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What are the pros and cons of a property bond and how are investors funds used?

by Nikki Dale -

If you are looking for a way to generate passive income from your investment, that pays regular and appealing rates of interest, plus your capital is secured against assets, property bonds or loan notes could be a good option for you.

This type of investment product (known as a ‘financial promotion’) can be an extremely attractive investment opportunity for any prospective high net worth individual, sophisticated investor or self-certified investor.

READ MORE: Who can invest in property bonds?

How are investors funds used?  

Often investors ask why can’t the developer borrow from the bank?

The answer is they do.  Generally you will find the company offering the bond or loan note investment uses bank funding as well, but they do not rely solely on it.

Bank funding can take time to arrange, so often companies will use a multisource strategy utilising high net worth and sophisticated investors, institutions as well as private funds.  Companies on a large scale dealing with national and international companies, especially, across several sectors, need to be agile enough to secure the ideal sites needed for its projects.

Whether commercial or residential the developer uses the money raised from the sales of bonds to proceed with projects in a range of sectors such as:

  • Commercial sector: retail, fast food
  • Residential Sector: Private Rental Sector, private housing, Housing Association.
  • Industrial & Logistics sectors: Trade centres, distribution, warehousing

READ MORE: What security can Property Bonds / Loan Notes provide for investors

Advantages of property bonds 

  • Payments of per annum interest can be higher than traditional property yields or dividend payments
  • Investment into the property market – more diversified in defensive asset classes.
  • A short-term exit strategy and fixed sum maturity
  • Less volatility and risk than stocks and shares
  • Asset-backed security over property and/ or land
  • A legal right for investors to claim against the physical security offered by the lender, should there be any payment default.

Disadvantages of property bonds 

  • As it is not regulated by the Financial Conduct Authority (FCA) there is a risk of losing some or all of your investment.
  • Most products will not allow early withdraw of funds. (if they did, naturally the returns would be lower)
  • No actual tangible ownership of property.

READ MORE: Best fixed rate property bonds


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