Why investing in commercial property bonds can be an excellent way to get better returns in a recession or inflationary times

Why investing in commercial property bonds can be an excellent way to get better returns in a recession or inflationary times

updated January 6, 2020

Investing in commercial property bonds during a recession or period of prolonged inflation can be beneficial to investors. Indeed, economic uncertainty is said to be the friend of fixed commercial property bond yields.

Despite recent political developments in the UK, lingering concerns remain about the outlook for the country’s economy over the next year or so. Overall, economic growth is relatively subdued and there are several uncertainties still to be resolved, with the finalisation of Brexit and related issues still top of the agenda.

Previous recessions and inflationary periods

Past recessions in London have seen interest rates drop dramatically as the government of the day sought to stimulate the economy and encourage investment. As a result of ongoing inflation, as day to day goods and the general costs of living become more expensive, the real value of money is likely to diminish.

Even when inflation is running at an average of only 3%, as it was between 2002 and 2012, investors will have had to earn at least that percentage return on their investments to avoid eroding the real value of their capital. With interest rates at or about 0.5% since March 2009, getting 3% or more from holding cash has been almost impossible. In fact, UK equity funds have generally failed to deliver an ahead of inflation performance with only around 16% of them providing a return more than annual inflation. That’s one reason many investors look to invest in bonds during these times.

Making the right investment choices, and smart investing during a recession, therefore, becomes even more important. Indeed, perhaps now more than ever, there are a number of excellent reasons why investing in commercial property bonds during a recession is a great way to beat a downturn and protect the value of your hard-earned savings… as well as the potential to enjoy attractive, above-average annual returns.

Let’s have a look at some of the key attractions of property bonds:

  • Commercial property bonds offer fixed or variable interest rates

 A fixed interest rate means an investor in a commercial property bond will receive the same amount of interest throughout the bond period, regardless of what changes are made to interest rates in the UK. Even if interest rates go down during the bond period, the higher interest rate specified in the bond agreement will still be paid.

Variable interest on a commercial property bond means that the interest rate on offer varies depending on the interest rate offered by banks. Yet it is still likely to well be above bank deposit rates.

Commercial property bonds can offer such interest rates for a fixed period of time, perhaps 3 or 5 years. Such rates may be as high as 8.25%, as is the case for the Nao Bond. Naturally, these will look more and more attractive as governments and banks lower interest rates to encourage domestic spending and stimulate their home economies. The theory being that, when borrowing costs are low, more people are encouraged to lend money for consumer items or to start new businesses and so on;

  • In difficult economic times, a key question always is: do bonds perform well in a recession?

Well, in most recessions, there is a flight to purchase safer bonds such as Treasuries (essentially instruments of government borrowing) or investment-grade bonds. The higher demand means that bond prices will go up, and bond yields (or the annual returns) will go down. If yields on Treasuries or other government or quasi-government issued bonds do drop, then the fixed interest returns on commercial property bonds appear even more attractive.

Not since the recession of 2008, when strong demand for bonds pushed yields down, have bonds yields been as low as those seen in 2019. However, if you had invested in a commercial property bond with fixed returns, you’d be getting an attractive, positive spread between rates paid by the property bond, and current Treasury and other government bond yields;

  • Real estate investment in a recession

It’s worth considering further some of the advantages of investing in real estate in London during a recession. In a downturn, as banks become more risk-averse, financing may be harder to get for new developments. Only those well-researched and well-planned new projects, with strong feasibility study results, are likely to proceed to the construction stage.

This elimination of less viable or attractive property projects, in turn, shrinks the potential future supply of commercial property in London over the forthcoming 2-3 years. So, any new developments starting construction in the middle of a recession will actually be well-positioned to launch to the market when the economy starts picking up. The project will effectively achieve a first-mover advantage and capture pent up demand which has accumulated over the development period.

Therefore, investing in commercial property bonds when the economy is down, with a developer having a sound track record of success, makes a lot of investment sense.

Commercial property bonds are well worth a closer look

For an investor making their initial inroads into London property, commercial property investment bonds could be a great way to go. Investing in UK commercial real estate bonds can be an excellent starting point for not only novice investors but experienced players who are yield conscious.

Read more on how to ensure your commercial real estate investment success.

Unless you’re involved in the real estate market on a full-time basis, it’s difficult to know everything about maximising investment returns. Furthermore, the last thing you want is development-related hassles.

It’s apparent, therefore, that commercial property bonds issued by an experienced developer offer a number of advantages:

  • As mentioned above, some of the most attractive returns currently available are generated by commercial property bonds—recession or no recession;
  • Such bonds can be asset-backed, so there would always be underlying assets to generate the contracted returns;
  • Some bonds have a so-called early exit option. This means that a contract for a bond can be terminated at any time, subject to certain conditions being fulfilled. These terms usually relate to how the interest on the bond is calculated and paid;
  • Collective experience and insights of an experienced developer, together with liabilities and costs being shared by all investors in the commercial property bonds, help to significantly mitigate development risks;
  • Investors can make their initial investment without the need for a mortgage or loan which they would almost certainly need to have in place to buy a property outright in London;
  • Investors can benefit from the profitability associated with the property sector, without all the downsides or costs of direct property ownership. Such costs may include paying maintenance fees, stamp duty, council tax, insurance payments, tenancy issues and so on.

Commercial property bonds can be considered “recession proof

Investing in commercial property bonds issued by a developer with a solid track record will generate attractive investment returns, whether there is an economic downturn or recession forecast or already in place.

It makes sense to invest with a developer who clearly knows the London market well and has a long track record of success.

Nao Group has undertaken a number of successful real estate investment development projects in London over the years. Therefore, if you are looking for great asset-backed investments into commercial properties in London and are interested in learning more about Nao’s property investment bonds, contact us today.

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

 

 

 

 

 

 

Reference articles:

Moneywise.co.uk 

CNBC

Macrotrends.net 

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