Society

In this week's thought exercise, we turn our attention to the ongoing tussle between the freehold investment community and the government over the ground rent caps introduced by the Leasehold and Freehold Reform Act 2024. This is hitting the headlines once again, 18 months after it gained its much-needed Royal Assent, as people ponder how much of a financial unwind may actually be needed in the wake of these changes. Rather than defending the morally indefensible in a concerted effort to provide a balanced judgment, the spinoff topic we want to focus on is much closer to home: the notion that “what’s good for society is usually good for investors”.

And what do we mean by that?

We mean avoiding legitimacy risk is often prudent. That phrase isn’t about moralising investment decisions or pretending that markets exist to deliver social outcomes; they don’t, it’s led by returns first and foremost, let's all be honest here. However, it’s about recognising that markets, from an academic perspective (one we like to take to try to make sense of a fractious world), are embedded in society, not separate from it. They operate within political systems, legal frameworks, and public norms. When an asset class such as leasehold relies on friction, resentment, or power imbalances to generate returns, it is implicitly betting that those conditions will persist indefinitely, which, if you are a believer in society, is a risky bet.

For years, the direction of travel was obvious. Residential ground rents, particularly those embedded in leasehold housing, had become politically toxic. Campaigners were vocal, leaseholders were organised, and successive governments made clear that reform was not a question of if, but when. The political risk was neither hidden nor obscure, and it was not hard to model. It was sitting in plain sight. Leaseholders paid for an asset they did not meaningfully control, often in return for no service at all, under terms that could escalate over time and depress the value of their homes. It was an income stream that added little economic value while generating a growing sense of unfairness. That imbalance was always going to attract attention, and eventually, intervention.

This is where, in hindsight, institutional investors made their mistake. Ground rents were considered low risk because they were legally enforceable and historically stable. But legality and durability are not the same thing. Durability is reliant on perceived legitimacy in wider society. When an investment depends on an arrangement that large numbers of people experience as unjust, it carries a different kind of risk. Not market risk, but legitimacy risk. As Kennedy said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” But unfortunately, there is a narrowing of perception when it comes to investment risk, and “perception-based futurism” can often be cast aside as ethereal or guesswork when people want products that are solely predictable, long-dated, and largely insulated from conventional economic cycles. But that predictability, without the bigger-picture and perhaps slightly ethereal thinking, rests on a brittle foundation, because with the exit of the guesswork, you're also tossing out the common sense. These incomes existed not because of innovation or productivity, the cornerstones of capitalism, but because of contractual structures that extracted value from people who often had no realistic ability to renegotiate or escape them.

How long was that going to last in a world where public perception alone drives modern political power structures? One of the few positive byproducts of the attention economy is that wrongdoing is often dragged kicking and screaming into the light. Some of the UK’s largest asset managers have publicly acknowledged that the reforms will have a tangible impact on their balance sheets, and these are not marginal adjustments. They are material write-downs in the hundreds of millions, driven not by a market crash, a liquidity shock, or a failure of execution, but by social and political change that had been signposted for years and years, on massive signs, those huge ones you sometimes see on the side of highways from three miles away. And ignored.

So, how does our offering fit into this perhaps slightly virtuous lecture on the value of moral hindsight?  Well, the Innovative Finance Individual Savings Account (IFISA) plays a valuable role in society; it’s returns-driven, but those returns aren’t generated through an obviously harmful act. Introduced to widen the scope of ISAs, the IFISA allows individuals to invest in private credit in a tax-efficient way. This helps channel private savings directly into productive parts of the economy, particularly small and medium-sized enterprises (SMEs), which are vital for job creation and innovation.

From a social perspective, the IFISA promotes financial inclusion and diversification. It gives investors access to alternative investments that were previously dominated by banks and institutional investors. By offering tax-free interest, it incentivises long-term saving and improves financial literacy, as investors are encouraged to understand risk, return, and the real economy behind their investments. And at the end of all of that, the legitimacy is that it provides much-needed housing; the end outcome is a net positive, so you're not running the risk of society deciding one day that this needs unravelling for the greater good. Laws are not static rules carved in stone; they are living instruments that must adapt as society evolves. This is why the UK government continues to support the Innovative Finance ISA (IFISA) as part of its latest strategy to encourage investment, diversify savings options, and direct capital into British businesses.

Invest & Fund has returned over £330 million of capital and interest to lenders with zero losses, showing the rigour that governs our business. To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com

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