The Intermediary sits down with Tom Brown, managing director at Ingenious, to discuss the future of property investment, including co-living and permitted development trends, the state of play for landlords and investors, sustainability and the prevailing strength of bricks and mortar.
First of all, can you introduce yourself, and Ingenious?
Ingenious has been around for about 25 years. It was set up by Patrick McKenna as a way of attracting investment, initially into film, media and the various subsectors, including computer gaming. It became one of the leading funders of independent film, and subsequently invested in renewable energy infrastructure: wind, solar, and other areas of sustainable energy.
That market became increasingly institutionally mainstream, so a decision was made to exit that sector three years ago.Â
Increasingly, Ingenious’ funds have been allocated to my real estate area of the business, which is the residential lending platform. We’ve seen that go from being the smallest part of the business to now being the firm’s engine room creating a business we can be really proud of.Â
We’re now approaching £1bn lending since we started in 2014. We’ve successfully filled a gap left by the main clearing banks after the Global Financial Crisis by launching a competitive and popular development lending product. The team is very capable of continuing to exploit the opportunities presented by this market in a changing world.Â
Today, we manage multiple sources of capital, from family offices to financial institutions, as well as our core retail invested capital. So, we’ve become a multi-capital, multi-relationship asset manager within the development and bridging finance space, focused on the residential sector.
Does that journey show that bricks and mortar will always be a solid investment market?
I think you’ve hit the nail on the head there. Bricks and mortar is inherently a good, safe place to put investors’ money, particularly the type of investors we work with.
The core assignment is wealth preservation. Investors demand that their capital is invested wisely and secured against assets which are durable and perform through the market cycle.
Property isn’t the most liquid asset class, it takes time to unwind and refinance. But equally, property and land can’t go anywhere. Nobody’s making any more land, and we’re a crowded island where people need places to live, work and study.
We continue to see the UK as a structurally attractive and secure investment place. We have an excellent legal system and a good framework for deploying and recovering capital. That capital helps towards regeneration and development, creating jobs, places to live and improving our communities.
The Government needs to achieve its goals for creating more housing and doing so as sustainably as possible. We’re about investing safely, securely and in growth right here in the UK.
How do you approach that question of sustainability?
We’re very mindful of the impact the built environment, that construction in particular, has on carbon emissions and the role the sector has to play in hitting the UK’s net zero targets.
We’ve partnered with a consultancy called Construction Carbon to work with us and our borrowers to help address embedded carbon – and I stress here the point of embedded carbon specifically. It’s not just about building something that has a high Energy Performance Certificate (EPC) or is efficient for consumers’ heating bills. Our mission is to quantify the carbon involved in actually building a project.
Globally, the built environment creates something like 40% of the total world’s emissions, and of that, about a third comes from construction, so there’s a lot of low-hanging fruit there to go after.
We want to help our clients make good choices for their developments. And we cover the costs of working with Construction Carbon.
Our green lending scheme targets a level of emissions that is broadly consistent with the UK’s timeline towards net zero by 2030, so 5 years ahead of where the UK needs to get to. We recognise that doesn’t come for free and therefore, for selected schemes, we will waive our exit fee up to 1% of the loan amount borrowed towards the related costs, this can be a fairly substantial incentive.
Here we’re asking developers to think more carefully and, if necessary, change the way they build, their choice of materials, and the partners they work with. And we’re putting cash on the table to help with the additional costs of doing that.
It’s good business for investors, and it’s good for the planet and a sustainable future for us all.
Regardless of the sceptics, we’re clear that climate change is real, and it’s a massive global challenge.
What is the environment like for landlords at the moment?
With higher interest rates and the pivot towards tenants’ rights over landlords, it’s a pretty hostile environment for small-term private buy-to-let (BTL) landlords. Although there’s a great deal of occupational demand, and we’ve seen large increases in rents across the UK, it’s still a difficult environment to be a small scale landlord, and I don’t see that changing anytime soon.
The good news remains that demand from renters is remarkable. We’ve seen a 30%-plus increase in rental prices over the past three years, as a national average, with some areas like London trending even higher.
There are multiple reasons for that – higher interest rates for those looking for mortgages to get on the property ladder, immigration into the country, changing lifestyles, and of course, higher living costs for us all. The rental market really has been a story of remarkable underlying price growth. That’s one of the reasons why we’re seeing so much activity in the beds space.
Some of the changes in the Renters’ Reform Bill coming down the line will give tenants much more flexibility in how long they are required to commit to living in a particular property and will restrict how landlords take back possession of their properties. Many private landlords are opting to sell, which reduces stock for renters in the short term and pushes up prices further.
Interest rates are coming down rather slowly and mortgages are gradually becoming cheaper and hopefully more flexible. Increasing supply may make property values more affordable relatively speaking. But looking back, we’ve had Brexit, Covid-19, the cost-of-living crises, wars in Ukraine and the Middle East raging, and what’s happened to house prices? They’ve just continued to go up.
Realistically, fundamental upward price pressures are going to make it increasingly difficult for many people to buy. Pair that with the fact that today, rather than working in one place their whole lives, people are more mobile and change careers – it only seems to point to more and more people renting.
What kinds of schemes does Ingenious invest in or lend to?
We prefer to support larger, more experienced developers and contractors. After joining in 2016, I reset Ingenious’ proposition to work principally within that marketplace where personally I had greater experience historically.
It follows that when the market cycle turns – for example, during COVID-19, or an extraordinary period of higher interest rates – you have developers that are usually more resilient and better able to weather those storms. They can work with us to deliver the outcomes and returns that we expect to see on our investments. This has served us well over a number of years and driven performance that compares favourably with our peer group.
To get those clients and transactions, we’ve worked together as a team. It’s been a great and satisfying journey and we’ve delivered sustainable on-target performance for our investors.
We have a large number of repeat clients who come back to us, not because we’re always the cheapest or because we’re giving them most money day one, but because we understand that development doesn’t always go in a straight line.
We understand the value of relationships and of working together constructively and we’ve built a reputation, through recessions, downturns and changes to the economy, to strive for the best possible results that investors and developers alike are looking for.
Are you seeing a lot of conversions at the moment, or is it more about the new-builds?
Conversions have had a rather bad name in the past few years. Lenders are often more cautious, particularly regarding office-to-residential conversions. Occasionally, the configurations, including natural light and room shape, leave something to be desired.
However, these buildings can be great for investors and short-term tenants and good for the planet too. I always say greenest building is the one already standing!
There’s been some noise around the idea that they are generally less liquid than new builds. Accordingly, we’re inherently rather more cautious, and we fund selectively and carefully with a particular eye towards the exit. Here, we look to work with borrowers who are specialists in permitted development (PD).
My sense is that it’s an area of the market that needs a reboot. It’s good from a sustainability perspective, but we do need to think about how attractive and well-suited the end product is. It’s not the main part of our book at the moment.
That brings me back to construction and new-build, which is at the heart of what we do. That’s where there is continued liquidity and appetite from borrowers for credit.
For us, that might be brownfield sites – a closed timber yard was a recent example. These sites will have planning consent for flats or houses, and we support the developer with finance for ground-up construction. We can fund them through the stages of buying the land, clearing the site, putting footings in the ground, building, and then ultimately selling or refinancing.
We’re agnostic as to whether it’s for rental purposes or build-to-sell. 50% of the portfolio is now rental.
We do some bridging loans as well, typically for developers who are buying land for future development.
We like development, we like construction. And we’ve got all the tools, experience and resources to successfully deal with that for our investors.
It’s important for developers to have experience, but what about bringing newer investors into the fold? What do they need to know?
For a relatively new investor in private credit, the first question is around the exit. You’re going to create something great, but how are you going to get the money back, and how long is it going to take?
Some sectors, such as Co-Living, for example, remain relatively young and up-and-coming, not as established as, say, Purpose-Built Student Accommodation (PBSA) or Build-to-Rent.
As such, you might have to hold the deal whilst it stabilises. Will that work?
Then, it’s all the things we discussed around location and occupancy – are people actually going to live and remain here which will drive value and liquidity in the transaction?
Clearly, these factors may be easy to determine when you’re going into a very mature sector where there’s a lot of comparable evidence.
The less mature a sector, the more attractive returns might be, so you might be trading greater risk for greater return.
What does all this mean for the brokers in this industry?
From a broker’s perspective, there is always a lot to think about. It’s likely to drive better outcomes if the borrower and broker have together done their homework before approaching possible lenders.
There’s no substitute for the lender getting to know their client, but if the broker has really understood what their client is seeking to achieve and where the debt, equity and real estate pieces fit together, that will really help drive the best outcomes.
The best brokers do their homework; they understand how the various parts fit together and find the right partners to work together in a crowded field. They also help educate the client. Those are the brokers we like to work with.
That all feeds back into the fact that this is a relationship-based market.
What is Ingenious looking ahead to for 2025?
We’re excited about interest rates finally coming down a bit, and we hope that it will generate some more transactions within the build-to-sell space so that we can see more of those alongside the rental projects that we’re already supporting. I’m hoping for at least two 0.25% base rate cuts in 2025.
We’ve been busy in 2024 raising institutional capital, boosting deployment through that and developing investor, client and broker relationships further.
We want to make a noise when we hit the £1bn lending milestone and talk more about our green lending product, ensuring that we encourage developers to think thoughtfully about the impact of their building and construction on the wider environment.
Overall, I hope that we’ll continue to see more political and economic stability in the UK. We had a bit of a nervous eye on the spike in the cost of gilts recently, so I hope markets can stay calm and level-headed.
That’s in everybody’s interest, whether they’re an investor, developer, or a finance provider.
