Investors traditionally invest in bricks and mortar: a house or apartment is the most tangible way to invest in the property market. However, there are other ways in which the property market can work to strengthen a portfolio, and these don’t involve buying physical assets.
And that’s where Retail Bonds come into play.
A Property Retail Bond allows you to access the property market by investing in a property development. This doesn’t result in you becoming a landlord with a tenant, but you share in the ‘back end’ development – and profits – of property, usually with an attractive financial return.
It works like this: starting at £10,000, a property bond will allow you access the financial growth of a property development over a fixed period of 12-24 months. Bonds will pay in the region of 10% for a term.
Why Developers Offer Bonds
Why do developers offer bonds? Developers, like investors, need capital to carry out new property builds. They have the option of using bank financing for their development, but the bank is likely to charge a high rate for this. This is why they turn to sophisticated investors who buy bonds in their development; it simply costs less for them to raise capital in this way.
By fronting the capital for the project from retail investors, they are able to pay these investors handsome rates of return (and in today’s investment landscape, 10% is a respectable rate of return) while still paying less in financing costs to the big banks.
While bonds are only suited to sophisticated investors or High Net Worth individuals, there are a number of built-in safety mechanisms which protect investors in the event of financial insolvency on the part of the developer.
Firstly, funds invested are held in what’s known as a SPV – Special Purchase Vehicle. This is a legal structure which means that if the developer becomes bankrupt, investors will have first legal charge over the assets, meaning they are the first to be reimbursed.
On top of this, there is a Third Party legal team set up to manage the bond and its assets and this will enable investors to be paid first.
While these are legal safeguards, the nature of these bond is that they are unsuitable for unsophisticated investors, and the FCA requires that providers offer them only to those who fit certain criteria. The definition of High Net Worth, for instance, means that investors will hold at least £200,000 in assets. Clients with a couple of rental properties will already fit into this category.
There are a range of current bonds available that are of interest.
The Prosperity Wealth bond runs for 12 – 24 months and pays 12.5% per annum. This invests in ongoing Prosperity developments, and is subject to the usual legal safeguards.
The Dolphin Trust bond is attractive as it focuses on the German housing market. This is of interest because the currency denominated is the euro (and this is much more stable at present than the pound sterling). Furthermore, Germany has a very stable housing market.
Godwin is a Midlands-based developer, with over 400 properties under development for companies such as Tesco. Using client funds, they develop these units and return 10% p.a to investors.
Points to Remember
This is a short-term bond and should be used to boost a portfolio. Investors will receive capital back with interest at the end of the term. There is an option for compounding interest and this has added financial incentives. There is also the option to receive dividends on a quarterly basis, albeit on slightly less generous terms.
Too Good To Be True?
Assuming you’re a sophisticated investor or a High Net Worth individual who is willing to trust in the developer (and if you’ve bought an off-plan property already, you’ve already done this), property bonds are worth looking at for the shorter term. A range of legal measures help to provide investors with security and the financial rewards of such an investment are very attractive indeed.