When deciding where to invest, it’s likely that an investors priority will be maximising potential returns. Therefore, it can be tempting to opt for the most attractive headline rate, but it’s important to remember that higher doesn’t always mean better.
When choosing a property bond, there are several factors to consider:
1. Is the bond benefited by tax reliefs, such as the Innovative Finance ISA (IFISA)? This can make a big difference, because if the bond is not IFISA-eligible, your returns will be taxed - something the headline rate doesn’t take into account.
2. Who is issuing the bond? If it’s an inexperienced intermediary or property development company, the associated risks could be significantly higher. Therefore, the expertise and track record of the bond issuer is crucial.
The potential returns offered by a property bond can range from 4% to 15% per annum - but those above 10% should be approached with particular caution.
While all investments have an element of risk, it’s widely acknowledged that the higher the rate of return, the higher the risks.
Before committing to an investment, it’s crucial that you have a firm understanding of the associated risks, and speak to an independent financial advisor to ensure that the investment’s risk–return profile is suitable for your personal circumstances and investment goals.
Beware of property bonds offering unusually high (or guaranteed) returns
As mentioned above, investors should be cautious when presented with a property bond targeting potential returns above 10% per annum.
Though it’s not impossible for the issuer of a bond to generate a target return this high, it is difficult - and will, naturally, come with increased risk of losses for the investor. Target returns of between 4% and 8% are potentially more achievable.
It’s also important to remember that with investments, returns can not be guaranteed. All property bonds should be accompanied by a risk warning explaining that your capital is at risk.
Many property bonds - including the CARLTON Bonds property-backed IFISA - are asset-backed, meaning loans will typically have a first-ranking (or equal first-ranking) security on land, property and applicable assets of the borrowers.
However, this does not guarantee the return of your capital.
The expertise and track record of the bond issuer is crucial
An understanding of the bond issuer’s origination and deal structuring process, and their experience and expertise, is key.
This information should be readily available on the issuer’s website or in their Information Memorandum.
It’s important that the lender has sufficient experience in structuring high-quality deals, and that they work with borrowers who have a good reputation and track record.
An article featuring the Chief Executive of Urban Exposure - an organisation operating in a similar space as CARLTON Bonds - suggests that if a property bond is targeting unusually high returns, there is a chance that the issuer could be lending to inexperienced house builders.
This is because established, high-quality builders are unlikely to be prepared to pay the rate of interest needed to facilitate these yields of 10% and above.
The CARLTON Bonds advisory team - made up of Growth Capital Ventures (GCV) and Homes by Carlton - have over 100 years of combined lending and property experience, having successfully structured and delivered over £300 million of property transactions.
Adhering to a strict lending policy whereby a clear demand must be demonstrated for the product being developed and the project’s capital structure must reflect its risk profile with a sensible level of gearing, among others, the CARLTON Bonds team conduct detailed due diligence on every potential project.
You can find more information on CARLTON Bonds’ lending policy in the Information Memorandum.
Using the expertise of the team to select the highest quality property projects that help to drive innovation and regenerate communities, CARLTON Bonds target potential returns of between 4.75% and 7.75% per annum for investors.
This is done by working with strategic housing delivery partner, Homes by Carlton, to facilitate the construction and development of high-quality, bespoke housing projects, such as Cathedral Gates in County Durham.
It’s possible to invest tax efficiently into a property bond with an IFISA
Investing tax efficiently through an IFISA can help to maximise returns and minimise risk when investing into a property bond.
The IFISA - introduced to the already-established ISA family in 2016 - is benefited by a tax wrapper, making all returns free from income and capital gains tax.
CARLTON Bonds is IFISA-eligible, and below are figures based on an example investment of £100,000 by an additional-rate taxpayer holding their bonds in a IFISA and who subscribed in the first tranche, therefore holding their bonds for the full two or four year term.
Investors holding their bonds directly will be subject to withholding tax at 20%, and may have to pay further tax on interest received (unless they are a basic-rate taxpayer).
The gross equivalent return rates stated in the table above present what an additional-rate taxpayer would need to earn on an equivalent taxable investment held outside of an IFISA to achieve the same return as an investment held under the account’s tax wrapper.
An investor into our Series Three A (four year) bonds who is an additional-rate taxpayer and holds the bonds in an IFISA would earn tax-free interest of 7.75% per annum, paid at maturity. In order to achieve the same net return, the investor would need to find a taxable investment which yielded 14.09% per annum.
Choosing a property bond
The best property bond for you depends on a number of factors, and it’s advisable to seek advice before making a decision.
But these things are crucial: before investing, make sure you have an understanding of the risks, the experience and track record of both the bond issuer and borrower, and whether the bond is eligible for tax reliefs meaning, the headline rate is potentially achievable for you.
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).