How Do Property Loan Notes Work?

Property development notes are popular investment vehicles for new and established investors, looking to capitalise on demand for flexible and affordable funding among the property development community.

Often unable to finance projects in full, using commercial loan products from major lenders, construction companies and developers often turn to private backers.

For the investor, property loan notes provide simplified access to UK real estate sector investments and are considered a comparatively low-risk financial instrument.

The Life-cycle Of The Property Loan Note

Every property loan note is unique, consisting of mutually amicable terms and conditions agreed on by both parties. In all instances the life cycle of a typical property loan note will always go through a series of similar stages.

10 most important stages in the life-cycle of a property loan note are:

• The developer identifies a potential site for a property development project.
• Project plans are drawn up and a planning permission application is submitted.
• Local authorities review the plans and grant the permit for the development.
• The developer reaches out to experienced investors, established investment companies and high net-worth individuals with the opportunity to back the project, in return for regular interest payments.
• A property loan note is drawn up, typically secured against assets such as the land or the property being developed.
• The investor and the property development company formalise and sign-off on the terms and conditions agreed, resulting in a legally binding agreement between the parties.
• A Special Purpose Vehicle (SPV) is created ring-fencing liabilities and assets protecting investors the developer.
• The investor receives interest payments at a fixed rate on the agreed dates as soon as the contract has been formalised and the funds have been transferred to the developer.
• Development of the project goes ahead as planned and interest payments continue for the duration of the agreed period of time.
• The development project or completed property is subsequently sold and the proceeds generated are used to repay the initial investment capital to the investor at the end of the agreed term.

The duration of a property loan note can be anything from 1 to 5 years, in accordance with both the requirements and the preferences of the developer and the investor.

Issues With Local Council Planning Permission

The main issue where local council planning permission is concerned is the potential for delays following submission of an application. In most instances, local authorities will provide a formal decision within eight weeks of receiving an application for planning permission, however, it may take significantly longer where larger or more advanced projects are concerned.

In addition, it is also possible for planning permission to be withdrawn (or for other complications to occur) if any aspect of the development that goes ahead is found to have breached the boundaries of the original presentation and proposal.

This is another reason why it is of the utmost importance to perform appropriate due diligence before investing in property loan notes.

Loan Note Funding: Who Can Purchase Property Loan Notes?

Property developers and construction companies are forbidden from attempting to sell the property loan notes to the typical individual retail investor.

There are certain basic requirements that must be met for an investor (or investment group) to be considered eligible for this type of investment. For example:

• You must be considered a high net worth investor
• Self-Certified Sophisticated Investor
• Certified Sophisticated Investor

As determined by the Financial Conduct Authority.

https://www.handbook.fca.org.uk/handbook/COBS/4/12.html#DES582

This is not a sector that is open to the average investor, due to the elevated capital required to purchase property loan notes and the potential risks of losses.

For those who qualify for property loan note investments, however, returns can be both high and consistent, often with steps that can be taken to mitigate most risks.

High Yields at a Fixed Rate

The nature of the development project and its likelihood of generating significant profits for the developer will influence how much the issuer is willing to pay in terms of fixed-rate interest. In order to find the best property loan investment opportunities available to suit both your risk appetite and your preferred capital outlay, it is important to enlist UK Best Investments support at the earliest possible stage.

At UK Best Investments, we can provide you with the independent expert advice you need to make an educated and informed decision regarding your suitability for property loan note investments. Call on 0116 2168443, or e-mail invest@ukbestinvestments.uk anytime to book your obligation-free initial consultation with a member of the team.