It has been reported that there is circa £213bn secured against property in the UK of which £153bn has to be refinanced by the end of year 2016 (source Financial Times 5th June 2012). New financial products are being introduced into this sector of the debt finance market.
Many UK banks are locked into rebuilding their balance sheets following recent financial market turmoil. This appears to be affecting available finance for the UK mortgage market. However, it is apparent that the gap left by banks is being addressed by institutional finance from pension funds, insurance companies and specialist investment funds. These investors are looking to generate a premium on cash investment like products compared to the current low yield on UK gilts.
Professional investors look more closely at the quality and covenant of the underlying borrowers and/or tenants. The mortgage bonds are structured to match the liability profile of the lending institution and in effect create a sound base for funding long term debt compared to banks who typically fund their mortgage liabilities with retail deposits with on demand withdrawals and the inter-bank market with periodic roll over’s.
A UK approved investment trusts could be used to facilitate mortgage finance. The Trust concerned would raise money from retail and institutional inventors. The shares could be listed on the UK stock exchange. Under the Interest Streaming Regulations an investment trust is allowed to make certain distributions as interest distributions instead of normal dividend distributions. This enables UK pension funds, ISAs and other tax exempt investors to receive the interest from the underlying investment trust without deduction of UK withholding tax.
An approved UK investment trust could also be used for infrastructure finance and another article will be published on this topic.