As published in The Australian on 1 November 2016
You don't have to borrow big or worry about falling prices to invest in property. Property companies issue corporate bonds and they can be a great alternative – here are ten reasons why you might invest in a property bond instead of direct investment with a mortgage
There is something about property that makes our hearts swell. It can make a statement about who we are and what we value. One if its most redeeming features is that it’s tangible and can be beautiful, often invoking an emotional response.
It seems the must have accessory these days isn’t the latest Giant road bike or Chanel handbag, rather it’s an investment property. First home buyers are commiserating over their inability to break into the market, while Generation Xs and Baby Boomers borrow big to get ahead.
Historically, direct property investment has been rewarding. But in recent times there has been a string of commentators and regulators warning that the market is overheating and it’s about time for a correction.
Some cities and country towns exposed to the resources sector are already feeling the pinch with prices dropping as companies pull out or downsize.
But what if I told you that you don’t have to borrow big or worry about falling prices to invest in property and can achieve good income of between 3 and 7 per cent per annum? Property companies issue corporate bonds and they can be a great way to invest without the hassle and considerably lower concentration risk than direct property investment.
The investment then becomes a much more rational assessment of the risks and returns available.
Here are ten reasons why you might invest in a property bond instead of direct investment with a mortgage.
- You can diversify your investment across various companies in different sectors – retail, commercial, industrial or rural – from as little as $10,000 per bond.
- No need to worry about finding and keeping good tenants – you can expect regular income on the bonds either quarterly or half yearly. The company issuing the bond has to fail before you need to start wondering if you’ll get your income.
- Bond investors have an ‘equity buffer’. If the company fails, the shareholders absorb losses before the bondholders.
- If there is a correction, the prices of the bonds may decline but the company has a legal obligation to repay the $100 face value of the bond at maturity.
- Bonds are generally tradeable and more liquid investments than property. Most trades are done on a Trade +2 day basis, the same as shares. Selling an investment property may take months or you may have to drop the price if you want to sell it quickly.
- Because bonds are tradable, their prices go up and down, potentially offering higher returns if you sell before maturity. The reverse is also true, prices can fall and those that have to sell prior to maturity may lose some capital.
- Bonds issued by property companies are backed by the earning potential and the assets of the company and generally are lower risk than direct property investment.
- There are various maturity dates on offer. Once bonds have been issued they start trading in the over the counter market. You get to choose the maturity date of what you invest in. There are property bonds with three years to maturity or out to 10 years until final maturity. A bond issued by ASX listed 360 Capital has less than three years to run, maturing in September 2019, offering a yield to maturity of 5.67 per cent per annum. General Property Trust has a bond that has around ten years to run, maturing in 2026 offering 3.5 per cent per annum.
- There are three types of bonds that earn income in different ways, making them attractive under various economic conditions. Most corporate bonds issued by property companies are fixed rate, meaning investors know their returns upfront and these cannot change over the life of the bond. But Genworth Financial Mortgage, a lender’s mortgage insurance company, has issued a floating rate bond, where interest goes up and down depending on market expectations of interest rates. The current projected yield to maturity is 5.11 percent per annum.
ALE Finance, a joint venture between Woolworths and the Mathieson Group issued an inflation linked bond some years ago. The bonds’ returns are earned in two ways: the $100 face value of the bonds grows over time with inflation. They also pay around a 3 percent fixed rate of interest on the growing capital of the bond.
- The risk and return of the bonds on offer varies. For example the lowest risk bond is from ALE Finance, which is AAA rated – the same as Commonwealth government bonds. The bonds are secured over freehold assets consisting of 86 pubs and hotels across Australia. At the other end of the spectrum, high yield bonds from W A Stockwell and Sunland Group, maturing in June 2021 and November 2020 respectively both pay around 6.8 per cent per annum. See the table for other bonds options.
One of the big attractions with property is the tax benefit of negative gearing. It’s unusual to see investors gear into bonds but not unheard of.
Before you jump on the property bandwagon its worth doing your research, investing in bonds issued by companies in property may be a new option for you to consider.
Note: Bond dealers make most of their returns taking a small margin between the buy and sell spread, much the same way the foreign currency markets works. There is an account keeping fee but no entry or exit fees.
| Company | Maturity/call date | Bond type | Yield to maturity (pa) | Income/running yield (pa) |
| ALE Finance Company# | 20/11/2023 | Inflation linked | 4.76% | 3.17% |
| Dexus Wholesale Property | 16/06/2025 | Fixed | 3.64% | 4.39% |
| General Property Trust | 24/02/2026 | Fixed | 3.67% | 3.66% |
| Genworth Financial Mortgage | 03/07/2020 | Floating | 5.11% | 5.15% |
| Global Switch Property | 23/12/2020 | Fixed | 3.79% | 5.72% |
| Lend Lease Finance | 13/05/2020 | Fixed
| 3.68% | 5.58% |
| Stockland Trust | 23/11/2022 | Fixed
| 3.34% | 4.23% |
| Stockland Trust | 25/11/2020 | Fixed
| 3.13% | 6.91% |
| Sunland Capital | 25/11/2020 | Fixed
| 6.83% | 7.37% |
| W A Stockwell | 29/06/2021 | Fixed
| 6.76% | 7.54% |
| 360 Capital | 19/09/2019 | Fixed
| 5.71% | 6.69% |
Source: FIIG Securities
Note: Prices accurate as at 28 October 2016 but subject to change
#ALE yield to maturity assumes inflation runs at 2.5% per annum
Red = wholesale only, Black = wholesale and retail