Property bonds are a form of legally binding passive investment, which can be viewed as a ‘loan to a property development or construction company’. The bond allows the company to get started on their development of flats, houses etc.
For the investor, it gives them a fixed rate of interest over a particular (bond) period. Many investors like bonds because – unlike stocks and shares – there is no daily volubility and the loan is secured against the development. This means that were the company to go bust, their assets (i.e. homes) would be sold off in order to pay back the money to investors. In this sense, it’s regarded as a secure loan.
There will be a written contract for the bond, outlining the repayment terms and the duration of the loan. Once the bond is issued the legal charge (i.e. notification of the bond) is registered with the Land Registry Office, to be added to the property title for the development.
The reason property developers and construction companies use Property Bonds is that often they can’t get the full loan amount they need. The bank may see fit to give them 70 per cent, for instance, so the firm is ford to go privately for the remainder. It can also allow them to aim higher, at which point their profits should have increased too.
Why invest in property bonds?
Many developers like the consistent nature of property bonds i.e. the fact they’ll know exactly how much-fixed interest they’re getting, and for how long. Other reasons to invest include:
• The fact the loan is secured – like a mortgage – against a fixed asset (first legal charge over the physical property) which can be sold if the company goes bust;
• Interest is often higher (between six and 12 per cent) than other forms of investment ;
• It’s ‘hands-off’ i.e. there’s no having to deal directly with tenants, fork out stamp duty or pay maintenance fees as you would with a buy to let;
• There is usually the opportunity to exit early (although no further interest payments will be forthcoming);
• It’s another form of property investment diversification and which is, of course, safer than putting ‘all your property eggs in one basket’.
Tips for choosing a good platform
As with other forms of property investing, carrying out due diligence is essential. Only property bond platforms boasting a lengthy and healthy track record of returns should be considered. Again, platforms which offer a first legal charge to the investor are the most secure and should be considered above all others. That way you are more likely to receive your investment cashback if the company falters.
Even if you are time-poor, always set aside several hours at least to check out the company’s reputation and reviews. Which development or construction companies do they work with and what is their reputation like too?