What are property bonds and why invest in them?

9 August 2019 | Investment

Also known as property investment bonds, property bonds are a way for developers to raise funds from investors, with the main aim being to finance the initial stages of building development. Typically speaking, when a residential or commercial property development is proposed, the property bond forms a legally binding agreement between the development company and those investing in property.

What most often occurs is that capital is provided in the form of a loan to the development company and this is backed by a contract between the two parties that details exactly; how the funds will be used, how it will be repaid and how said capital is to be secured.

An attractive proposition

In the property market as a whole, property bonds often have a great deal of appeal, as they offer a healthy level of fixed annual interest, which also comes with the peace of mind of security and certification of the development they are helping to finance. Investing in property in this way is certainly an attractive proposition if you have the means to do so.

How do property investment bonds work?

What generally happens is that a construction or development company issues bonds for the purposes of financing their development. Obviously, the interests of the investors need to be protected, so their capital is secured against either the land or the property/properties themselves with a legal charge. This provides the investors with both security and collateral and is officially marked down on at the Land Registry Office on the property title itself.

The overall length of the agreement is typically between 2-5 years and those investing in property will be provided with a level of interest until the bond matures and the capital is returned.

Legal charges explained

The security that a legal charge provides to people investing in property is considerable and as far as the property market is concerned, you’ll struggle to find anything that offers more in terms of peace of mind. The reason for this is because it guarantees that the capital supplied by the investors will be returned, even if the company carrying out the development isn’t able to follow through on their obligations.

Even in the worst-case scenario where the developer or construction company defaults, the investor capital is returned by selling the assets against which the loan was secured. When a legal charge exists, it helps to make investors feel more relaxed about the safety of their capital and it’s something that follows a very similar model to another found in the property market, where residential properties are repossessed and sold if the mortgage isn’t paid.

An attractive investment opportunity

As well as representing a secure method of investing in property, there are a number of other factors at play that makes investment bonds an attractive opportunity for investors.

Fixed interest rates:First of all, when you invest in this way, you’ll typically get a fixed rate of interest each year for a specific amount of years. This is either paid out in full at the end of the agreement or as a regular payment, meaning you know with a high degree of certainty what you’re going to get.

Less hassle:When looking at investing in property as a whole, property bonds can be much more simple and stress-free when compared with traditional methods of investing in the property market.

Flexible exit strategy:Another benefit attached to property bonds is the ability to end the agreement before its full term by means of an exit clause that you’ll typically find written in. This allows investors to access their capital earlier than agreed, however, there may be a penalty in the form of lost interest payments.

Other advantages of property investment bonds include:

  • It’s much less risky than investing in stocks and shares
  • It’s attractive to multi-asset investors, as it provides an opportunity for diversification
  • The returns can be significantly higher than other dividend-paying investment schemes

Are property bonds right for me?

Investing in property bonds is a great way of creating a passive income at a healthy rate of interest and it’s one of the most secure around. Of course, nothing in this world is guaranteed, but in the property market, it doesn’t get much safer. If you’re someone with a significant amount of capital at your disposal and you’re wondering where best to invest it, it could be for you.

We’d always recommend that you seek professional property investment advice before making any commitment, as it’s the best way to ensure that you source your property bond from a company with a great reputation for success and promptly paying out investors.

This post has been originally featured in Progressive Property