What is a Property Bond?

Property bonds, or property investment bonds, are bonds that investors can purchase to contribute to a real estate project. These property bonds may be implemented by the developer during the commencement of a real estate development to generate capital for the project.

The property bond forms a binding agreement between the developer of the property and the investors, whereby the former is required to detail how the investment will be utilised, the applicable interest rates for the investment, how the funds will be secured and the investment horizon for the loan.

These property bonds can be appealing to investors because of the higher interest rates and they tend to be lower in risk since they are secured by the property involved in the real estate project.

How property bonds work?

With most types of bonds, the company issues the bonds to generate capital for its operations. The same applies to property bonds, where the developer or the company carrying out the real estate development issues the bonds, generating funds to finance the project.

As an additional security measure, the issued bonds are legally secured against the property or land, as indicated on the property’s title, as a form of collateral in the event that the loan is defaulted on.

The investors receive their principal, with interest upon the maturity of the bond, with the interest rate varying depending on the terms of the bond and the length of the investment.

Pros and cons of property bonds

Pros

1) Security-backed
Property bonds are secured against assets, such as the property or land that the project is situated on. Thus, the investor will be able to receive a return on his investment, whether that is from the property successfully being developed and sold, or from the property being liquidated if the developer defaults on the loan.

Since this security is outlined in the property title, the bond is legally enforced, similar to a residential property being used as collateral for a mortgage. It is also relatively low risk for the investor.

2) Higher interest rates
Property bonds typically offer interest rates ranging from 8% to 12% annually, which are significantly higher than other investment options offering dividends. They can be a source of passive income, with payments at set intervals, with the principal returned upon maturity.

3) Lower risk
Since property bonds are used to finance a real estate project, they tend to be less volatile than the stock market as they are subject to fewer factors impacting their performance, and posing less risk to investors.

Cons

1) Unregulated
As property bonds are not regulated by the government or any relevant financial authorities, investors are less protected legally, compared to other forms of regulated investments such as stocks, funds or government bonds.

2) Fixed investment term
Property bonds have a fixed investment term, as outlined in the terms of the investment agreement. Therefore, these bonds are not easily liquidated and taking an early exit option may result in losses.

Are property bonds right for you?

Property bonds can be suited for investors who are seeking an investment income with stable and relatively high rates of returns. They may offer payments at fixed intervals throughout the investment period, or provide a lump-sum payout at the maturity of the bond, depending on the terms of the agreement.

Property bonds are also a good fit for investors looking for a safe investment option since they are secured against real estate assets so investors do not have to worry about losing their capital.

Investors should be able to safely commit to the entire length of the investment without having to liquidate the property bond. Although flexible early exit options are offered for many property bonds, investors will have to sacrifice any upcoming interest payouts, thus losing out on potential profit.

In conclusion

Property bonds can be a simple way to indirectly invest in and gain returns from real estate. This allows for a more hands-off investment process compared to direct property investment, and investors can avoid the significant fees and taxes associated with traditional real estate transactions. Investors can therefore receive a yield without the hassle of sourcing, purchasing and maintaining their own property.

Alternatively, investors may take advantage of third-party companies, such as real estate investment trusts to indirectly invest in real estate or real estate co-investing to directly invest in and co-own property, without having to deal with the administrative aspects of property investment, while reaping the returns generated by real estate.

About RealVantage

RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.

The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.

Get in touch with RealVantage today to see how they can help you in your real estate investment journey.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.