Property bonds and why they continue to be a strong investment consideration in 2021

By Dan Smith16th April 2021

Over the last 12 months, a lot has happened on the investment landscape. If nothing else, it's been an interesting period for investments of all kinds and the data continues to prove fascinating to explore.

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But fascinating or not, experienced investors are likely to have witnessed one of several scenarios with their investments:

  1. An incredible amount of volatility
  2. A very low level of gain achieved compared to original expectations
  3. A loss, realised or unrealised

The base principle of investing - that you are providing money in anticipation of receiving your capital back with a gain, but without any guarantees - naturally brings with it a level of risk. This level of risk does vary depending on the investment type, but it shouldn’t come as a complete surprise to any experienced investor when investments don’t perform as hoped, regardless of whether they’re happy with the situation or not. With investments, performance and returns aren’t guaranteed.

Whilst many of the global markets and investment products have seen challenges - in some respects more than at any other time in living memory - there are some sectors that not only haven’t been negatively affected, but have in fact seen very strong growth.

The proliferation of people working from home throughout 2020 and into 2021 saw some associated technology companies benefit particularly well. Zoom’s share price hit a record $588.84 in October of last year, sitting at just $66.08 12 months earlier.

But this was largely a case of being in the right place at the right time.

It’s when we look towards the property sector - a market that has remained strong over the last 12 months - that we see an asset where the foundations and macro factors are aligned to provide a platform upon which investments such as property bonds have thrived.

And most importantly, will very likely continue to do so.

 

Property bonds explained: the right option for many

It’s important to note that there are some involved within the property sector that will have had a difficult time as of late, most notably buy-to-let landlords reliant upon rental income but where tenants struggled to pay rent due to reduced or even lost income.

But this itself is one of the reasons why increasing numbers of investors are looking towards property bonds as a way to have exposure to the property market.

Investing into property bonds, experienced investors can achieve exposure to one or multiple property developments over the course of what is usually a two or four year period. With providers often giving clear insight into how the funds will be deployed, investors are able to make a truly informed decision on whether they wish to - for example - invest into residential housing in the North East of England.

The ‘hands off’ nature of the investment makes them favourable, as we’ve seen during the last 12 months. Investors are removed from the day-to-day challenges that are apparent with more direct or ‘hands on’ investment options, something that has an increasing allure for many, and there’s an expectation that there will be a dramatic shift in how investors seek exposure to the property market moving forward.

The National Residential Landlords Association (NRLA) explained recently that “more than half of private landlords have lost rental income as a result of the Covid-19 pandemic” and for this reason “a third of landlords have also indicated that they were now more likely to either leave the market entirely or sell some of their properties”.

Whilst comparing property bonds to rental properties isn’t the most suitable comparison given the considerable differences, scaling it back to the basic principle of an investment into the property market and the volatility and unpredictability of the latter is understandably a concern.

It’s similar to the case with stocks and shares. The stock market is inherently volatile, but the level of volatility in recent time has understandably led to concerns amongst investors.

Although there has been a notable change in feelings in recent years towards the stock market - the latest ISA data from HMRC shows in the 2018/19 tax year, Stocks and Shares ISA contributions decreased year-on-year (and notably so - by just under 20%), being the only ISA product of the four adult ISAs to do so - it has undoubtedly been increased by the Covid pandemic.

Which brings us back to property bonds, as it’s important to highlight these are investment products, targeted at experienced investors, and capital is at risk. However, being asset-backed by residential property, the level of volatility is considerably less and these two points combined can be immensely useful for financial planning and risk mitigation for some investors.

What’s more, on the topic of financial planning, property bonds are often able to be invested into via tax efficient wrappers such as the ISA (via an Innovative Finance ISA (IFISA)), a SIPP or a SSAS pension. Whilst investments via the ISA are limited to your annual ISA allowance (currently £20,000, as of the 2021/22 tax year), when you begin understanding what your SSAS can invest into or what assets are eligible to consider within your SIPP, too, it can provide even more tax efficient ways to invest into property bonds.

 

Property bonds and supplying the new home demand

Regardless of how the money is invested into the property bond, it will have one clear end target result - to provide a return on your capital by loaning the money to property development companies to construct much needed homes.

Particularly in the case where bond funds are deployed to smaller scale developments, these developments are often in sought-after locations; locations where there’s not only a demand for new homes on a wider level, but specifically in or close to the development’s village or town.

The property developers behind such developments can be immensely knowledgeable of the local area, understanding the needs and wants of the market. These aren’t houses built at scale, but homes that have been thoughtfully planned to fulfil a high market need.

We’ve spoken previously about how the property market continues to look strong for investors and why the residential property market in the UK is still such a favoured asset for investors, with the latter piece highlighting once again how the UK has a chronic undersupply of housing. There is a requirement to build over 340,000 homes each year to meet demand, yet in 2019 the industry built little over 160,000.

 

The necessity of property bonds

Funding and investments play a very critical role in the development of homes, and for the smaller regional builders in particular, property bonds provide a level of investment that allows them to continue working towards meeting the demand for new homes within their region.

It’s understandable, given the numerous ways investment into property can be made, that property bonds can initially be overlooked. The likes of buy-to-let dominated for years. But we can’t ignore the fact that property bonds offer the necessary alternative investment needed and play a pivotal role in funding the development of new homes; homes that all the data and statistics highlight are so highly in demand.

We’ve seen it throughout Covid-19 as the interest in new homes increased considerably, but the pandemic simply highlighted further what was already in place. People want the right homes, in the right locations, built to the right specification - and property bonds have not only allowed investors to provide exactly this throughout Covid-19, but they’ll continue to provide it for years to come.