Whilst property bonds are not a new method of investment into the investor-favoured asset, they are becoming more and more popular due to their ease-of-access in comparison to other methods, and their potential to target high – sometimes tax-free – returns.
Issued to investors in order to aid in funding the development of both commercial and residential properties and eligible for some Government-backed tax incentives, property bonds boast several advantages for experienced investors that make them an attractive consideration for those looking to add property to their personal portfolio’s.
And with tax changes making the likes of buy-to-let less and less profitable, as well as an increase in the prominence of investing for impact, the appeal of property bonds is likely to continue to increase.
A hands-off, more tax-efficient method of investment
Whether the intention is to rent or renovate to re-sell, purchasing properties outright is expensive. On top of the initial expenditure to acquire the homes, the former requires a commitment to maintenance, mortgage and insurance fees, whilst the latter calls for significant upfront renovation costs.
With the addition of associated responsibilities including the general upkeep of the houses, becoming a landlord in particular can be time-consuming.
For some experienced investors, the returns from these methods of investment will be well worth the expensive, hands-on nature. For others, a lower initial investment will be preferred, or one with no ongoing costs or commitments.
A major benefit of property bonds, minimum investment amounts can be as low as £1,000 – whilst most providers also charge no management or exit fees – and investors are able to put their investment to the back of their minds as their target returns are generated by experienced builders.
On top of this, property bonds can often be held in an Innovative Finance ISA (IFISA), rendering all returns tax-free – a stark difference from the rising tax bills most landlords face after mortgage interest tax relief was eliminated, among other changes to taxation.
A resilient, impactful asset
Generated via the development of housing or commercial properties, the target returns offered by property bonds are most often between 4% and 8% – an attractive potential return in general, but even more so amidst all-time low interest rates and a volatile investment landscape.
Though these returns can never be guaranteed, at a time when most markets faltered in response to the Coronavirus pandemic, the housing sector proved to be resilient – and with demand for homes at its highest in recent times whilst still being undersupplied to a staggering degree, the need for impact-driven investments such as property bonds is more apparent than ever.
Continued investment into the development of property is imperative. Whilst providing rented accommodation is important, the UK is in desperate need of more affordable, mixed-tenure homes to tackle the backlog of existing need as well as current increased demand – as Rightmove report that even the 145,000 new listings on their site in April was not enough to match the number of prospective buyers.
In order to address the shortage and once again be able to deliver a richness of housing, small and medium-sized housebuilders must be able to re-establish themselves in the market.
After funding from mainstream banks diminished in the aftermath of the 2007/08 financial crash, The alternative finance provided via property bonds allows them to do so - and this alone showcases the advantages of investing into property bonds. They do not just serve the investors, but regional housebuilders and the hundreds of thousands of home-movers who will benefit from the breadth of housing delivered as a result.
Investing into property bonds
For experienced investors looking for more hands-off, impact-driven methods of investing into property, property bonds could very well be one of the key options for experienced investors moving forward.
Whilst the likes of buy-to-let are declining in profitability, the options that exist today – from direct purchases to acquiring shares in national housebuilders – will continue to be possible, and active, methods of investing into property.
Not only can property bonds offer high (and tax-free, when held in an IFISA) potential returns, their importance in providing alternative finance for small and medium-sized housebuilders means their significance is only likely to grow.
And with investing for impact becoming more and more important to most investors, property bonds offer a potentially tax-free and impactful method of investing into an asset that has long been – and will undoubtedly continue to be – a favourite of investors in the UK.