Bonds and the Commercial Property Bond Market Explained

Bonds and the Commercial Property Bond Market Explained

updated April 21, 2020
Bonds and the Commercial Property Bond Market Explained

Most people have heard about bonds, but how many really know exactly what a bond is and how the bond market works? And what about different types of bonds, such as commercial property bonds?

We’ve outlined some of the key facts relating to bonds and the commercial property market.

What are bonds?

Bonds are short, medium or long-term loans that are made by an investor (who is also called a bondholder) to a bond issuer.

The bond issuer pays an agreed level of interest to the bondholder for a fixed period of time. This interest may be fixed or variable depending on the terms and conditions of the bond. The proceeds of the bond are used for a variety of reasons such as financing commercial property developments (commercial property bonds), raising money for government long-term borrowing, or shorter-term city or municipality lending for the provision of social services or infrastructural improvements.

A bond will also have an expiry date or end date by which the borrower will repay the bondholder the original sum invested.

The amount of interest paid is often called the “yield” on the bond. If a bond has a long maturity date, a higher interest rate is usually paid as the bondholder may be exposed to higher inflation or other unexpected risks.

What types of bonds are there and who are the issuers?

There are a number of basic types of bonds, just as there are a variety of people or entities which invest in or issue bonds.

Types of investors investing in general bonds and/or commercial property bonds include private individuals, property developers, private and public entities, local and national governments, sovereign funds and major international banks or finance companies. 

Favoured types of bonds include:

  • Commercial property bonds: issued by property developers to raise funds for commercial property developments;
  • Corporate bonds: issued by companies or corporations to raise capital for various matters such as company expansion, product development or research and future investment etc.;
  • Municipal bonds: issued by cities and other local authorities, with the funds raised being used for providing public services, or financing projects such as roads or bridges or other capital intensive projects;
  • Treasury bonds: issued by the government for the purpose of securing long-term loans or debt. 

Key Characteristics of Bonds

Irrespective of the nature of the issuer, all bonds have certain features and the key terminology can be summarised as:

  • Coupon rate is the rate of interest which is paid by the issuer on the face value of the bond. For example, if the coupon rate is 8%, then the bondholder will earn this percentage annually based on the face value of the bond; 
  • Coupon date refers to the dates when the bond issuer is scheduled to make interest payments. The frequency depends on the actual agreement between the parties; the Nao Bond makes interest payments on a quarterly basis; 
  • Face value is the value of the bond which is used by the bond issuer when calculating interest payments. Whether the bond value goes up or down, the face value will be used to determine interest payments;
  • The maturity date is when the bond matures and the issuer is required to pay the bondholder the bond’s complete face value;
  • The issue price refers to the amount which the bond issuer sells the bonds.

Some Benefits of Investing in Bonds

  • The interest payable on bonds (the “returns” or “yield”) can be known (if a fixed interest rate) or estimated (if variable) in advance;
  • The principal amount invested is returned, together with the accrued interest, at the end of the bond period;
  • Bonds typically offer the highest and most reliable cash flows. Even at times when interest rates are low, there are still options such as high-yield bonds or emerging market debt which will enable investors to build a portfolio to meet their income needs;
  • Investing in a commercial property bond, for example, allows investors to participate in, say, the London commercial property market without having to accumulate enough money for self-investment or, indeed, take all of the associated development risks;

Note: It is important that prospective investors obtain appropriate advice from a financial consultant before investing in bonds.

Why commercial property bonds can be your best investment option if you’re looking for exposure to the London property market

Commercial property investment bonds are one of the best options for anyone looking to invest in the London property market. Or, indeed, for someone making their initial foray into financial investment and planning to build an investment portfolio

Investing in commercial real estate bonds takes away the various hassles related to development or direct property ownership. Investors do not need to pay maintenance fees, stamp duty, council tax, insurance payments, or get involved in complicated tenancy issues.

What are you waiting for?

Don’t hesitate to contact us at Nao Group today, if you’re looking for great asset-backed investments into commercial spaces in London, or are interested in learning more about Nao’s property investment bonds. You can also read more financial news and tips here

Nao Group is a commercial property developer creating coworking spaces in London and around the globe: building communities, not just places to live and work!