deals to date – namely a £21m loan to develop residential property at Villiers Point, Kingston, and a £19m loan to construct residential units and office space in London’s Southwark district. The winner will be announced on 16 May 2018 at the Grosvenor House Hotel, London.
You can read more about the awards and see the full shortlist here.
Ingenious Real Estate has provided a £21m loan to fund the development of residential property at Villiers Point, Kingston and a further £19m to construct office space in London’s Southwark district. Ingenious has now deployed over £250m in UK residential and commercial loan facilities since its inception in 2014.
Villiers Point, Kingston: Ingenious Real Estate has provided a loan of £21m to Ensco Homes Limited to assist with the development of 50 properties, including a ground floor pre-let commercial building, 10 affordable housing properties and 39 private units.
The deal was introduced by broker John Philips of Kingswood Associates.
Southwark: The team has also provided a loan of £19m to construct 39 flats and 24,000 square-foot of office space in London’s Southwark district.
The scheme includes a large amount of initially unlet commercial space which demonstrates Ingenious’ ability to provide bespoke and flexible financing for high quality and diverse schemes in the UK.
