Are Property Bonds the future of property investing?
John Fahey is a property bond specialist with HE Global Investments
They’re flexible, short term and secured, with impressive fixed interest rate returns – but are they for you?
In these uncertain times investors are seeking safe havens to invest their money. Here in the UK property investment has always been one of the go-to areas for reliable returns, with the buy-to-let option serving investors well.
However, with recent changes in government legislation and taxation, together with the ever present hassles of tenants, maintenance and managing agent fees, many landlords are struggling to make decent returns from buy-to-lets.
An increasingly popular and smarter, alternative method of property investment is an Asset Backed Property Bond, sometimes known as a Property Loan Note.
In its simplest form a Property Bond is a loan from you, as an investor, to a developer enabling them to acquire and develop projects. Effectively each investor acts as a bank, with a secured loan to the developer, which is why they are often referred to as loan notes. Investors 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.
Private investors loan money to the developer for an agreed fixed term at an agreed fixed rate of return – typically 10 – 12% per annum. You can enjoy an income option, where interest is paid at predetermined intervals, or a capital growth option with interest plus bonus, paid at maturity.
To protect the investors’ capital against loss, once the bonds are issued they are secured against the property or land with a legal charge. These charges offer 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 ensuring there is always sufficient to repay in a default situation.
What are the benefits to investors?
• fixed term property investment – typically 2/3 years with a clearly defined exit strategy
• pre-determined date of maturity
• consistent high level of returns – typically 10-12% per annum
• a choice of income or capital growth variations
• security of a first charge on the assets
• a far simpler and hassle-free process
• no worries about credit rating, council tax, stamp duty, insurance repayments, maintenance fees, tenancy challenges, etc.
Simply invest your money and receive your profit without the complexities of building, selling and letting a property.
Why do developers use Property Bonds?
Traditional lenders make developers jump through a lot of hoops so it can take an age to approve a loan; in a competitive situation this can often mean losing a deal. They also impose lending limits and require around 30%-35% deposit, limiting developers from running multiple projects. Property Bonds are effectively 100% financing which is virtually impossible to find elsewhere.
This method of finance is more flexible for developers and allows them to react when attractive properties come to market and to run consecutive projects to maximize profits. It can also position the developer as a cash purchaser, able to negotiate and purchase at below market price.
What are the best types of projects financed by Property Bond?
Property Bonds can apply to different types of property development and can be used to raise capital in various instances, for example land purchase, new build, luxury development and conversion of commercial buildings to residential. You need to carry out your own due diligence but one area of development that is certainly – right time, right place – is the conversion of empty office premises to affordable apartments to help ease the current UK affordable housing shortage.
With the work from home phenomenon fuelled by Covid, demand 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. Amendments to planning laws mean a developer can now obtain permission to convert from commercial to residential without undue planning delays. Conversion from office to residential is the most appealing option, especially if the conversion 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 means they can complete multiple projects in the Property Bond timeframe, maximising profits for investors.
Are Property Bonds a safe Investment?
It’s important 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 suitable for everyone. While the potential reward is high, investing in developments comes with some risk. However such risks can be mitigated by choosing a Property Bond that is asset-backed.
One of the main factors to consider when investing in a Property Bonds is the history, credibility and terms offered by any particular provider. You need to source a Property Bond offered by a reputable company with a demonstrable 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 new and many have returned handsome profits to Investors. If you want a hassle free property investment then Property Bonds are well worth considering.