What Are Property Investment Bonds and Who Are They Suitable For?

Investment in property has long been a popular and attractive investment. With interest rates on savings accounts and other types of investment such as stocks and shares currently so low, returns from the property market have supported this appeal.

The problem for the vast majority of would-be property investors, however, is that investment in the purchase of even a single property takes a considerable amount of money, a mortgage is likely to be needed to make that purchase, and, with all your funds for investment in that single basket, your choice of any particular property is critical.

Property investment bonds offer a way of investing in the property market without putting all your eggs in the one basket by making a long-term purchase of a single property, and instead give you access to property investment as part of a collective.

This allows much smaller amounts to be invested and also gives you the chance to diversify your investments by spreading them across several different sources – a diversification encouraged by most financial advisers.

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How Property Investment Bonds Work

Just as the term suggests, property investment bonds work in much the same way as any other bond.

By purchasing a bond – typically through a fund manager specialising in bonds – you are effectively lending money, which the borrower undertakes to repay at the end of an agreed period (the maturity date) and, in the meantime, pays regular interest instalments at either a fixed or variable rate.

Interest may be paid annually, half-yearly or even every three months.

Some types of bonds may be traded and their price varies in the way in which the value of other investments may go up as well as down.

In the case of bonds, prices may be determined by a variety of factors, such as the standing and perceived financial strength of the borrower (and, so, an indication of the certainty with which the loan is going to be repaid in full upon maturity), the length of time until the bond matures, and the rate of interest offered (the so-called “coupon rate”).

How Secure is Investing in a Property Investment Bond?

Just as you might expect, property investment bonds involve the lending of money to companies involved in the property market.

If you make use of a bond fund – specialists in the purchase of bonds – you are likely to have a much broader choice in the amount of money you choose to invest. Some property investment bond funds, for example, have minimum investment rates as low as £1,000 – allowing access to the property market to even the most modest investor.

As with any other investment, the value of your property investment bonds and the rate of return, may vary and go up as well as down. But that performance is underpinned by the general movement of property prices – which, even in the current uncertain economy, continue to rise.

Research by the British Property Foundation, for example, shows how the value of both residential and commercial property has outstripped the rate of inflation over the past few decades.

This has enabled some property investment bond funds to offer investors rates of interest as high as 8% per annum.

Stella Hulott

Stella Hulott has been working in, and writing about, the personal finance sector since the early 1980's. She specialises in writing about property, insurance and money saving tips. She lives on the Kent coast with her husband and three cats.