Property bonds are corporate bonds (sometimes known as loan notes) that property businesses or developers issue to investors.
Our free guide, An Introduction to Property Bonds, goes through the basics of property bonds and how they work. It’s available for download here.
Bonds are often issued for a set period of time, usually two to five years, with a predetermined rate of return that is paid to the investor quarterly, yearly, or at maturity.
Investors obtain a bond certificate in exchange for their money, and they usually get security over the underlying asset in the form of a first or second ranking legal charge.
A corporation may issue bonds to raise funds, and your money will be used to lend money to property companies or development projects if you invest. Property bonds are typically issued by specialized property lending organizations, property developers, or construction firms to fund real estate transactions or development projects.
After the bonds are issued and loans are provided, they are secured by a first or second legal charge* against the property or land. These charges provide investors with collateral and security and are recorded on the property title at the Land Registry Office. An Independent Security Trustee** may be appointed to provide an extra layer of security in some cases.
Both the interest rate and the period are usually fixed. The lender (investor) will be paid a rate of interest based on the terms of the agreement (usually 2 to 5 years), after which the bond matures and the initial loan amount is refunded.
Interest payments (also known as coupon payments) are made on a regular basis. Some fixed-term bonds pay out monthly or quarterly, while others pay out annually or when the bond matures.
The lower the overall target rate – usually around 5% per year – the shorter the investment term and the more frequent the interest payments are. Property bonds with a longer period of 4 to 5 years may have target rates of around 7%.
Be wary of high rates of roughly 10% or more per year. The higher the rate, the greater the overall risk, and there must be a balance between acceptable risk and acceptable rewards in any investment.