The words low interest rates written using scrabble letters

Very Low Interest Rates: Could Real Estate be the Answer?


It is a striking news: on the 16th August 2016 and for the first time, Raiffeisenbank Gmund cooperative bank, in Germany, announced that it will start to charge deposits in excess of 100,000€. Could this be the beginning of a temptation from European banks to pass on negative rates of the ECB?

Billions of pounds are held in savings accounts paying such abysmal rates of interest that in real terms the holders are losing money and purchasing power on the deal. The Individual Savings Accounts (ISA) and standard saving accounts have seen their interest rates decrease over the years, and savers are barely able to protect the real value of their savings from the effects of inflation and tax. To do so, according to BBC a basic taxpayer would need to receive interest of at least 2.5 per cent.

While the UK decided to part ways with the European Union, these low interest rates threaten to last in the coming years. In this environment, what will be the next investment opportunities for your savings?

Graph showing how ISA rates have fallen in recent years


In its objective to boost consumption, investment and above all growth, the European Central Bank (ECB) lowered its interest rates since 2008. They went from 4% to …. 0% today. Similarly, the Bank of England lowered its rates from 5% in 2008, to 0.25% just a few weeks ago.

The cash ISA, one of the most popular investment option in the UK in 2015, saw its average rates drop, slowly but surely, in recent years. From 2.5% in 2012, they decreased to less than 1% in 2016. On top of that, in July 2016, the UK inflation rate rose to 0.6%, as pricier imports due to the fall in the exchange rate after the Brexit vote took its part of responsibility.

The priority for many people has become to outpace inflation. The Personal Savings Allowance, introduced in April 2016, has become a more viable option than using an ISA. As a result, according to the British Banking Association, in the six months to February this year, more than £1.7 billion was pulled out of ISAs, contrasting to the £4.4 billion that was invested into ISAs during the same period the previous year. Today, standard saving accounts are seeing a surge in demand as the Personal Savings Allowance provides instant access.  The problem goes beyond taxes and a decrease in interest rates though. It is the security of these investments that is at stake. The IMF points to European banks, which are thought to have about 900€ billion of “suspicious ” debt, adding to the risk of global economic contagion in case of a problem. Yet, other sectors of the economy benefit from these lower rates, and one of them is real estate.


Graph showing how property prices have risen in the Bedford Area over the past 30 years

A growing number of investment professionals are finding alternatives to stock markets and the traditional banking system, to secure a portion of their capital through real estate.

Homes of England is one of these companies that has acted upon this situation since 2013, benefiting from the legal change about Permitted Development rights to respond to both the housing needs in the UK and to the need for strong and efficient investment opportunities.

Today, Homes of England is the leader in the conversion of office buildings into flats on the outskirts of London. The company operates in a dozen cities in the UK and has consolidated substantial profits since its creation. Instead of engaging in buy-to-let, they engage in build-to-let as they believe in adding value to their buildings in order to create a healthy, diversified and secured portfolio able to resist market drops. The company converts office buildings into residential buildings, for which demand is rising in the commuter belt, in cities located between 30 to 45 minutes away from London. It now has a real estate portfolio whose market value will be £128 million once completed.

Following the rising demand from experienced investors to take part into their projects, the company has decided to open up to alternative financing to the sole banks. This company partners with experienced investors that benefit passively from their expertise in project development. While actively investing in real estate projects requires time and significant amounts of funds, in this case investing passively is much less capital intensive.

Group picture of the staff team at property firm Homes of England

If the expertise of Homes of England lies in its ability to locate and select schemes with high development potential, the company also works to fund its real estate projects. The company finances 70% of its activities through banks, the rest is financed by its own funds. As mentioned previously, some experienced investors also invested for a fixed return.

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