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The below should not be considered investment advice, it is designed purely for educational purposes, for self-certified sophisticated and high-net-worth investors. As part of our obligation to the Financial Services and Markets Act 2000 we can’t provide investment information without prospective investors verifying their investor status, further details below. CAPITAL AT RISK.
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Introduction to Property Bonds and Loan Note Investment
Property bonds are a relatively well-established investment structure which enable investors to partner with property developers. In this structure, some of the countries leading house-builders raise capital from private investors to fund the purchase and development of prime construction opportunities.
Investors form a legal contract with the developers to have interest paid on the funds they commit. In essence, it’s a legally binding financial loan which returns market-leading interest. In most cases, the investment is secured against the developer’s property portfolio.
Why Invest In Property Bonds & Loan Notes?
Some investors have been interested in the alternative market for years, but it’s now becoming more mainstream.
Since the 2008 financial crash, developers have had to become more agile and seek other ways to raise funds without having to fork out +35% deposits for finance from banks. Although bank lending is still routinely used, loan note agreements allow for scale, speed of implementation and less red tape.
So, when done properly, this structure allows for developers to build high-quality property more often across the UK, as well as providing investors with an above-average return.
Property Bonds allow investors to benefit from developer-grade returns. Most investors compare it to a rental income yield but it should be viewed as more of a partnership in a construction project with the associated risk/reward structure. Partnering with an established company can return a lucrative profit.
Given the size of the developers we partner with, the value of the assets of which investor funds are secured against is significant. Should the developer ever default, the regulated trustee can exercise their authority to liquidate the developer's assets to repay capital and interest, making it very secure.
We have a variety of bonds available with various timeframes for such investments. Although the investment is illiquid, the timeframe of the investment is typically a year or two allowing for flexibility and a relatively short turnaround.
Investment providers vary in size and Track Capital introduces investors to established firms, who have experience and a track record of delivering large scale projects as well as paying investors principal capital and interest back over the years.
Property Loan Note Life-Cycle
The loan note process varies significantly between projects. However, this brief outlines provides an idea of the steps involved:
- Property Site Development identified
- Outline Planning Permission applied for to local council if not provided
- Formal legally binding planning permission granted by Local Council
- Developers seek funding for the project by issuing a property development specific loan note solely available to institutions, companies, and experienced investors ( retail investors are excluded)
- Interest payments start as agreed, as outlined in the terms of the loan note
- Special Purpose Vehicle (SPV) is created ring-fencing liabilities and assets protecting investors and developer alike
- Land is bought and detailed Planning Permission submitted
- Once Planning Permission is granted a gross development valuation (GDV) is completed by an authorised valuation agent
- The development project is sold to a major investment institution. If the project is not sold, bank finance is arranged in many cases
- The investor capital is repaid
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Marketing property bonds and loan note investment products in the UK is restricted.
Regulations are outlined in the Financials Services and Markets Act 2000 with the intention of marketing such products to only those who are able to effectively judge the suitability of the investment to their personal situation and ultimately understand the risks.
As a result, investors must self-certify their investor status before reviewing promotional material. If you’re interested in self-certifying, it can be done quickly online and it doesn’t commit you to an investment.
Frequently Asked Questions
Below you can find a range of common questions from previous investors. If you require specific details and advice please do not hesitate to contact us today on +44(0)203 627 3987 or via [email protected]
Property developers will typically work with a profit margin of 20-40% on residential schemes. As a result, when you consider finance raised from investors with the blended rate from the development finance, the actual interest rate is not as significant as first considered in relation to the likely profit of any one scheme.
Developers make use of multiple finance models, it’s an essential part of business. Raising funds from private investors does have various benefits, including the ability to move a lot more quickly and secure sites at below market value by paying in cash. The main positive is the fact it allows developers to typically run multiple development sites at any one time because they are not tying up capital and resources by paying 20-40% deposits of which many traditional banks require. So less red tape, no deposits and better site purchase values makes the structure very compelling.
Your capital is at risk with all property bond and loan note investments. Whilst we work with developers who have extensive track records, past performance does not indicate future results. Having said that, the loan note structure typically utilises physical property for security, meaning investors have their capital and investment secured against a tangible property portfolio.
The process and return of capital will vary depending on the original security provided by the developer, e.g. first, second or floating charge. In any case, there will likely be a regulated trustee involved to act on the investors behalf to recoup capital by the sale of assets through the legally binding agreement, should the developer default.
There are various time frames available, starting from 12 months.
What does Nick, our Founder and Director, think of investing in property bonds?
“With the changes to tax regulations in recent years including Stamp Duty Land Tax and the phased introduction of Section 24 revisions, investors are starting to become more open to alternative investment, but security is still the most prominent factor influencing decisions.
We have been able to partner with a number of developers that take the capital-raising process incredibly seriously and base their business model around it. As a result, they offer exceptional security, some with portfolios worth over £100m being used as security, which has led to investors becoming more comfortable with the structure.
If an individual is able to understand the process and risks, then property bonds can be a fantastic opportunity to move closer to property development rather than being a passive landlord. This means investors can benefit from the associated rewards that come with the business model“.
Nick Hyland, Director
Our role is to advise, educate and present the most suitable property bond and loan note opportunities to investors. If you would like to discuss your options with the team you can call us on +44(0)203 627 3987, email us on [email protected] or send us a message below.