Put simply, property bonds for UK investors allow ordinary savers to put money into the property development sector in a manageable way which does not require any expert knowledge of land development. Property bonds are an asset-backed investment which means investors are able to contribute to both housing and land development.
One of the main attractions of a property bond is that it can deliver fixed returns from anything between 9 percent to 14 percent each year. Most bonds of this type are sold on settled terms which range between 12 months and three years. Although the terms are fixed and you have to see this period out in order to realize the full potential of the investment, interest is commonly added on either a quarterly or bi-annual basis.
Bear in mind that when property bonds that UK residents can buy are invested in, they don’t mean you obtain any form of equity in the development company that has offered them. You’d need to buy shares in the business to get that. Property bonds are issued by developers to raise funds in order to buy land, building materials and so on. This means that such property investment bonds are frequently regarded as loans by developers which are preferable to other financing options. As such, the industry can often refer to property investment bonds as loan notes.
Like other corporate bonds, investors are not able to pull out of their chosen scheme and take their investment back early although such options are not unheard of in some cases. Where a withdrawal from a property bond is allowed, investors can expect to lose all of the return they would have received had they allowed their bond or bonds to mature. At the end of the term, property bond holders can expect their investment to pay out in full. At this point, they can take back their investment plus the interest that has accrued. Many types of property bond can then be reinvested if wanted.
When secured property bonds are invested in, the funds should be secured against the properties being developed with the title of the property being registered at the Land Registry office. This means that the ‘loan’ in the bond is secured. If something were to go wrong with the development, for example, it planning permission or change of use permission were not granted, then the bond holder has a registered interest in the land. You can think of this step as providing you with collateral in case the planned development never takes place because the land itself still holds value.
Many property bond investors like to put their money in them because they allow more housing stock to be built in the UK. The demand for housing is high, after all. Most are provided by businesses with extensive track records of managing developments successfully and the market is seeing solid development potential currently.
However, you may well ask why developers don’t obtain all of their investments from traditional sources like banks. The reason is that lending criteria for property development are quite strict and single financiers are often not able to fund an entire development project on their own. As such, developers need to seek financing from other sources which is why they offer property investment bonds to normal investors.