Your guide to property bonds

Property bonds provide an attractive investment opportunity.

By Hugh Metcalf | 10 June 2020

Recent tax changes have made buy-to-lets less attractive, but there is another way to invest in property. Learn about property bond investment with this quick guide.

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modern design homes with car park

Image: Acorn Property Group

When it comes to investing in property, the traditional method is to buy-to-let or renovate and sell on. But not everyone wants to be a landlord, which is why property bonds appeal to some investors…

The basics of property bonds

Put simply, a property bond is a loan to a housebuilder or developer. Many developers lean on their own funds, or borrow money from banks, but there’s occasionally a shortfall in the money they require. At this point, most of the larger PLC housebuilder issue shares to raise money and private developers issue bonds to investors who qualify.

These property bonds raise capital for the developer, but also pay a return to the investor. Terms vary, but these returns could be quarterly or yearly, while the bond is for a fixed term such as three or five years. In other words, you won’t have ready access to the money you’ve invested. Sometimes you can choose to receive the returns on a monthly basis, sometimes you’ll get a higher rate of return if you defer receiving them until the end of the term.

new build homes in Bristol seen across a river

Image: Acorn Property Group

Why invest?

What makes property bonds attractive for many investors is that the rates of return are often very good – ranging from perhaps 4 to 12% annually, which looks even better when interest rates are historically low. It’s also a way for different types of investor – both small and large – to enter the property market for a fraction of the sum they’d need to become a landlord.

People who traditionally enter the property market as investors often have to renovate the property and flip it or become a landlord to receive a rental income. Both these approaches require a high initial outlay and involve a degree of input and ongoing work. Bonds, however, have a lower barrier to entry and are often secured by the land or the development itself.