What is a Property Bond?
Property bonds, otherwise known as property investment bonds are a means for developers to raise money from investors in the form of a loan. The intention is to fund the projects during the earlier stages of development.
Generally, the bond is a legally binding agreement between the investor and the property developer. The investors’ capital is offered as a loan to the development company and the contract between them explains how the investment will be used, the interest payable for the investment, how the capital will be secured and when the investment will be repaid to the investor.
From an investors’ perspective, the appeal is often the higher-rate fixed annual interest, backed by a certificate and security over the property they are helping to fund.
How do Property Bonds Work?
Any company may issue bonds as means of raising finance. With property bonds, these are usually issued by developers, or construction companies for the purposes of funding property development.
To protect the investors’ capital against loss, once the bonds are issued they are secured against the property, or land with a legal charge. These charges offer collateral and security for investors and are registered on the property title at the Land Registry Office.
Depending on the terms of the agreement (usually 2-5 year) the lender (investor) will be paid a rate of interest after which point the bond matures and the loan amount is returned.
What is a charge on a property?
When a legal charge is applied to a property bond it brings with it a great deal of security. It ensures that the investors’ capital will be repaid even if there is a default and the development company can not fulfil their obligations, as expected. This is done by securing the loan against assets that will be sold to return the investors’ capital, in the event of the worst case coming to fruition. Where there is a legal charge within the bond, investors can feel more comfortable investing their money, given this degree of security provided.
Usually, the firm that issues the bond will have the right to seize the development, or whatever assets have been pledged as collateral to ensure the investors’ capital is safe.
What if the development company becomes insolvent?
Any property bond worth investing in will structure the asset-to-liability ratio so that the debt is covered. This means that in the event of a default from the development company, the investors’ capital will be repaid via sale of assets that were used as collateral. These measures ensure that your capital is protected, once invested.
Any investor should always check the capital adequacy and or financial accounts before investing
Why Wouldn’t Property Developers Simply Borrow from the Bank?
Most developers do borrow from banks and other finance providers, however, in the case of large development projects, banks may not cover the full amount required.
If traditional finance fills 50-75% of the required investment, there is still a significant gap to fill and this is where property bonds can be a useful tool for raising the remaining capital which is needed.
Using private equity for development projects gives property firms access to greater funds, meaning they can take on ambitious projects and ultimately make more money.
What makes a property bond a desirable investment?
There are several factors that may make property bonds attractive to investors. Some of these factors may include the following:
Fixed interest rates
Property bonds usually have fixed rates of annual interest over a fixed term. The amounts repaid are usually regular income payments, or in one lump-sum at the end of the agreed term for investment.
Asset-backed Investment
Investors often look for options where their capital is protected: investments secured against property and land are considered to be safer than not having a secured asset.
Flexible Exit Options
Typically, early exit options are available for investors within property bond agreements. This early exit ‘clause’ allows the investor to end the agreement before it’s due date for termination, allowing the investor to gain access to their capital earlier. However, taking advantage of this early exit clause will often mean that the investor will have to forgo any due interest payments that were due.
The Convenience Factor
Investing into property bonds can be a far simpler and hassle-free process, when compared with a standard investment into a property.
When you look to invest into a property with the intention of acquiring a profit, there is often many things that need to be considered before you approach the UK property market. Some of the factors that you would typically have to address when investing directly into the property market would be council tax, involving estate agents and tenancy challenges, stamp duty, insurance repayments, maintenance fees, etc.
Property bonds offer a simpler option for investors, akin with stocks and shares, but offering lower volatility and more security when asset backed. They allow investors to simply invest their capital and take a more hands-off approach to acquiring profits.
Are Property Bonds Safe?
The main risk factor with investing in property bonds is the history, credibility and terms offered by any particular provider.
You need to source a property bond offered by a reputable company with a demonstrable track record of paying investors promptly, delivering successful projects on budget, and who, ideally, offer a legal charge for security.
As with any investment you should never invest in something you do not understand, and always do your homework before investing. It is worth remembering these investments are targeted at a particular section of experienced investors for a reason.
Advantages
- Less day-to-day volatility and risk than stocks and shares, if secured
- They may offer a relative certainty of a payment twice a year and a fixed sum at maturity;
- Interest payments can be significantly higher than traditional dividend payments;
- They often come with asset-backed security;
- The investor has a legal right to claim against the physical security offered by the lender, should there be any payment default;
- Offers diversification for multi-asset investors.
Disadvantages
- You cannot redeem your investment before the agreed term;
- The onus is on you to do your homework first before investing
- Currently not regulated by the Financial Conduct Authority (FCA) or Financial Services Compensation Scheme (FSCS)
- The issuers of bonds are often, but not always, smaller private companies so may pose a greater risk
Are property bonds right for you?
If you are looking for a way to generate passive income from your investment, that pays regular and attractive rates of interest this can be a good option for you. If you are seeking an investment that protects your capital, by securing it against assets, property bonds may be an ideal opportunity for you.
Property bonds can be a very attractive investment opportunity for any prospective high net worth individual, sophisticated investor, self-certified investor.
We recommend that you should always seek professional financial advice before investing into any type of investment.
How to invest
You will need to fall within one of the following three categories to become eligible:
High net worth individual
You will need to confirm that you either:
• have a net income that exceeds £100K or;
• have net assets that exceed that value of £250K, not including any pension fund assets and private residence.
Certified Sophisticated Investor
You will need to confirm that have been one of the following:
• A director of a limited company that has a turnover of at least £1m within the last two years;
• You have made more than a single investment in an unlisted limited company within the last two years;
• A member of a network, or syndicate of business angels for a minimum of six months;
• Have worked in the past two years in a professional capacity in the private equity sector, or in the provision of finance for SMEs.
Self-certified Sophisticated Investor
You will need to confirm that you are an individual that has signed a certificate in the last 12 months confirming that you will not invest more than 10% of your net assets in non-readily realisable securities.
