For experienced investors, property bonds are becoming an increasingly popular investment vehicle, and a valuable addition to a balanced portfolio.
In the aftermath of changes to taxation which have had a largely negative impact on buy-to-let investors, many property investors may be considering alternative methods of investment into the popular sector.
This is where property bonds - and their high target returns and ease-of-access - become an attractive consideration. And with tax-efficient options such as the property-backed IFISA, they could be an effective instrument to maximise returns and minimise risk.
What is a property bond and how do they work?
A property bond - also known as a property investment bond, or a loan note - is a method of raising funds used by property companies and developers. These funds are raised from investors, in the form of a loan.
Property bonds are an alternative investment, and they have the potential to provide attractive returns which are uncorrelated to traditional equity and bond markets.
Most property bonds are fixed-term - usually between two and five years - with a target fixed-rate of return paid to the investor quarterly, annually or at maturity. This gives investors flexibility and choice over how and when they receive their interest payments.
As well as this, many property bonds benefit from asset-backed security, meaning that once the bonds are issued, they are secured against the property or land by way of a first or second legal charge. These charges offer collateral and security for investors, and are registered on the property title at the Land Registry Office.
What are the benefits and risks of a property bond?
There are a number of key features that make asset-backed property bonds a valuable investment consideration for experienced investors.
Firstly, some property bonds are Innovative Finance ISA (IFISA)-eligible - for example, the Carlton Bonds IFISA - giving them an element of tax efficiency that is beneficial to all investors, but high earners in particular.
Any peer-to-peer loans or debt-based securities held in an IFISA are free from both income tax and capital gains tax, meaning investors into a Carlton Bonds property-backed IFISA could potentially receive returns of between 4.75% and 7.75% completely tax-free.
Some Self-Invested Personal Pension (SIPP) and Small Self-Administered Scheme (SSAS) providers will also allow you to hold property bonds, so you could benefit from their attractive tax reliefs.
The costs associated with property bonds are also relatively low, especially when compared to the expense of buy-to-let.
For example, the minimum investment amount for the Carlton Bonds IFISA is just £1,000, and there are no ongoing fees or charges for investors.
On a wider social and economic level though, property bonds are more important than ever. With the UK’s chronic housing shortage and the housing market’s significance in the bounce-back of the economy in the wake of COVID-19, the alternative finance provided to regional house builders through property bonds is crucial.
However, it’s important to remember that property bonds are an investment product, and therefore your capital is at risk and returns are not guaranteed.
Property bonds are not covered by the Financial Services Compensation Scheme (FSCS), and though asset-backed property bonds provide an element of downside protection, they do not guarantee the return of capital.
What potential returns can property bonds deliver?
There are differing types of property bond, and each will have varying target returns.
Typically, returns will range from 4% to 8% - but returns in excess of 8% can also be found, though they should be approached with particular caution.
Generally, the higher the return, the higher the risk. So, it’s imperative that you understand the risks associated with the particular property bond you are considering, and it’s advisable to speak to an independent financial advisor before making any investment decisions.
Why choose a property bond?
For investors, property is one of the most popular assets. But the costs associated with the traditional method of property investment - buy-to-let - have increased over recent years, while the availability of tax reliefs has declined.
Therefore, it could be time for experienced investors to consider an alternative way of accessing the high potential returns offered by the property sector.
In the current climate, property bonds - and the property-backed IFISA in particular - are more important than ever. And while potentially earning an attractive, tax-free target return, investors could be delivering a positive social, economic and environmental benefit.
The Carlton Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).