Are Property Bonds the future of property investing?

Property bonds are flexible, short term and secured, with amazing fixed interest rate returns – But are property bonds for you?

In these uneasy times, investors are pursuing a safe place to invest their money. Here in the UK property investment has consistently been one of the go-to areas for reliable returns, with the buy-to-let option benefiting investors well.

However, with recent modifications in government legislation and taxation, together with the ever-present hassles of tenants, maintenance and managing agent fees, many owners are struggling to make good returns from buy-to-lets.

An increasingly widespread and more intelligent, alternative method of property investment is an Asset-Backed Property Bond, also known as a Property Loan Note.

In its most straightforward form, a Property Bond is a loan from you, as an investor, to a developer allowing them to acquire and develop projects. 

Each investor acts as a bank, with a secured loan to the developer, which is why they are usually referred to as loan notes. Investors enjoy a taste of the profits made by experienced property developers, without the challenge of creating a portfolio or the hassle of tenants and ownership.

Private investors loan funds to the developer for an agreed fixed term at a decided fixed rate of return – typically 10 – 12% per annum. You can enjoy an income option, where interest is paid at predetermined gaps or a capital growth option with interest plus bonus paid at maturity.

To cover the investors’ capital against loss, once the bonds are issued they are secured against the property or land with a legal charge which allows a lender to protect the money they have lent to the developer. These Legal charges deliver collateral and security for investors and are registered on the property title at the Land Registry Office. A better Property Bond will also have an FCA regulated Security Trustee to watch over the developer’s property assets providing it is always sufficient to compensate in a default situation.

Benefits to investors?

• Fixed-term property investment – typically 2/3 years with a clearly defined exit strategy

• Pre-determined date of maturity

• Constant high level of returns – generally 10-12% per annum

• A preference of income or capital growth deviations.

• Protection of a first charge on the assets.

• A far more straightforward and hassle-free process

• No concerns about credit rating, council tax, stamp duty, insurance repayments, maintenance fees, tenancy challenges, etc.

Just invest your money and get your profit without the sophistication of building, selling and letting a property.

Why do developers use Property Bonds?

Conventional lenders make developers jump through a lot of rounds so it can take years to approve a loan; in a competitive condition, this can usually mean losing a deal. They also set lending limitations and need around 30%-35% deposit, restricting developers from executing multiple projects. Property Bonds are 100% financing which is virtually impossible to find elsewhere.

This form of finance is more adaptable for developers and allows them to respond when appealing properties come to market and to run consecutive projects to maximize profits. It can also position the developer as a cash purchaser, able to bargain and purchase at less than market price.

What are the best kinds of projects funded by Property Bond?

Property Bonds can apply to various kinds of property development and can be used to raise funds in various models, for example, land purchase, new build, luxury development and conversion of commercial buildings to residential. You need to carry out your due diligence but one area of development that is undoubted – right time, right place – is the conversion of vacant office premises to reasonable apartments to help ease the current UK affordable housing deficiency.

Due to work from home phenomenon fuelled by Covid, the need for offices is likely to decline, so property owners will be looking for new uses for their buildings. Or in some cases, they will want to sell on to developers. Modifications to planning laws mean a developer can now get permission to transform from commercial to residential without undue planning delays. 

The transformation from office to residential is the best appealing option, particularly if the transformation is for affordable housing.

A developer with a strong track record in this type of conversion, with all the associated experience, contacts and purchasing power, can economically turn a project round in less than 12 months and also manage consecutive developments. This implies they can complete numerous projects in the Property Bond timeframe, maximising returns for investors.

Are Property Bonds a Safe Investment?

It’s necessary to note that Property Bonds are a non-regulated product and as such represent a high-risk investment when compared to regular savings. Property bonds are not right for everyone. While the possible reward is high, investing in developments comes with some risk. Nevertheless, such risks can be mitigated by choosing a Property Bond that is asset-backed.

One of the main aspects to consider when investing in Property Bonds is the history, credibility and terms proposed by any particular provider. You need to source a Property Bond offered by a reputed company with a provable track record of paying investors promptly, delivering successful projects on time and budget, and who offer a legal charge for security.

Property Bonds are not unknown and many have produced handsome profits to Investors. If you want a hassle-free property investment then Property Bonds are well worth considering.

by Rachel Buscall

by Rachel Buscall

Co-Founder & Managing Director at New Capital Link. Having started her career in the financial sector, Rachel demonstrated a natural flair for entrepreneurship.

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