The Demise of the Minibonds

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.

About Us

Hilltop Credit Partners is a specialist funding partner for smaller and mid-sized UK residential property developers and house builders. We help developers who know their local markets but need access to attractive capital to effectively scale their projects and grow their business by building and selling more homes. We do this by providing tailored financing solutions. As former developers ourselves, Hilltop is entrepreneurial and deal driven, and we move quickly to provide you with the funding you need to seize development opportunities

Our business model is focused on helping you to secure your development sites and build, complete and sell the homes so that you can move on quickly to new developments where both our interest are aligned. Together we can help you to get your plans off the ground quickly. 

As banks continue to retreat from development lending it can be difficult for smaller developers to secure enough senior, mezzanine, and equity in a timely and cost-effective fashion. That’s where we come in. 

We work as your funding partner, and work with you helping to put together a credible deal memo, and structuring your financing in weeks instead of months. We don't broker your deal or shop it around. We fund it with capital we have secured. Contact us.