Mike Coates, Founder and CEO of Commercial Expert
An investor’s preference is usually to split their investment across different funds, in a varied and balanced way. Research has shown that the most popular investments made by high-net-worth individuals (HNWIs) vary between stocks, shares, hedge funds, private equity, and real estates (residential and commercial properties). The allocation of funds is predominantly governed by taxes, goals and individual preferences.
However, in the past decade, HNWIs have encountered barriers to accessing finance because of the way lenders approve loans.
The barriers facing HNWIs
In the aftermath of the GFC of 2008, a notable trend to emerge was lenders seeking to minimise the level of risk to which they were prepared to expose themselves. This was achieved through adopting a more stringent selection criteria when it came to assessing an individual’s financial situation before approving a loan.
As a result of this change in lending behaviour, securing finance has ultimately become more difficult across the board, including, ironically, HNWIs, whom you might expect would be unaffected. The reason HNWIs might struggle is because the new lending culture favours those with straightforward finances, and a regular income.
However, for HNWIs, this is not usually the case. For example, a HNWI’s portfolio could be split across various asset classes and jurisdictions; their income may be irregular or derived abroad (including off-shore tax-havens); many HNWIs are expats and may be receiving income in different currencies. When these factors are considered, it’s easy to see why HNWIs might be classed as ‘high-risk’ in the eyes of some lenders. As a result, many HNWIs have struggled to secure funding or even a credit card.
Consequently, for HNWIs looking to take advantage of the current low borrowing rates, as well as the tax relief by securing finance, they will be better off finding a reputable financial adviser or broker who will take a more holistic view when it comes to assessing their financial situation.
Financial advisers have established relationships with a wide portfolio of lenders who aren’t just the regular high street banks and building societies. There are certain lenders who are used to dealing with clients that have huge property portfolios and are experienced in calculating the stress levels on existing portfolios. They are able to use different assessment criteria in order to approve loans, even where applicants have a low debt service coverage ratio (DSCR). They may also request to see your SA302 (self-assessment tax returns for the last 4 years), tax overviews and accounts in order to gain a deeper understanding of your income structure. Where people have deferred tax, this also gets taken into consideration. At the end of the day, it’s about having your foot in the door with the right lenders, that helps to determine your ability to secure a mortgage as an HNWI.
Reasons to invest in property
Compared to private equity and hedge funds, real estate investment is by far the least risky option. Real estate is safe and is set to lead us to recovery following the aftermath of Covid-19.
What we witnessed during the global pandemic was that contrary to early predictions, rental prices remained relatively stable and property prices rocketed. The UK house price index, published in January 2021, revealed that the average house price increased by 7.5% year-on-year. i Initially, the stamp duty tax relief may have been attributed to the increase, however, as the tax relief deadline approaches, there doesn’t appear to be any sign of a slow-down. This indicates that other factors are underpinning the rise. Many believe that lockdown has forced people to reassess their priorities, with an increasing number of people desiring more generous living and outdoor space in areas away from cities.
What properties to invest in
As it currently stands, almost 60% of HNWIs have revealed that they invest in real estate. ii The properties are usually where they themselves reside, or in “offshore” areas where they enjoy going on holiday. If properties are situated in tourist hotspots with nearby beaches or mountains, they are often rented out to tourists during peak holiday seasons and available for their own holiday use during off-peak times.
Final thoughts
If you want to invest in properties either in the UK or abroad, don’t be deterred by previous failed attempts at securing finance. It is a good move to appoint a specialist commercial finance broker with access to the whole of market, who can undertake all the research required, and recommend a suitable lender and product.
There are only a handful of lenders who are equipped to deal with HNWIs, with complex income structures, therefore it’s crucial to make sure you’re speaking with the right people.
References:
i https://moneytothemasses.com/owning-a-home/house-prices-2/what-is-going-to-happen-to-uk-house-prices
