Real estate bonds attract with high yields in times of low interest rates. In addition, the terms bond and real estate suggest security for many investors. Experts explain to what extent real estate bonds represent a rational investment.
Investment opportunities in real estate
During times of low interest rates, real estate has become more and more established with capital market investors. In addition, many opportunities to invest in the real estate market developed. There are numerous open and closed real estate funds, investments in real estate investment trusts (REITs) and mortgage bonds. But real estate bonds are particularly attractive, especially with permanently low interest rates. These are bonds from real estate companies that often promise an attractive fixed interest rate.
What are real estate bonds?
Since neither the term mortgage bond nor real estate bond are legally protected terms, any corporate bond with a certain reference to real estate can be declared as such. This already represents one of the risks that real estate bonds pose. It is therefore important to check the core of the underlying investment product in advance.
Usually, however, a real estate bond is based on a specific real estate portfolio that is to be financed by the issuer. Thus, real estate companies that issue said real estate bonds can then invest the capital gained in their own projects through which the company grows. As a rule, existing properties and construction projects are supported.
An example of a specific bond would be the real estate investment of Exporo Projekt 77 GmbH. The company invests the capital gained through the real estate bond in a specific commercial property. An annual interest rate of five percent is promised, with a fixed term of three years.
These numbers seem appealing, but are accordingly also burdened with high risk.
The risks of real estate bonds
The term real estate bond often suggests a high level of security to the investor, supported by the ongoing real estate boom, the idea of a possible loss of capital quickly evaporates.
“The term property is often synonymous with durability and security. An investment in real estate bonds should not be confused with an investment in real estate, ”explains Klaus Kumpfmüller, member of the board of the Austrian Financial Market Authority FMA, in an interview with Capital. A real estate bond is therefore based on the issuer’s corporate risk. Investors are not considered to be the owners of the underlying property and they also have no direct participation in the property, unless this is explicitly agreed in the contract. Therefore, Kumpfmüller warns: “The majority of the bonds accessible to small investors are unsecured.” Accordingly, the investor is left behind if the issuer becomes insolvent.
Ratings by the major agencies such as Moody’s offer a certain degree of transparency; they give real estate companies certain credit ratings. Michael Oblin, department head at the investment company Degroof Petercam, advises in an interview with Capital that one should insist on a Moody’s rating of at least Baa3, so that the company would have at least an “investment grade rating”.
For example, the real estate company Deutsche Wohnen was rated A3 by Moody’s, which is a decent rating. The real estate bond issued by Deutsche Wohnen with a term until 2030, however, only promises a coupon of 1.9 percent per annum. More profitable than a German government bond, but far from five percent annual interest. “The higher the interest rate or the yield on a bond, the greater the risk,” Oblin comments.
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However, since rating agencies mainly rate large corporations, investors in real estate bonds usually have to independently carry out an intensive review of the issuer.
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