News

12th Oct

Unique inflation linked retail bond to deliver income and capital growth potential

 

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Unique inflation protected retail bond set to appeal to income investors comes with potential for long term capital growth with interest and redemption payments linked to RPI.

 

Heylo Housing Group Ltd is a residential property company with a long term investment strategy to provide affordable housing across the UK; the specialist in part buy - part rent residential properties, has announced the launch of a secured sterling bond via its wholly owned subsidiary Heylo Housing Secured Bond plc.

It is worth investors spending some time to fully understand this offer as the bonds have a structure that is unique in the sterling retail bond market in that over its ten year term the bonds will pay interest semi-annually at a real rate of interest of 1.625% per annum, adjusted to take account of changes in the level of the UK Retail Prices Index (RPI); protection from inflation is likely to prove attractive to those looking to protect their investments and any capital appreciation very welcome.

Interest will be paid semi-annually on 31st March and 30th September in each year starting 31st March 2019.

To understand the unusual structure, and potential appeal of the bond, it is worth briefly revisiting how things usually work.

If a company (borrower) wants to raise capital for expansion, or perhaps to pursue an acquisition it may issue a series of IOUs (bonds), which it sells to investors (lenders) at a face value that is known as ‘par’ - nominally £100.

It then rewards the lender with a series of interest payments (coupons) typically twice a year; the interest rate is normally set at the outset and is fixed for the duration of the loan. The bond can be bought or sold at any time, and market forces dictate whether it trades at, above or below its face value; however, when the loan is repaid it is at par.

It is the nature of its coupon payments and its nominal value that make this bond unique; put simply, the coupon and the face value of the bonds may go up if there is inflation during the ten year term, but there are safeguards in place to ensure that you do not receive less than the initial interest rate, and do not receive less than the face value of the bond.

In this way the Heylo bond appears to enhance the core features that have made retail bonds so popular with investors – regular income payments and the return of the initial loan in full at the end of the term agreed.

'the Heylo bond appears to enhance the core features that have made retail bonds so popular with investors'

Technically, the bonds are described as ‘limited’ in that that the adjusted nominal value and the income paid to investors, increases without limits during periods of inflation but is protected from decreases during periods of deflation.

Any adjustments to the income and redemption value are upward only, therefore on maturity the amount repayable to investors will be no less than the full value of the bonds, adjusted upwards if there has been inflation during the term of the bonds; in the vernacular, the bonds have potentially ‘unlimited upside’, but no ‘downside’ unless the borrower goes bust.

The bonds form part of Heylo Housing Secured Bond plc’s Euro Medium Term Note Programme and are expected to be listed on the Official List of the UK Listing Authority and to trade on the London Stock Exchange's Order Book for Fixed Income Securities (‘OFIS’) on 29th October 2018.

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  •   *   The bonds have a minimum initial subscription amount of £2,000 and are available in multiples of £100 thereafter.
  •   *   The offer period is now open and is expected to close at or before 15.30hrs on 22nd October 2018; the issuer retains the right to close the offer early.
  •   *   During the life of the bonds, investors may sell them at any time (within market hours and in normal market conditions) on the open market through their stockbroker.

 

  *    Best bought within an ISA or SIPP as the RPI element is treated as income.

Heylo’s business generates low volatility, RPI linked cash flow which allows it to offer inflation matching investments with an enhanced risk return profile; it may not be the easiest concept at first glance, but is likely to tick a lot of boxes for those targeting long term income and capital growth potential.

The homes are covered by fully repairing and insuring leases and bondholders have first ranking security over the properties.

 

In announcing the issue Chris Hewitt, Chief Financial Officer, said:

‘We’re delighted to announce the launch of our first retail eligible bond. Demand for affordable housing continues to intensify and we see a significant opportunity to grow our portfolio of occupied, part buy - part rent residential properties.

We believe that the low volatility, long term and inflation-linked cash flows generated by this attractive asset class, enable us to offer investors stable returns protected against inflation, with no deflation risk. We intend to deploy the proceeds of the bonds quickly and build on our strong track record of growing the portfolio and providing greater access to affordable home ownership.’

 

heylo table

The Authorised Offerors are:

 

  *   AJ Bell Securities Limited

  *   iDealing.com

   Limited NCL Capital Markets, a registered trading name of King & Shaxson Limited (Institutional investors only)

  *   Redmayne-Bentley LLP

   RIA Capital Markets Limited (Institutional investors only)

  *   Saga Personal Finance

   Selftrade

  *   Shareview

  *   Winterflood Securities Limited (Institutional investors only)

 

 

heylo strip

 

About the Heylo Group

 

The Heylo Group was established in 2014 with the dual ambition of providing greater access to affordable home ownership, at the same time as providing inflation-linked returns, secured against residential property, for investors seeking to mitigate inflation risk.

It now has a portfolio to over 1,650 part buy - part rent residential properties worth in excess of £300 million and has a further 1,300 properties already under contract.

Part buy - part rent (sometimes ‘shared ownership’) is a type of affordable home ownership which allows the purchaser to buy a share in a property, while paying rent on the non-purchased share.

In 2016, in response to the significant level of public demand, the government announced a £4.1 billion grant funding programme, the Shared Ownership and Affordable Homes Programme 2016 to 2021 to deliver a further 135,000 such homes, a four-fold increase in annual delivery.

The Heylo Group employs multiple routes to grow its portfolio, predominantly through its strong relationships with over 50 house builders acquiring the affordable homes made available as part of planning obligations.

It also enables customers registered with Help to Buy to purchase existing properties in the second-hand market on a part buy - part rent basis; the company has a significant pipeline of investment opportunities with national and regional house builders and the issuer will use the proceeds of the bonds to grow a portfolio of part buy - part rent residential properties, occupied on 125-year leases with contractual, long term, inflation-linked rents with annual, upwards only reviews.

 

Some Context

 

Statistics in support of its business are strong – 86% of people say they want to get on the housing ladder but just 25% of under-35s manage to do so.

2.5 million private renters want to be part-owners – Heylo customers can buy between 25% - 75% of a property, and can increase their share at any time; most would save money when compared with renting, and would benefit from any increase in the value of their property.

Heylo has extensive and active stakeholder relationships with a who’s who of UK house builders and 8 of the top 10 are repeat partners – inter alia, Bovis Homes, Redrow, Barratt Homes, Taylor Wimpey and Persimmon; it has previously issued inflation linked long dated institutional bonds.

In its 2015 manifesto the Conservative party pledged to deliver increased affordable home ownership including 120,000 Help to Buy and 200,000 starter homes; currently supply is far outstripped by demand with more than 200,000 pre-approved buyers on waiting lists.

 

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Further information and full supporting documentation see our Current Issues page

 

 

 

 

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