Property Bonds: What are they and how to invest - Certa Invest

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Property Bonds: What are they and how to invest

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What is a Property Bond?

Property bonds are sometimes called property investment bonds and they offer a new way for investors to profit from the early stages of a development project. They allow investors to offer their capital as a loan to the development company in exchange for a fixed rate of return over a set period of time.

In general terms, a property bond is a legally binding contract between a borrower (the property developer) and a lender (the investor) that details specific terms of how the investment can be used, how much interest is paid to the investor and when, how the investors capital is secured and when the initial investment is paid back. The terms of each bond differ depending on the bond issuer, just as a loan differs depending on the company offering the loan.

More and more property development companies are now issuing bonds to raise the required capital needed to start a development project. Some companies use bonds to raise the full amount for the entire development cost but usually, responsible developers will diversify their borrowing across various financial instruments and platforms, only using bonds to fund a small part of the project.

What a property bond isn’t!

Property Bonds vs Mortgage Bonds

A property bond is not a mortgage bond! Plain and simple!

Some think that the words ‘mortgage’ and ‘property’ are interconnected in this case, but that couldn’t be further from the truth. It may seem a little confusing at first but rest assured, after I explain the differences you’ll understand exactly how one is so different from the other.

Where property bonds are secured against physical assets, like a property development or an area of land with a specific value, mortgage bonds are secured against a mortgage or a pool of mortgages. So essentially, a mortgage bond is a loan against a loan.

Mortgage bonds were the primary reason for the property bubble that burst in 2007. Investment bankers would take a bundle of mortgages and wrap them in an entity called a CDO (collateralised debt obligation). They would then take out a loan against the CDO and offer more mortgages to people who couldn’t afford them. They would then put those CDO’s into another CDO and take out another loan on top of that, repeating the process and increasing the debt over and over again.

Eventually, the CDO’s, filled with thousands and thousands of bad mortgages, started to fail when home-owners couldn’t afford to repay their loans, so hundreds of thousands of people lost their properties and the taxpayer had to foot the bill for the bank’s bad debt.

Property bonds are not secured against bad loans! They are secured against a physical asset with a current value that can be legally claimed by the investor in the event that the bond issuer defaults on their payments or go out of business.

Property Bonds vs Holiday Property Bonds

Sometimes, people can confuse property bonds with holiday bonds, or timeshare.

A property bond is a financial investment vehicle that pays a specific percentage of income, whereas holiday bonds don’t offer any financial return. Instead, holiday bonds offer investors the option to use one or many holiday homes throughout the year for free, providing no other investor into the holiday bond is there at the same time you want to use it.

How do Property Bonds work?

Example:

Great George Street development Ltd have received planning permission for a large scale property development in a prime city centre location and are looking to raise funds for the project. Since banks usually don’t fund entire property development projects, the company decided to find alternate methods.

They already have the developers own funds invested in the land and so decide to issue a bond that will raise £2m, enough to fund the first stage of the project. In order to secure investors funds against loss, they offer the land, currently valued at near £5m, as collateral via a legal charge.

property investment bonds

What is a legal charge on a property?

A legal charge adds a lot of security to a bond. Its inclusion in any bond offering assures that, in the event of a default, the development company’s assets will be sold off in order to pay back the investors capital. So for example, when you take out a mortgage on your house, the lender will have a legal charge against your property should you no longer be able to pay it. The lender will then legally take over ownership of your house and sell it to get back their funds.

This is usually how property bonds are secured. The bond issuer that the development company use will hold the rights to seize the development and use it to pay back investors should the development company default on payments. Sometimes the developer will provide other physical assets as collateral as opposed to the actual project, but as long as the value of the legal charge is higher than the amount of debt the developer has incurred, the investors capital is safe.

What if the property value is less than the debt?

In order for you to lose a portion or all of your capital investment, the development company who issued the bond would have to go bust and the legal charge value not cover the investors’ funds. This is a common cause of concern for investors that are considering property bonds but are worried about security.

A well-structured property bond will always include counter-measures to make sure this never happens. For example, Great George Street development Ltd has issued a property bond through Investably to finance the initial stage of the development. In order to make sure that the legal charge in place is always valued higher than the net debt incurred, they have an independent surveyor re-evaluate the site accordingly on a monthly basis to ensure that they never borrow more than 85% of the development value.

The higher the development is valued, the more funds they can borrow from the bank and the more funds the company can borrow, the more they can develop. The more they can develop, the higher the value, and so forth.

Why are Property Bonds becoming so popular?

Property development 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 to gain a healthy income on their capital, and property bonds are proving an increasingly popular solution.

Below are some of the main features that are making property bonds popular among financial investors of all categories.

Fixed Interest rates

Any interest earned on property bonds is usually set at a fixed annual rate and paid either as regular income payments or as a net capital gain at the end of the investment period (the point of maturity). The uncertainty of Brexit makes this a very interesting investment opportunity because, in the event of an economic slowdown, interest rates paid on bonds would remain the same.

Liquidity

You can sometimes choose to trade your bond on a verified stock exchange, providing the bond is listen on one.

For example, the Ingard property bond, available with Certa Invest, is listed on an HMRC approved EU stock exchange where you can trade it any time you like.

Early Exit Options

Property bonds sometimes have an ‘exit’ clause whereby the bondholder (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 6% bondholder 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.

Asset-backed

As mentioned earlier, one of the reasons property bonds are attracting investors is because they are secured against physical assets. The most secure bonds from the most responsible developers take measures to make sure their investors capital is as secure as it bans possibly be.

Hassle-free

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, sit back and enjoy their income returns.

Are Property Bond investments right for me?

Property bonds can generate some of the best returns available at relatively low risk. If you’re looking for a long-term investment option that pays a sizeable sum of interest with security in place to protect your capital or are looking to earn a regular income on your investment, then yes, property bonds should be a fantastic solution for you.

However, if you’re looking for high gains over a short period of time, without the low-risk 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.

Ready to Invest?

We’ve got some great opportunities at Certa Invest, but in order to invest in property bonds, you first need to meet one of the following three criteria:

High Net Worth Individual

A certified high net worth individual, as defined in Article 48 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended (the Order), being a person who has signed, not more than 12 months prior to the date of this Information Memorandum, a statement complying with Part I of Schedule 5 to the Order to the effect that in the financial year proceeding the date of the statement, he or she has either;

  • an annual gross income to the value of £100,000 or more, or
  • net assets (subject to exclusions of his or her principal home and mortgage thereon, and certain life insurances and pension products specified in the Order) to the value of £250,000 or more.

Sophisticated Investor

Any certified sophisticated investor, as defined in Article 50 of the Order, being a person who:

  • has been a member of a network or syndicate of business angels for at least the 6 months prior to the date on which the above statement was signed (Statement Date), or
  • has made more than one investment in an unlisted company in the two years prior to the Statement Date, or
  • is working, or has worked in the two years prior to the Statement Date, in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises; or
  • is currently, or has been in the two years prior to the Statement Date, a director of a company with an annual turnover of at least £1 million.

Self-certified Sophisticated Investor

an individual who has signed a certificate in a prescribed form in the 12 months prior to receiving the Information Memorandum confirming that they will not invest more than 10% of their net assets in non-readily realisable securities.

 

Property Investment Bond

We currently have a property bonds investment opportunity for high net worth and sophisticated investors only. Some of the main details are as follows…

  • High annual assured returns
  • Quarterly payments
  • Compounding interest option
  • Asset-backed via a legal charge
  • No stamp duty payable
  • Completely hassle-free investment
  • All charges covered by the developer
  • Minimum £10,000 investment

Contact us now on 0151 958 1200 or email us at enquiries@certainvest.co.uk to receive a free brochure with details.

Alternatively, see more details on our Property Bond Investment page.

*If you do not meet the required criteria to invest, as listed earlier in this article, you cannot take part in this opportunity. We do have other investment opportunities available in student, off-plan, care home and buy-to-let.