In the search for investments to strengthen portfolios, investors may come across Mini Bonds based on property companies, which have so far been presented as being an exciting and lucrative investment.
But are they really worth your time? As with most things, there are risks as well as potential benefits to be aware of.
What are Mini Bonds?
Property mini bonds are a part of the UK Alternative Finance Market. They represent an exchange of money in return for a stake in the performance of a company. The money will be repaid to you on an agreed future date. In this way, mini bonds are very much like traditional corporate bonds – an IOU given to you by the company, which will be repaid in the future.
They are also similar to retail bonds which have been offered on the London Stock Exchange since February 2010, the aim of which was to encourage firms to approach personal investors directly.
The origin of mini bonds lies in the credit crunch of six years ago, when smaller companies found it harder to raise finance and so turned to issuing their own bonds directly to the public. As a gimmick to catch attention of investors, returns were sometimes paid in the form of free food and drinks.
Hotel Chocolat paid part of the returns on its Tasting Club bonds in monthly chocolate box selections
The returns on these bonds can be attractive – but if the business goes bust, investors have little recourse. These bonds do not have the security of the Financial Services Compensation Scheme if the company goes into administration.
What’s more, there is always a risk in assuming that one company will be able to pay back amounts of money at a time in the future. Even the high street banks have found themselves in difficulty in the past. Investors should be careful to diversify, diversify, diversify.
However, despite this, in an era of low interest rates investors are always searching for competitive rates of income where they aren’t putting their underlying capital at undue risk, and therefore mini bonds catch their eye.
Property Mini Bonds
There are some property-based mini bonds currently on the market which will be of interest to those investors wishing to get the benefit of property growth without buying actual bricks and mortar.
Prosperity Developments have been in business for over twenty years, growing from a small marketing company to a small to medium-sized developer based in Birmingham. In 2017 they plan to complete 1000 units and offer Crowdlords (regulated by the FCA)-funded Mini Bonds attached to each new development. This mean good transparency and security as each bond is backed by pre-sold apartments and the SPV is backed by the development land purchased.
They do not pay income, but purely capital which is returned on finalisation of each project, hence they offer higher yields of 15%, but a 2,3 or 4-year lock in.
Empire Property is a larger property development group focussing Yorkshire and the North. They are paying a lower yield on their Two Year Income Product: every six months, reaching 8 % in year 1, 10% in year two.
Plutus Capital is run by a successful London based chartered accountancy firm. It buys land around existing super markets and develops it. The Bond is backed by that land and it has first call over it. Yield is 6% per annum.
Dolphin Capital is a German based group is a global real estate investment fund, investing directly or indirectly in a portfolio of real estate assets belonging to several key sectors such as residential, retail, commercial, logistics, industrial or leisure.
This has a three year lock in, with a six monthly notice period. Return is 8% per annum.
Bonds – yes or no?
Depending on your appetite for risk, and the extent of diversification in your portfolio, there are certainly some interesting mini bonds which can bring some eye-catching returns from the UK property market – and which don’t require you to tie yourself down in bricks and mortar for the longer term.