Everything You Need to Know About Property Bonds

For experienced investors, alternative investment products such as property bonds are becoming more and more popular, thanks to their potential to deliver higher returns than more traditional investment methods.

For an in-depth insight into property bonds and how they work, download our free property bonds guide.          

What is a property bond?

A property bond (also known as a property investment bond) is a way for property companies and developers to raise money from investors in the form of a loan.

Property bonds are an alternative investment product, and they have the potential to provide attractive returns - for experienced investors in particular - which are uncorrelated to traditional equity and bond markets.

How do property bonds work?

Property bonds are corporate bonds (also known as loan notes) issued to investors by property companies or developers.

An Introduction to Property Bonds, our free guide, provides an in-depth insight into property bonds and how they work. Download it here

Bonds are usually issued for a fixed term - generally two to five years - with a target fixed-rate of return paid to the investor quarterly, annually or at maturity. 

When investing, investors receive a bond certificate and usually benefit from security over the underlying asset by way of a first or second ranking legal charge.

Are property bonds a good investment?

Whilst the definition of a “good” investment is dependent on a number of factors for each investor, the attractive target returns, exposure to the property market and opportunities to invest for impact can make property bonds a good investment consideration for some experienced investors.

When investing into a residential property bond, experienced investors are helping small and medium-sized housebuilders to provide homes at a time they’re needed most, after decades of undersupplied demand. 

This chronic undersupplied demand has resulted in a continuous need for the alternative finance provided by property bonds.

Are property bonds safe?

The fact that property bonds are asset-backed, and typically secured by way of a first or second charge over the underlying asset, means there is an element of downside protection for investors.

However, property bonds are an investment product, and as with all investments, your capital is at risk and returns are not guaranteed.

The returns on offer should always be considered target returns. Property bonds are not covered by the Financial Services Compensation Scheme (FSCS).

What are the benefits and risks of property bonds?

Property bonds have a range of benefits and risk considerations that must be carefully assessed when deciding whether they are the right investment option for you.

The main benefits are;

  1. Potential for higher returns than more traditonal savings and investment products.
  2. Typically asset-backed with security over the underlying property and/or land.
  3. Potential for tax-free returns if the property bonds are held in an Innovative Finance ISA (IFISA), Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS). 
  4. Some property bonds offer an added layer of protection by appointing an Independent Security Trustee.
  5. Property bonds offer experienced investors the opportunity to build a diversified and balanced investment portfolio.

As always, you should keep in mind that property bonds are an investment product - this means your capital is at risk and returns are not guaranteed.

What type of projects do property bonds finance?

Property bonds can be utilised to finance either residential or commercial property developments, or a combination of both – this will depend on the specific bond. 

Residential property bonds generally aid small and medium-sized housebuilders in delivering much-needed housing developments in the locations – and at the time – they’re needed most. 

Why do developers / housebuilders use property bonds?

Property bonds provide much-needed alternative finance to housebuilders further to the gap left by traditional lenders who reduced the supply of funds available to SME housebuilders in the wake of the 2008 financial crisis. 

With property bonds allowing these housebuilders to raise the finance required to support the costs associated with their development, this can range from the acquisition of land to the construction of the homes. 

Should property bonds form part of my portfolio?

If you are an experienced (sophisticated, high-net-worth or professional) investor looking for an investment that has the potential to offer higher returns than more mainstream products, it’s worth considering the addition of property bonds to your portfolio.

Property bonds should only form part of a well balanced and diversified portfolio, and some property bonds can be held in an Innovative Finance ISA (IFISA), which means any returns are tax-free.

What potential returns can property bonds deliver?

There are many different types of property bond, and each will have different risk and return profiles. There can also be a significant spead of target returns, all of which will vary from provider-to-provider.

Typically, returns can range from 4% to 15% per annum - but treat any bonds suggesting returns in excess of 8% per annum with particular caution.

Generally, the higher the return, the higher the risk. So, before investing into a particular property bond, it's essential that you understand a number of key points.

How can I use my ISA to invest into property bonds?

For experienced investors looking to maximise returns through the ever-popular ISA tax wrapper – which renders all returns free from both income and capital gains tax – it’s often possible to invest into property bonds via the Innovative Finance ISA (IFISA).

How can I use my pension to invest into property bonds?

Though many mainstream pension offerings do not allow alternative assets such as property bonds, it is often possible to invest into the asset with a Self-Invested Personal Pension (SIPP) and Small Self Administered Scheme (SSAS)

As a result, experienced investors holding a SIPP or SSAS are able to benefit from both property bonds’ attractive potential returns and the traditional tax reliefs afforded by a pension.

Free Guide: An Introduction to Property Bonds

A comprehensive free guide for experienced investors. An Introduction to Property Bonds delivers information on how asset-backed property bonds can provide easy access to the high-yielding property market, offer potentially tax-free returns when Innovative Finance ISA (IFISA)-eligible, and present the opportunity to diversify an investor’s portfolio.

In detail, the guide explores:
– How property bonds can provide potentially higher returns against a backdrop of low interest rates
– Why property bonds have increased in popularity, and how they can offer an attractive hands-off approach to the property sector
– How investors can get involved with property bonds through tax-efficient methods including the IFISA, SIPP and SSAS pensions