What is Real Estate BOND?

For movie lovers, the first thing that comes to mind at the mention of bond is the character of the famous MI 007 agent, James Bond and his love for gadgets and women. Albeit real estate bond has nothing to do with James Bond and his love for gadgets and women. In this article we throw our searchlights on Real Estate BOND.

For a business man, bond is regarded as one of the three main generic assets along with stocks and cash and generally referred to as fixed-income security traded publicly on stock exchanges by corporate and government organizations.

By definition, a bond can be referred to as a debt investment. They are a way of raising money to finance new ventures, maintain ongoing projects or refinance existing debts by organizations, cities, states and countries. A bond is issued when an organization or government doesn’t want to obtain loan from a bank and decides to borrow money from an investor for a stated period of time at a variable or fixed interest rate.

The way it works is that the entity borrowing the money (which is referred to as the indebted entity or issuer) issues a bond which specifies the interest rate (or what is referred to as coupon) that will be paid when the funds loaned (referred to as bond principal) are returned (regarded as maturity date) while owners of the issued bonds (that means the investors) are referred to as debt-holders or creditors of the issuer.

The bond price issued most times is usually at the equivalent of the face value of the individual bond and it changes as coupon rates become attractive or not based on the existing interest rate at the time. This means there is an inverse relationship between bond value and interest rate.

Also, market price is dependent on a number of factors such as the credit quality of the bond issuer, duration of time before expiration and the coupon rate when compared to the general interest rate at the time.

It is however important to note that credit quality and duration are major determinants of the coupon rate. When the bond issuer has a low credit quality, the probability of default is higher thus causing the bonds to be traded at a discounted rate. I

n the case of bond maturity which can last from one day to more than thirty years, bonds with a longer maturity date have a higher interest rate since they tend to have lower liquidity.

Thus, in determining the risk level of bonds, an investor should consider price sensitivity to changes in interest rates as well as the curvature of the duration. Another area of interest for bond investors is the government bond market. This is because of its size, liquidity and the fact that it is used to measure credit risk by comparing to other bond markets.

There are different kinds of bonds such as:
(a) Zero-coupon bonds whose market price eventually meet up to its face value upon maturity and are issued at a discounted rate
(b) Convertible bonds which offers the bond holders the option of converting their debt into shares if the share prices increases to a very high level
(c) Callable bonds which are traded at a premium to non callable debt due to the fact that the organization can call back the bonds from the holders if interests rate reduces drastically
(d) Puttable bonds which offers holders the option of putting the bond back to the issuer if interest rates satisfactorily increases.

There is also what is called a mortgage bond which is a bond backed by a real estate property and secured by mortgage on one or more assets.

A mortgage bond gives an investor the opportunity to secure the principal using a valuable asset thus offering the investor a certain level of protection since the asset can be sold off to take care of the debt in case of a default situation. Because of this, most mortgage bonds have a lower return rate than traditional corporate bonds.

Even though there are various kinds of bonds, there are still some basic generic characteristics all bonds share which includes:
• Issue price: This is the original price the bond is sold for by the issuer
• Face value: This is the amount any kind of bond will be worth at its maturity and is also the reference amount used by the bond issuer in the interest payment calculation
• Coupon rate: This is expressed in percentage and is the rate of interest the issuer will pay on the face value of the bond
• Coupon dates: This is the designated date for interest payments to the bond holder by the issuer and are usually at yearly or six months intervals
• Maturity date: This is the date the bond will mature and the issuer pays the face value of the bond to the holder

It is reported that over N225 billion have been raised from Nigeria’s Bond Market in the last 10 years by more than 20 companies.

Although the banking sector seems to take the lead in raising of bonds, the ones that directly have impact on the real estate sector are the UACN Property Development Company Plc’s N15 billion issued in 2010 for 5 years at 10% per annum coupon rate and the Federal Mortgage Bank of Nigeria (FMBN) issued N30.56 billion bond with 17.25 coupon and 5 years maturity tenure in 2012.