With a property bond, you are essentially investing in part of a property development or developments.
How do property bonds work?
With a property bond, you are essentially investing in part of a property development or developments. Your investment is typically secured on the assets, such as the land the properties will be built on. However, having security doesn’t mean that your capital is fully protected - in the event of an economic downturn, you may not get back the amount invested and in the event of default, the security held doesn’t guarantee the return of your capital.
Bonds can be offered for sale to lenders through an online platform - such as a P2P lending platform - or they can be listed on a market. This, along with the typically lower minimum investment amounts, has made property bonds available to a wide range of potential investors.
However, following new rules introduced by the FCA from January 1st 2020 regarding the promotion of speculative mini-bonds, only experienced investors classified as either sophisticated or high-net-worth are eligible to invest into mini-bonds, which the FCA describe as ‘where a company raises money from investors with the intention of lending the money to a third party or investing in other companies, or property.’
Property bonds are usually issued for a fixed term, in the region of two to five years. The term is typically set for an amount of time that will allow the property developer to complete the construction and generate return. The return is in the shape of an interest (coupon) payment that can either be paid at regular intervals, or rolled up and repaid on maturity. The face value of the bond - the original price paid for it - is also repaid on maturity.
The returns you get from a property - in terms of both capital repayment and interest - are generated by the developer completing the property and selling it, although they may also be funded from rental income.