An alternative investment with the potential to generate higher target returns than more mainstream products whilst providing hand-off access to the often lucrative property sector, it’s no surprise property bonds have become an increasingly popular consideration with experienced investors.
Property is an asset that has been favoured by investors for some time – with benefits including a history of strong capital growth and, most recently, evidenced resilience throughout the Coronavirus pandemic; a pandemic that saw most other sectors struggle.
Whilst property bonds are not the most appropriate investment option for all, they can be particularly appealing to experienced investors with the appropriate appetite for risk – and here we explain why.
The potential for tax-free returns that are higher than most mainstream investment products
Maximising potential returns will most often be one of an experienced investor’s top priorities, and property bonds’ status as an alternative investment means they can usually offer target returns that are higher than most mainstream investment products.
These returns are often between 4% and 8%, and some property bonds are also Innovative Finance ISA (IFISA)-eligible – giving them an element of tax efficiency that is beneficial to all investors, but high earners in particular.
When held within an IFISA, all returns from property bonds are tax-free. This means, for example, if an additional-rate taxpayer invested £10,000 into a property-backed IFISA with a target return of 7% over a four year fixed term - with interest paid at maturity - they would receive £12,800 after the four year period. On the other hand, if the property bond was held outside of an IFISA and was therefore subject to tax at the additional-rate, the investor would receive just £1,540.
For comparison, to achieve the same return as seen within the IFISA outside of the tax wrapper, an additional rate taxpayer would need to be achieving a per annum interest rate in excess of 12.7%.
You can invest for impact with a property bond
Choosing investments with the potential to deliver positive environmental, societal and economic benefits has become crucial for many investors.
And when it comes to investing for impact, property bonds can prove to be the ideal route for some.
It’s widely known that the UK is – and has been for some time – facing a chronic housing shortage.
In a white paper published by the Government in August 2020, which examines some of the key barriers and potential solutions to increasing housing supply in England, emphasis was placed on the need for small and medium-sized regional housebuilders to help tackle the ongoing housing crisis.
And these housebuilders are exactly the ones who benefit from the alternative finance provided through property bonds – allowing them to aid in the provision of much-needed housing.
This is also advantageous on a wider economic scale in the wake of COVID-19, as the housing market’s importance in the bounce-back of the economy has been highlighted.
House building is a major source of employment, and regional builders are able to create a variety of jobs directly and throughout the supply chain - for construction workers, estate agents, and more. From an investor’s perspective, the property bonds’ funds may be being utilised to support the development of new homes, but it can’t be understated how much of an impact this has both immediately and continually throughout the UK.
Investors can gain exposure to the UK property market without the high costs and time requirements of other routes
Many investors want to add the popular asset of property to their investment portfolio, but when choosing a method of investment into property, personal circumstances and goals will play an important role.
While some investors want to own property outright and benefit from regular rental income, others prefer a hands-off method of property investment. And this is increasingly becoming the case for experienced investors, particularly those who want exposure to the market but don’t have the time to be an active property investor.
For these investors, property bonds have many advantages. For instance, when investing into a property bond, your investment is usually to support an entire development, often at the early stages. There are no investor responsibilities in regards to any part of the process outside of the investment - no sales or marketing and no maintenance of properties, for example. Both considerations from a more direct investment into property - buy-to-let, for example - and both responsible for sizable costs.
In addition to this, whilst some investors are attracted to buy-to-let and more direct and active routes into property because of its ability to offer a regular income, some property bonds offer the provision of quarterly return payments. Whilst choosing a property bond with interest paid at maturity will generally target a more generous target return,options do exist for investors who want to supplement the income on a more regular basis.
Experienced investors and property bonds
For investors, property is one of the most popular assets. But the costs associated with the more traditional, direct and active methods of property investment have increased over recent years, while the availability of tax reliefs has declined, something that’s particularly the case for buy-to-let.
Naturally, this has led experienced investors to consider an alternative way of accessing the high potential returns offered by the property sector and in the current climate, has shown how property bonds - and the property-backed IFISA in particular - are more important than ever.
Providing investors with exposure to the property market while targeting a generous per annum rate of return - and one that could be tax-free if invested into through the IFISA - experienced investors can more easily than ever before find their portfolio both providing a strong return and delivering a positive social, economic and environmental benefit through property.