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!
Save yourself a headache when looking for the best property bonds by downloading my free cheat sheet guide
It explains all the common terminology, why certain “property bonds” or “loan notes” can be more secure than others, and questions you can ask to help find out more about an offering – all in one convenient place