What is a Property Bond?
A property bond offers a new way for investors to benefit from development projects by offering their investment as a loan to the development company. In general terms, it is a legally binding contract between a borrower (the property developer) and a lender (the investor) that details specific terms of how the loan is to be used, how much interest is paid and when, how the bond is secured and when the investment is paid back.
The terms of each bond differ depending on the issuer, just as a loan differs depending on the company offering the loan. Corporations and governments often issue bonds when they need to raise cash. Property developers are now doing this to fund part of their development projects.
How do Property Bonds work?
The property developer will issue a bond, or a series of bonds, using a verified bond issuer that total the amount needed to finance a portion of the development.
Investors who are attracted by the interest rates and securities of the investment will then buy into the bond through the issuer’s chosen broker. They’ll begin receiving interest payments at the times specified in the agreement for the entire duration.
At the end of the specified borrowing period, the bond will ‘mature’, meaning that the full initial investment will then be paid back to the investor and the agreement is fulfilled.
‘Property Developer Co’ need to raise £2million to fund a new development project. They issue a bond via a verified property bond issuer that details the following:
- 5% Fixed interest per annum
- Interest paid directly to investor twice annually
- Bond maturity period: 5 years
- 100% asset-backed with development assets
According to the details of the bond above, the investor stands to make an interest rate of 5% per annum, paid in two instalments each year, for a period of 5 years.
So, for an investment of £100,000, the investor will receive two instalments of £2,500 each year, totalling £25,000 of interest over the 5-year term of the bond.
After the 5-year term, the bond ‘matures’, meaning the investor will receive their initial £100,000, concluding the agreement.
The details also state that the bond is 100% asset-backed with the development so if the property developer were, for some unlikely reason, to default on payments, the bond issuer would seize control of the development and sell it to pay back it’s investors.
Why are Property Bonds becoming so popular?
Property investment remains one of the most lucrative investment options available. However, stalling Brexit negotiations have caused a decline in domestic property investment due to uncertainty over the future of the UK economy.
Concurrently, 2016 saw foreign investment in the UK rise to £145.6 billion as overseas investors take advantage of the weak pound by snapping up UK real estate, hiring expensive property management agencies to manage their investments in their absence.
This has forced some investors to look at alternative opportunities, and property bonds are proving a great way for investors to grow their capital at relatively low risk (that being said, as with any investment there is an element of risk involved and you should seek advice from a financial advisor first).
Below are some of the main features that are making property bonds more popular among investors.
Fixed Interest rates
One element of property bonds that spike the attention of investors are the high fixed interest rates available. When you buy into a property bond, you are bound by the interest rate agreed between you and the developer, regardless of any fluctuations in economic interest rates.
So, if interest rates go down, the interest rate on your bond remains the same throughout the whole term of your agreement, and you carry on generating a healthy income.
Alternatively, if interest rates do go down, giving your bond a higher interest rate than the market provides, you can often choose to trade your bond on a verified stock exchange.
For example, the Investably bond, available with Certa Invest, is listed on an HMRC approved EU stock exchange where you can trade it any time you wish.
Early Exit Options
Property bonds sometimes have an ‘exit’ clause whereby the bond holder (you, the investor) can choose to end their agreement with the developer and receive their initial investment early. In this case, the investor will of course have to give up any remaining interest that’s due to them.
So, using the example from earlier, a 5% bond holder who chooses to exit at year 3 will forego the interest for the remaining 2-years of the bond period. The investor will then receive their initial investment, happy with the 3 years of interest they’ve already gained.
One of the reasons they carry less risk than a standard property investment is because bonds are secured against physical assets that can be sold off to repay investors should the borrower default on the agreement. These assets may be the development itself or a separate site that usually totals the value of the entire loan, or a combination of both.
You should also consider that interest rates often reflect the security of the bond. For example, sometimes a property developer will issue two bonds: one that pays 5% interest and one that pays 10% interest.
In the event of a default by the developer, the 5% bond will usually have first rights over any pay-outs from cash generated by selling the assets that the loan is secured against. This is called a first legal charge.
What’s left will be used to pay the 10% bond investors, known as a second legal charge.
Property investment isn’t usually as simple as buying a house and selling it for more than you bought it for. You have to think about insurance payments, council tax, stamp duty, maintenance fees, tenancy issues, etc.
This can cause a massive headache not only for overseas investors who are looking to capitalise on the UK property market, but also for domestic investors looking to generate an income but know little about what’s involved in property development.
With property bonds, investors aren’t involved in the day-to-day hassles that come with development projects. They simply invest their cash and start earning income.
Are Property Investment Bonds the right investment for me?
If you’re looking for a long-term investment option that pays a sizeable sum of interest with relatively low risk involved, then yes, property bonds are a great fit for you.
However, if you’re looking for high gains over a short period of time, without the de-risked benefits of a bond, a standard off-plan property investment may be the right option. As always. we at Certa Invest recommend seeking financial advice before entering into any type of investment.
To find out what property investment bond opportunities are available at this time, please contact us and one of our investment consultants will be happy to help. Furthermore, if you have any questions about property bonds and would like more information, get in touch via our online chat box or contact form.