There are a mixture of property bonds available to sophisticated investors today, but what exactly are they? how do they work? and how safe are they? Let’s take a look

What are property bonds?

Property bonds allow investors to enjoy a taste of the profits made by professional property developers, without the challenge of building a portfolio or the hassle of tenants and ownership.

Property bonds, sometimes known as “loan notes”, are essentially corporate bonds issued by property developers.

The investor buys the bond and in return receives a certificate and security over the property they’re helping to fund.

A fixed annual interest is then paid to the investor, often lasting between 2 and 5 years.

At the end of the term, the investors bond “matures” and the principle is returned back to them.

Bonds are bought in cash, but it’s also sometimes possible to invest using a pension too.

For example, if you hold a self-administered pension like a SIPP or SSAS. You have the freedom to invest in a range of commercial property opportunities, instead of being tied to the stock market.

You can check out at our article on SSAS property investments to learn more about that.

How do they work?

A property developer will use the investors funds to purchase and renovate properties.

Normally an SPV (special purpose vehicle) is also set up for this purpose to keep the assets separate and protected.

The investors funds are then secured against the properties with a charge, which is registered on the title of the property at the Land Registry office.

This makes the investors loan to the developer secured, because the investor holds an interest in the property as collateral in case something went wrong.

A common example of secured lending in action is when a bank lends money to someone for a mortgage.

Imagine if we took out a mortgage with a bank but didn’t keep up with the monthly payments. What would happen? The property would likely be repossessed

Secured lending eliminates a lot of risk for the bank in this example, because it’s likely they could always sell the property to recover their money

Why don’t property developers just lend from the bank then?

Most property developers who issue property bonds do lend money from banks and other finance providers too.

However, as banks are now quite strict with their lending criteria, they will often only lend 50-75% of the loan, which leaves a much bigger gap to fill.

As a result, many developers use private equity to help fund some of their projects. This allows them to expand and take on additional projects which they wouldn’t normally be able to do using traditional means.

Private investors who lend money to fund development projects can often demand a higher return on their investment.

This is because their funds are usually helping to fund the majority or all of a development project, so they are taking on some additional risk.

Are property bonds safe?

The quality and safety of a property investment bond will depend on which one you are looking at, as they will likely offer different securities and terms.

Ultimately, only you or your financial advisor can decide whether or not property bonds are right for your portfolio.

However, the property developers Ivory Stone choose to work with do hold a strong track history of paying investors. They also offer a first charge security, and have also been approved for pension investment via independent SIPP/SSAS suppliers.

In a buoyant and highly resilient property market such as the UK, many property investors would argue that funding an experienced property developer while holding a first charge on the property, is safer than owning unsecured shares in the stock exchange for example.

However a stock investor may ague differently, which is why it’s always important to do your own due diligence and seek professional advise if needed before investing in anything.

Remember that although it’s possible to make ‘double digit returns’ per year by lending money to developers, like any investment it’s also possible to lose money too!

New UK tax rules mean a £125,000 property will now cost you £3,750 more in Stamp Duty Tax, something which previously would of cost you nothing – isn’t there another way?

As a UK property investor, you not only face paying extra stamp duty, but tougher mortgage rules and less profit because of changes on how mortgage interest can be deducted.

While there are still buy-to-let deals out there, it’s certainly going to be harder for investors to find them with these new challenges in place

In fact, almost one fifth of landlords are now ready to sell up, according to recent surveys completed by the National Landlords Association

If you’ve got a lump sum of cash to invest and you’re thinking twice about buy to let, there are some other options worth considering that can still make your money work very hard for you

In this article I’m going to share 3 alternative ways you can invest in UK property without paying stamp duty tax

1) Hotel Rooms – Earn a monthly income from the booming UK tourism industry

Since the Brexit vote, the UK tourism industry is booming due to the weaker pound making it more attractive to visit the UK.

In locations close to cities or attractions, buying a hotel room can offer steady monthly income, and often comes fully managed making it a hands off investment

Some of the benefits typically include:

• Higher yields than buy-to-let, usually in the region of 8%+ NET per year
• Investors usually buy a room in the hotel and then lease this back to the hotel operator, who cover all the costs and pay a fixed rent per month
• Most operators will offer to buy back the room in the future at a profit – providing an exit route
• Due to hotel rooms falling under commercial transactions, there is no stamp duty tax on purchases below £150,000

2) Purpose Built Student Accommodation – Make regular income from the UK’s top university cities

The purpose built student accommodation sector has seen positive growth year on year for the past decade. It’s no wonder it’s a staple for many hedge and pension funds.

Why? University accommodation simply can’t keep up with new student housing demands, which has led to shortages of rooms in many university cities

Here’s a few of the typical benefits:

• NET yields usually in the region of 8-10% per year
• Rooms often come fully managed making them ideal for income investors looking for minimal hassle
• Most operators offer rental assurances and a guaranteed exit with uplift after a few years
• PBSA is classed as commercial property, so no stamp duty taxes on purchases below £150,000 and no Capital Gains taxes when you sell either

3) Become an ‘armchair’ property developer, lend cash and take a cut of the profits

Although the new buy-to-let changes make it tougher for investors to make profits, there is still a serious shortage of housing in the UK.

The recent 2017 budget announced new government targets to build 300,000 new homes per year through incentives for developers.

How can you profit from this?

It’s still hard for smaller developers to lend from banks, so developers are always seeking assistance in funding new projects.

One way developers are securing funding is through structured vehicles like ‘mini property bonds’ or ‘loan notes’

Some of the typical benefits to these might include:

• Fixed income, usually in the region of 10%+ per annum
• A short term investment, ranging from a few months to a few years
• Full funds returned at end of term, with no long term commitments
• A security charge or debenture against property assets to help minimise any risks to the investor
• No stamp duty taxes to pay, as you are not directly investing in the property

So there you have it, 3 alternative ways you can start earning income from the UK property market, without paying any stamp duty tax

What are the risks with alternative assets?

Although alternative property can provide greater income (and in many cases a more ‘hands off’ investment) than buy-to-let, there are a few things to consider:

• They are only available to cash investors
• They won’t usually have much of a secondary market – so it might take longer to find a buyer if you wanted to sell earlier
• Extra due diligence and care will be required to check out the developer and any guarantees offered

Of course, it’s important that you fully research these options yourself and seek whatever professional advise required, before deciding whether or not they are right for your portfolio.

However, as part of a well-diversified portfolio, many sophisticated investors are using these alternatives to enjoy higher incomes, pay less tax and avoid the hurdles faced in the current buy-to-let climate.