Investments in residential property are a hot talking point at the moment, with a series of investment and shared appreciation mortgage products being launched by the newly formed Castle Trust.
I was quoted in the Independent on Sunday yesterday, in an article talking about these new products.
My comments followed a conference call earlier in the week with a director of Castle Trust, so I could better understand their proposition.
Castle Trust is seeking to raise money from investors, offering them growth or income products over a three, five or ten year term. For the growth products, returns will be linked to the Halifax House Price Index, with a higher multiple of return for longer investment terms.
The money raised by these investments will be used to fund shared appreciation mortgages, which are what fund the investment returns.
Castle Trust plans to take a 20% interest in residential property investments by private homeowners across the UK. Buyers will already need to have their own 20% deposit, as well as a clean credit history and acceptable age profile of 18-55 years old.
When the property is sold or the end of the term is reached, the homeowner returns 40% of the growth in the value of the property to Castle Trust, as well as the 20% funding they were originally given.
Castle Trust is not charging interest on the 20% funding so is consequently taking a higher share of the growth. If the property were to fall in value, Castle Trust would participate in 20% in the fall in value.
These are interesting concepts, both for borrowers and investors, although ‘interesting’ alone is not enough to make something a sound idea for our clients.
A lot of the focus in the press, including within the Independent on Sunday article, has been on the mortgage side of the equation.
Shared appreciation mortgages do not have a good reputation historically. They tended to target the elderly, with equity release a focus rather than funding new purchases. The offering from Castle Trust differs in this respect, although comparisons will continue to be made with the way these products used to be promoted.
It is the investment side of the Castle Trust proposition which really interests us here at Informed Choice.
During the conference call I had with them last week I expressed concerns about a number of things, including the potential issue of a liquidity mismatch. They assure me this is not an issue, although with fixed term investments and longer term lending, you do have to wonder about what might happen if funding were to dry up in the future.
Another problem on the investment side is risk management and asset allocation for the individual client.
Investors already tend to have a high degree of exposure to the residential property asset class, with their main residences often representing more than half of total assets. Investing more in residential property can quickly result in overexposure which means taking too much risk.
Due to the fixed term nature of the products from Castle Trust, it would not be possible to make tactical adjustments to residential property allocation during the investment term.
This is a problem associated with all fixed term investments, not just limited to what Castle Trust has to offer, which is an important reason why we tend to discount the use of fixed term investments in the portfolios we recommend to our clients.
Investing in residential property could be due a comeback, with Castle Trust perfectly anticipating high investor and borrower demand ahead of their launch later this year. Alternatively, this could be one of those things we consign to the ‘reasonably good idea but no use to our clients’ box. Only time will tell.
Photo credit: Flickr/europealacarte.co.uk
