While the UK Tier 1 Investor visa (UKT1-i) allows for investment in both equity and bonds (corporate and gilts), the overwhelming majority of applicants opt for fixed income rather than share capital. Two program experts explain why.
“Prior to the 2014 hike in investment requirements from £1 to £2 million, 95% of investors chose government bonds,” says Farzin Yazdi, Head of Investor Visa at Shard Capital. “After the doubling, allocation preferences shifted, and we’re now seeing roughly 70% of investment going into bonds – typically a combination of gilts and corporate – with the remainder in equities”.
Yazdi emphasizes that part of the reason fixed income is the preferred asset class for most investors is the regulatory requirement to not advise non-sophisticated investors to acquire publicly traded shares, a security perceived as relatively high-risk.
“Many main applicants are students who have been gifted the £2 million from their parents. These individuals typically don’t qualify for share investment due to a lack of experience, knowledge, and wealth. We find that very few of our applicants meet the FCA’s (Financial Conduct Authority’s) suitability and appropriateness tests,” adds Yazdi.
0% net return on bonds
Rupert Gather, Executive Chairman of Invest UK, says that in his experience, nine out of ten applicants prefer to acquire bonds rather than shares in publicly listed companies, but recognizes that this proportion was even greater prior to the doubling of the investment requirement and that investors’ risk tolerance increased alongside the doubling in opportunity cost associated with fixed income investment.
“Fixed income is always the preferred structure because of an aversion to volatility. This is partly a ‘hangover’ from the earlier requirement to ‘top up’ if capital dropped below £1m (since removed) […] The increase to £2 million has, I believe, focused investors’ minds on the quality of their investment, and most importantly has reduced the appeal of UK Government Gilts as a potential investment option,” writes Gather in an email
In real terms, he explains, bond investors typically lose money.
“Regardless of how it is structured or who the manager is, any yield from the Gilts will be taken up in management fees leading to a 0% net return for investors, or an actual loss if inflation is taken into account,” laments Gather.
“The asset management industry has failed to respond to the challenge that this presents, in particular, the significant real-terms cost implied in holding Gilts (even if capital is nominally protected), the risks and low yields of corporate bond and the volatility of equities portfolios,” adds Gather.
Applicants can still invest in the property market, just not directly
Another change that took place in 2014 was the disqualification of real estate as an investment option. UKT1i-rules previously permitted the allocation of 25% of total capital to property but prohibited direct investment in the sector on grounds that it could inflate property prices and housing speculation.
“International investors, particularly Chinese, have long seen UK property as a desirable investment target. Property is a readily understood asset class and is perceived as offering high levels of asset protection, strong yields and potential for capital growth,” writes Gather, and points out that while applicants cannot qualify for the visa through direct investment in property, they can still gain exposure to the sector indirectly.
“[…] investment into construction and related capital uses provide substantial opportunities for investors to achieve their objectives, provided this ‘investment’ is in the form of a loan (i.e. does not participate in the equity of any given project). InvestUK has studied the equivalent schemes in the USA ‘EB-5’ and Irish ‘Stamp 4’ and both invest in funding property construction projects in this way, and in projects that are considered socially desirable to qualify for applicants to qualify for Permanent Residence”.
Image via: By kloniwotski (Flickr) [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons