Building your own property portfolio in today’s market can come with many drawbacks including higher stamp duty tax, stricter mortgage rules and reduced profit margins.Today we explore one way savvy investors are getting a taste of the returns made by professional property developers, but without the hassles of actually doing any development work.
The UK housing shortage
According to the UK government, there is currently a shortage of around 232,000-300,000 homes per year making the demand for affordable housing now higher than ever.
The UK has recently announced plans to help tackle this issue by reducing stamp duty tax for first time homebuyers, and creating more incentives for developers to start building. But smaller developers still struggle to obtain the funding they need which is a separate issue.
While developers are able to access development finance, banks will often only lend around 65% of the loan these days which can mean tying up all their funds into a single project, or having to raise additional finance with mezzanine investors.
The solution? Many developers now seek private investors
Developers regularly team up with equity investors on Joint Ventures in exchange for a developers professional expertise and a split of the profits. But these deals are usually only available to the financially elite.
Over the years developers have turned to alternative ways of raising finance such as crowd funding and property investment bonds.
These vehicles offer more flexible terms and allow sophisticated investors to lend smaller sums of capital, giving the advantage of being able to diversify across a broader range of projects, sectors and developers.
This way a developer isn’t tying all their money up, and can grow by taking advantage of additional projects that they wouldn’t normally be able to do using traditional financing methods.
How do they work?
In a property bond, investor funds are usually secured against the property assets being developed with a title charge or a debenture in favour of the investors.
That means if something went wrong the assets could be sold to help recover investor funds.
Investors are then usually offered a fixed rate of annual interest that can be as high as 12% per year for somewhere between 1 and 5 years. The income is often derived from the rent made by the properties.
At the end of the loan term the properties are either refinanced or sold, providing the investor with their exit and the developers with their profits.
How to find out more about property investment bonds?
Ivory Stone Investment is a specialist in finding alternative property investments. They currently have access to a range of secured property investment bonds available to sophisticated and high net worth investors.
Tony Dodd the managing director explains that “For the right investor looking at simpler ways to tap into the UK property market, secured property bonds or loan notes are very popular options. Whilst there are of course risks, the rewards can mean a double digit passive income and no hassle of tenants or extra costs. Something that is getting tougher to achieve for landlords today”.
In their recent article they explain the must know on property investment bonds before you invest and offer suitable investors access to a range of live deals too