What is a Property Bond?
Property bonds, otherwise known as property investment bonds are a means for developers to raise money from investors in the form of a loan. The intention is to fund the projects during the earlier stages of development. Generally, the bond it is a legally binding agreement between the investor and the property developer. The investors' capital is offered as a loan to the development company and the contract between them explains how the investment will be used, the interest payable for the investment, how the capital will be secured and when the investment will be repaid to the investor.
How do Property Bonds Work?
Any company may issue bonds as means of raising finance. With property bonds, these are usually issued by developers, or construction companies for the purposes of funding property development. To protect the investors' capital against loss, once the bonds are issued they are secured against the property, or land with a legal charge. These charges offer collateral and security for investors and are registered on the property title at the Land Registry Office. Depending on the terms of the agreement (usually 2-5 year) the lender (investor) will be paid a rate of interest after which point the bond matures and the loan amount is returned.
What is a charge on a property?
When a legal charge is applied to a property bond it brings with it a great deal of security. It ensures that the investors' capital will be repaid even if there is a default and the development company can not fulfil their obligations, as expected. This is done by securing the loan against assets that will be sold to return the investors' capital, in the event of the worst case coming to fruition. Where there is a legal charge within the bond, investors can feel more comfortable investing their money, given this degree of security provided. Usually, the firm that issues the bond will have the right to seize the development, or whatever assets have been pledged as collateral to ensure the investors' capital is safe. Essentially, this type of charge is very similar and works in the same way to what you might have come to expect when taking out a mortgage on a house, for example.
What if the development company becomes insolvent?
Any property bond worth investing in will structure the asset-to-liability ratio so that the debt is covered. This means that in the event of a default from the development company, the investors' capital will be repaid via sale of assets that were used as collateral. These measures ensure that your capital is protected, once invested.