What are they, and how can they form part of your investment strategy?
From residential buy-to-let to commercial sectors such as care homes and hospitality, property investors from around the world are continuing to invest in the UK, despite the heightened political and economic uncertainty.
But investors can further unlock and tap into the strength of the country’s various markets by investing in Secured Loan Notes.
What is a Loan Note investment?
A Loan Note is a type of financial instrument issued by house builders and developers as a means of raising capital in order to build a project or portfolio of developments.
This is done by effectively borrowing money from investors, which is then returned with contractually-agreed interest after a pre-determined period of time.
The conditions of Loan Notes, including the level of returns, cash input required, frequency of repayments, and duration of the contract can vary depending on the company issuing them.
An example Loan Note
In the case of one Loan Note, investors can purchase a Loan Note from as little as £25,000 and earn fixed returns of anywhere between 12% and 22% per annum, with annual bonuses that increase incrementally each subsequent year, up to a maximum of 7 years.
Additionally, every year, the investor can sell their Loan Note and receive their initial payment plus any interest earned by providing at least 30 days’ notice prior to the anniversary of their original purchase date.
This creates a clear exit strategy which does not rely on a sale, giving the investor the ability to have a predictable and concise investment plan which details exactly when they can expect their Loan Note to mature.
Why choose a property Loan Note investment?
Unlike the traditional method of investing in property, by purchasing a physical asset and having it as leverage as part of the investment, Loan Notes can be secured via a third-party.
To ensure their investors’ returns are properly protected, a Loan Note issuer can appoint an experienced and regulated Security Trustee which will hold debenture over the firm’s NET assets, providing reassurance that the investment is fully secured.
Purchasing a Loan Note does not mean the investor owns a stake in the company issuing them. Instead, they are a promissory agreement between them and the issuer.
Neither do they own a physical asset; by investing with a Loan Note, you are effectively buying into the company as an entity, including its track record, reputation, and chiefly its development portfolio.
The advantage of not owning a physical asset is there are no property fees involved, such as maintenance costs, money lost from void periods, or stamp duty land tax.
This also means the investor does not need to be actively engaged in running the property or incur the cost of appointing a management company to oversee its operation.
One perceived drawback of Loan Notes is that the fixed terms of the returns means the investment does not benefit from capital gains through property prices and rental growth, but this can also be an advantage.
Much like the differences between fixed-rate and variable-rate mortgages, having returns that do not change means the earnings from it are predictable as they are not susceptible to, for example, economic downturns, price declines, fluctuations in buyer/tenant demand, or changes in interest rates.
Additionally, Loan Notes allow investors to benefit from the strength of the UK’s property market by investing with smaller amounts. Depending on the region and city, the costs of investing in physical property can vary dramatically.
Buy-to-let purchases in London fell significantly in 2018 by 5.8%, meaning it is no longer the English region with the most sales for buy-to-let property for the first time, whilst landlords that do operate in the capital have lost as much as £1,806 in rental income as a result of Brexit.
Property Loan Notes are an exceptional alternative that can compliment the investment strategy of any investor.
If you would like to learn more about Loan Notes, or discover our current Loan Note investment opportunities, get in contact with us today: