For pension funds, the possibility of investing in residential housing is obviously an attractive one, made the more so by the Government's abolition of tax credits on dividends. Though housing has come nowhere near enjoying the post-War return on equities, it is on the whole less volatile and over the long term pretty much inflation proofed.
Warburg is backing the security with what are called shared appreciation mortgages, or SAMs. In a SAM, the house owner gives up a proportion of any appreciation in the value of the property in return for a lower interest rate on the loan. Obviously this is not something anyone would want to do given the choice, but it does seem to hold attractions to certain types of borrower, especially those with negative equity and elderly "asset rich but cash poor" property owners.
Bank of Scotland is the only mortgage provider offering SAMs at present, and the take up in relation to the housing market as a whole is tiny. But properly marketed through intermediaries, SAMs could become a not insignificant part of the mortgage market. The really interesting question is whether, if this does prove a popular investment with institutional investors, it might in itself exert extra upward pressure on the housing market. Theoretically it should do, for it represents a previously untapped flow of funds into the sector. However, it would take a veritable explosion in this type of security to make much impact on a trillion pound market place. Warburg's initial offering is only pounds 130m worth.Reuse content