Property Bonds –-
the medium risk investment with higher than market average returns. When a piece of land is ready for development,
the construction costs incurred are lower than the cost of land in Hong Kong and China,
mainly due to lower costs of labor and higher land cost as to the contrary of the higher
construction costs than land cost found in North America resulting from higher costs of
labor and lower cost of land. However, the market value of the fully developed property
will usually turn out to have premium/profit over the total costs, which include the cost
of the land, the cost of construction, and financial and operational costs. The profit or
loss accounts for developing a property can hardly be translated by historic trends or
values, the prevailing market conditions such as interest rates, competitions, and supply
and demand will determine the intensity of such effects.
The structures of Property
Bonds vary from their geographic diversities where differences in real estate policies,
market natures and investment behaviors and cultures significantly affect payment and cash
flow patterns of the bonds.
For properties in North America, Property Bonds
can be structured to absorb a part of or the full par/outstanding principal value of the
Land Bonds previously issued. This continuous investment option will in effect reduce the
cash required in the land purchase substantially. It applies as an extension of
loan/investment with the same effect in the case that both Land and Property Bonds are
issued by the same issuer/land owner/developer. In order to assure investors of the
independent natures between the two bonds particularly in the areas of income and yield
which include interest payments and profit sharing, the Property Bond will only be issued
right after the full retirement of the Land Bond as to be sure that there will not be any
overlapping interests or outstanding payments brought over from the previous bond.
For properties in Hong Kong and other Asian
areas, Property Bonds serve simply as loans to finance the development costs of the land.
Certain redemption features can be structured to the bond such as preferential rights for
the bondholders to purchase the developed properties through bond redemption. In case of
excess funding available from the bond portfolios, management of the bonds may consider to
facilitate mortgage financing to the property buyers with particular preferences given to
those buyers/bondholders at the later time. This is another spin-off opportunity for the
issuance of mortgage bonds in the nearest future when the aggregated loan grows to a
feasible size. As a result of tremendous demands for the properties at the time of
pre-sale, developers can issue the Mortgage Bonds themselves to provide competitive
mortgage financing to buyers as to boost further sales activities and buying interests of
the properties. On the other hand, it provides developers with a spread-driven thrill-less
stream of income and greater cash flow.
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