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Wealth Management

WHY IMPACT INVESTING COULD BE MORE IMPORTANT THAN EVER

By Dan Somers of Boundary Capital

 

The current pandemic is alarming, but the data suggests that an increase in crises will be the new norm. Climate, Disaster and Development Journal predicts that intense floods and storms around the world could double in frequency within 13 years, as climate breakdown and socioeconomic factors combine. Pandemics also are predicted by some to increase more and more from urbanisation, resistance to drugs, and also indirectly from climate change. According to the newest data, more than 2.8 million people in the United States experience an infection from antibiotic resistant bacteria each year. Moreover, these “superbugs” cause 35,000 deaths per year in the country. The Washington Post cited research looking at the spread of disease carrying vectors such as mosquitos (notably spreading the Zika virus) as well as the encroachment of humans and animals for the same resources e.g. bats in West Africa having their climates destroyed by climate change, forcing them to hunt nearer humans which led to the Ebola outbreak of 2014. The U.S. intelligence community’s bottom-line assessment of the risk is plain: “Over 20 years, the net effects of climate change on the patterns of global human movement and statelessness could be dramatic, perhaps unprecedented.”

It’s not all doom and gloom however: There is a groundswell of popular mainstream opinion now demanding that Governments and businesses do more to help the environment and sustainability. Action is being taken by Governments and businesses, and indeed voters, consumers and investors all now voting with their feet to drive more businesses to adopt “ESG” policies.

Last year, flows into U.S. sustainable funds more than tripled, marking the fourth year of record flows. Talking about sustainability “is a way to build better relationships with clients. In 2019, according to the Global Impact Investing Network, assets in this market totalled around $500 billion, based on surveys with 1,300 impact investors.

Investors no longer want to be associated with or contributing to companies to may harm society, on the wrong side of new sustainability guidelines or going against popular consumer views and trends.

As a result the climate solutions market could double from $1 trillion a year now to $2 trillion a year by 2025, says BofA.

Ironically, what the recent Covid-19 ‘lockdowns’ have shown is that environmental pollution can drop dramatically in coordinated activities (planned or unplanned). Recent satellite images from NASA of China also showed less air pollution amid the country’s economic shutdown, due to less transportation and manufacturing. Nitrogen oxide pollution above major cities has decreased by 30% to 50% compared to the corresponding period of last year. And since the lockdown in Italy and the drastic reduction of water traffic and tourism, residents have observed the usually muddy canals run with bright, clearer water with swarms of fishes and the canal bottom clearly visible. More and more people are looking for ways to create such impact, without the reverse consequences of course.

This is where impact technologies come in. Impact technologies are those which provide a meaningful benefit to people’s lives directly or indirectly. This might be improvements in batteries and Electric Vehicle (“EV”) technology to reduce environmental pollution, improvements in drugs and medical devices which improve life quality, AI which helps to empower ordinary citizens transparently to take decisions and improve their skills and productivity. It is only changes in the ways we do things that can have a meaningful impact and with a viable approach to economic sustainability too. Many of these technologies have a high positive social or environmental impact as well as a medium and long-term economic advantage to make a strong financial return. However, like all technology development and adoption, there are many associated risks bringing a new technology to market and productising it, particularly when the market doesn’t yet exist or is nascent.

Boundary Capital is one of a number of innovative investment firms that are trying to change the rules around impact investing. Rather than investing in ESG public companies or impactful businesses, it focuses on investing in early-stage private “B2B” (Business to Business) technology companies that have the potential to enble and transform markets to make the most impact. So rather than investing in EV charging infrastructure, it invests in the technologies that it believes will make the most difference to accelerating the adoption of EVs by improving battery life and longevity. Similarly, it doesn’t invest in tertiary healthcare, but in oxygenated wound care devices that reduces the time and cost of wound healing (and hospital beds) by over 70%. The partners are all experienced technology investors and entrepreneurs who can bring more than just finance to impact businesses to help them succeed and deliver on the promised societal or environmental benefits.

As well as six themes derived from the UN’s Sustainable Development Goals, Boundary only invests in businesses that affect 100m lives or more in a meaningful way, based on a proprietary methodology measuring the lives impacted over a long-term period. These goals are also underpinned by an overall economic return for investors of 3x overall over 5 to 7 years.

Their latest investment is in Cambridge based Inotec, is a fast-growing medtech business that has developed a novel device capable of healing complex chronic wounds. The business has developed a world leading medtech product, called NATROX® Oxygen that generates pure humidified oxygen to treat a range of chronic wounds, from diabetic and venous ulcers to non-healing surgical wounds.

Dan Somers, Managing Partner at Boundary Capital says: “Impact investment has mostly been socially-driven up until now. There is now the real opportunity for investors to make a return as well as optimising the impact that their investments can make on human lives.”

Daniel Rodwell, Chief Executive of GrowthInvest adds: “We are seeing the market moving increasingly towards responsible investing, driven by a rising commitment to sustainability and a next-generation approach to wealth management.”

As long as we have an eye on medium term and place our support in the right places, we can all do our bit to mitigate some of the future crises and enjoy profitable and impactful lives.

 

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Finance

GEOSPATIAL DATA VISUALISATION MAKES SENSE OF MASS OF COMMERCIAL PROPERTY INSURANCE DATA

Heikki Vesanto, Manager GIS Data Science, LexisNexis Risk Solutions UK & I

 

Like most areas of the general insurance market, data, analytics and technology are helping commercial property insurance providers make faster and more accurate decisions based on a holistic view of risk.  The big difference in commercial property (and to an extent home insurance) is that it is quite literally a picture or map of risk that’s being created – right down to an individual property outline – through the evolution of desktop based geospatial data visualisation tools.

Knowing that visual imagery is more intuitive and speeds up the ability to assess risk, data visualisation tools developed specifically for the insurance sector have become increasingly sophisticated.  They help make immediate sense of the huge and growing volume of data at the market’s disposal.

This data includes the characteristics of a property (floors, height, roof type etc.); its location; the individuals behind the business; the crime and environmental risks including near real-time data on flood and river flows direct from the Environment Agency plus customer and policy data held within an insurance providers’ own databases.

Heikki Vesanto

All this data can now be analysed, aggregated and visualised in map form for use within the insurance continuum – marketing, pricing, underwriting, claims. It reveals where exposures and accumulations exist in an instant and shows insurance providers where there is capacity to write more business.  Fundamentally, the inclusion of all this data allows insurance providers to more accurately price each risk upfront relative to its unique profile.

The demand for this level of insight is only set to grow as commercial insurance providers face changing risks on two fronts. The first is climate change and the cost of claims emanating from extreme weather events. Profitability in commercial property insurance is significantly affected by weather conditions and a recent report suggests commercial property insurance rates were up around 20% on average in Q3 2020[i].

The second is the shift in the use of commercial property space, partially caused by the pandemic.  Surveys suggest that the enforced exodus of workers from offices could be permanent for at least part of the week[ii].  Indeed, several banks across Europe have confirmed they will be closing branches and asking staff to work from home[iii].   There are also questions over the future of town centres which were already in decline before COVID-19.

Understanding which insured properties are vacant versus occupied in a flood, fire or a severe storm, knowing roads closed due to fallen trees, where flood water will flow or how a fire in one building could spread to another is now possible through the evolution of geospatial data visualisation tools such as LexisNexis® Map View, enabling complex property data to be quickly and easily understood and acted upon.

When a weather event occurs, insurance providers can look at a specific geographical region, a postcode, an address or a single property outline, pulling on a wide range of data including live feeds from the Environment Agency.  This means that rather than wait for an influx of claims to assess the exposure to a climate event, they can upload their policy and claims data to visualise the risks and exposure for a whole book of business. They can understand which policyholders could be impacted and where on the ground resources need to be located.

The flexibility of the tools offered today makes it easy to filter down to the risks most of interest, focus on one property for underwriting purposes or a whole block of properties in the path of a coming storm.

The use of ‘live’ data also means that Estimated Maximum Loss and Potential Maximum Loss can be calculated.

Risk can be assessed as needed or a constant monitor created for a whole commercial property portfolio. Looking at a whole portfolio alongside past claims may also help insurance providers price more accurately and understand how they could help mitigate future claims and potential losses.

As well as supporting underwriting, pricing and claims management, with this visual depiction of risk, insurance providers can easily identify areas where they can sell more business in large cities and automatically see where they have areas of high concentrations of Sums Insured for reinsurance calculations.

Insurance specific geospatial data visualisation tools are enabling the insurance market to utilise the increasing availability of ‘live’ and new data sources related to commercial property risks.  This is helping the market to price with pinpoint accuracy, manage their portfolio and get on the front foot when a weather event hits to limit their losses and protect policyholders.

 

[i] https://www.artemis.bm/news/commercial-property-insurance-price-rises-accelerate-globally-in-q3/

[ii] https://www.bdonline.co.uk/news/london-office-market-collapses-amid-pandemic-deloitte-survey-finds/5109149.article

[iii] https://www.ft.com/content/a15f17d3-dc86-4030-85fe-74a29eb1fafa

 

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Top 10

A GUIDE TO HMO PROPERTY INVESTMENT

Many experienced property investors are turning their attention to HMOs and achieving much higher rental yields as a result. Find out what a HMO is, why they are so popular and how to finance these properties.

 

What is an HMO?

A property is considered to be a house in multiple occupation (HMO) if at least 3 tenants live there forming more than 1 ‘household’ and share facilities with other tenants.

HMOs can have a range of tenants such as students, professionals or for social housing.

 

Why are HMOs such a popular investment?

There’s no doubt that HMO properties are very popular with landlords, the main reason for this is the fact that the rental yield is much higher than with a standard single household type let.

HMOs are let on a ‘per room’ basis i.e. the rent generally covers the use of 1 lockable bedroom and use of the shared facilities such as the kitchen and bathroom. This is in contrast to a single let whereby the rent covers the whole property.

As an HMO has scope for multiple tenants, if a tenant was to move out or to stop paying rent for any reason, there will likely be other tenants still making payments. For a landlord, this can help cash flow, especially if the property is mortgaged.

This isn’t the case with a single let, meaning there can be a greater risk of rental voids. As the demand for affordable housing grows, so does the popularity of HMO style investments to landlords.

 

Are there any drawbacks of HMO property investment?

Like most property investments, there can of course be drawbacks when investing in an HMO.

The main factor when considering investing in HMOs is the interest rate of the mortgage. As this is a more specialised area of investment you may need a special HMO mortgage product, this almost certainly means the interest rate will be higher than with a standard buy to let. As HMO rental income is higher compared to a buy to let, there is still a good profit to be made even if you are paying a higher interest rate.

As there are multiple tenants this can mean multiple tenancy agreements and a greater turnaround of people moving in and out. As such HMOs can be more time consuming to manage compared to a single let.

You must also consider the start-up costs when buying a property to let as an HMO. As each room is let individually, you must consider the fire regulations and things such as waste disposal and planning regulations.

 

What finance is available for HMO properties?

As HMO’s have become more popular the number of lenders offering HMO mortgages has increased, this means a greater choice of products. Interest rates and deposit requirements vary depending on both the property type and the applicant’s profile.

A seasoned landlord generally needs to put down a deposit of 25% whereas a first-time buyer would be expected to pay a 35% deposit. A low-value property or a property with a large number of bedrooms may require a larger deposit, even if you are an experienced landlord.

As with any mortgage, there are other factors to be taken into account such as credit history and personal earned income.

 

What should I look for in a potential property?

When considering properties, there are important factors that need to be taken into account to make sure your property investment is successful.

The location should be researched to make sure there is a good demand for HMO properties in the area, if it’s near a university, hospital or near a large town or city you would expect demand to be high, it is worth speaking to a local letting agent to confirm this.

If the area is already flooded with HMO properties the local authority may impose an Article 4 Restriction. This restriction means you cannot simply convert a property to an HMO, you must apply to the local authority for approval.

Another thing to look for is the size of the rooms, depending on the number of tenants you have, the bedrooms and shared areas have to be a certain minimum size. It is easier to buy a property that is already set up and running as an HMO although you may pay a premium for this.

 

What are the key considerations before moving forward?

HMO’s can certainly be a good investment but you should weigh up the pros and cons compared to other types of lets.

You should also compare buying the property in your personal name compared to buying through a limited company. A good accountant will be able to provide advice on the tax implications involved in each route.

Due to the work involved in running the property, it may be worth using a local letting agent to manage the property for you, they will look after the property and deal with tenants, although you will have to pay for the service.

When looking for a suitable mortgage it is worth speaking with a specialist HMO mortgage broker who fully understands the market. Again, there may be a fee to pay for the service but this will often save you money in the long run.

 

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