Property bonds are corporate bonds (also known as loan notes) issued to investors by property companies or developers.
Bonds are usually issued for a fixed term - generally 2 to 5 years - with a target fixed rate return paid to the investor quarterly, annually or at maturity.
Investors receive a bond certificate and usually benefit from security over the underlying asset by way of a first or second ranking legal charge.
A company may issue bonds as a means of raising finance, and when you invest, your money is used to lend money to property companies or property development projects. Property bonds are usually issued by specialist property lending companies, property developers, or construction companies for the purposes of funding property transactions or development projects.
Once the bonds are issued and loans are made, they are secured against the property or land by way of a first or second legal charge*. These charges offer collateral and security for investors and are registered on the property title at the Land Registry Office. Sometimes an Independent Security Trustee** can be appointed to provide an additional element of protection.
Usually, both the rate of interest and the term are fixed. Depending on the terms of the agreement (typically 2 years to 5 years) the lender (investor) will be paid a rate of interest after which point the bond matures and the original loan amount is returned.
The frequency of interest payments (also known as coupon payments) varies. Some fixed term bonds will offer payments monthly or quarterly, and others may be offered annually or upon maturity.
Generally, the shorter the investment term and the more frequent the interest payments, the lower the overall target rate - usually circa 5% per annum. Longer term - 4 years to 5 years - property bonds may offer target rates of circa 7%.
Beware of high rates of around 10% per annum or over. The higher the rate, the higher the overall risk, and as with all investments, there's a balance between acceptable risk and acceptable returns.
* A legal charge is a legal document signed by a borrower that is registered against a property or land at the Land Registry Office. This offers collateral for investors in the event of a borrower defaulting on their loan.
** An Independent Security Trustee is an independent body whose primary responsibility is to act impartially, while representing the interests of investors (bond holders) - particularly in the event of borrower defaults.
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Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors.
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To find out more, download our free IFISA guide.