The Demise of the Minibonds

by | Nov 27, 2019

This week saw a key ruling by the Financial Conduct Authority. As of January 2020, no more marketing so-called “mini bonds” to yield-hungry retail investors.

An unregulated product, the property mini bond exploded several years back as a relatively simple way to secure property development finance. Indeed, mini bonds facilitated capital raising for all manner of ventures.

Sadly, over the past year or so there have been a number of high profile cases (it’s not unfair to call most them scandals) where unregulated “illiquid” property mini bonds have left investors high and dry. Many of these came from within the property development finance sector.

The collapse of London Capital & Finance, one of the larger mini bond sales firms, has prompted a chain of events to clean up the investment community of unregulated products.

Many retail investors, lured by high returns in a low-interest rate environment, possessed insufficient market knowledge or investment experience to understand what exactly they were funding. Or the risks involved…

True, in many cases investors did indeed receive high returns. Returns that would prove extremely difficult to achieve in a comparable period from most other investment classes. Everybody was happy, maybe even incredulous. 

But then, for any number of reasons, the going gets tough. Sales slow, margins become tighter….and suddenly the ‘security’ offered to hapless investors becomes worthless. A charge over a company’s dwindling asset value, a personal guarantee from a property entrepreneur worth something on paper but nothing when push comes to shove. Now not so happy, but just as incredulous.

Slick marketing, high promises, pseudo-boiler room sales tactics and the explosion of high-yield investment opportunities. A combination that ultimately left investors at the back of the queue for repayment and administrators suggesting that as little as 20% of investors’ money may ever be recovered.

As stated earlier, not all property mini bond investments are bad. They began as a bucket of fresh capital to fill the gap created by the retreat of traditional funding. Given the huge structural housing shortage and funding gap, the rationale for generating high single and often double-digit returns was appealing. Maybe even believable.

The problem is a few operators always tend to ruin a good thing. Funds raised for developers’ projects were often used to fund operating costs and lifestyles. A process reliant upon money from new bondholders coming in to exit front runners. That sounds like Ponzi to many of us and now a criminal investigation is underway to uncover marketing firms and developers who abused the system.

The fact is, however, that the funding gap still exists and so does the structural shortage of affordable homes. It will be interesting to see what effect the demise of the mini bond has for property investors. For developers capital is always available one way or another and, actually, I believe the landscape for the investor will improve. The regulated, reputable firms should do well with a greater pool of potential investors to deal with. Fewer pie in the sky “opportunities” on the market to distract the less knowledgeable. More tangible collateral underlying investments.

It’s a tragedy that so many decent, honest individuals got their fingers burnt. It’s a shame that the honest operators will have to rethink their approach to fundraising. But calling time on mini bonds is a necessary, overdue measure to make property development investment a much safer proposition.

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