New 4.5 per cent retail bond launched – should struggling savers be tempted?

In a bid to raise extra capital, the Reit is offering investors a six-year retail bond with a fixed income yield of 4.5 per cent.

In our era of ultra-loose monetary policy, retail bonds have become increasingly popular with savers, but launches are few and far between. With rates on cash abysmally low, for many people they offer relatively high and safe returns.

The latest retail bond to launch is from Regional Reit, an investment trust with a property portfolio composed primarily of office space outside of the M25.

In a bid to raise extra capital, the Reit is offering investors a six-year retail bond with a fixed income yield of 4.5 per cent. This yield will be paid semi-annually, with investors receiving payment in arrears of £2.25 per £100 of their principal investment in August and February each year.

The initial minimum subscription for the bond is £2,000. However, investors can increase their holdings by further purchases in multiples of £100.

The bond will mature in 2024. As is the case with retail bonds, investors will receive back the initial amount they paid for the bond at the date of maturity. However, bonds are eligible to be traded at any time before redemption on the secondary market (the Order book for Retail Bonds, or Orb).

Investors wishing to purchase the bond must do so by 12 noon 1 August 2018. The issuers reserves the right to close the offer early.

Regional Reit intends for the bonds to be available as either an Isa or a Sipp investment. 

With an income fixed at 4.5 per cent, much higher than many savings rates offered, and redemption at maturity guaranteed at a fixed price, the retail bond may seem like a good option for cautious investors.

However, some warnings. Unlike those with money in savings accounts, investors in bonds are not always able to recover their full initial investment before the bond’s maturity date. To do so, investors would have to sell their bond to other investors, possibly receiving less than the original amount paid.

At the same time, investors have no guarantee as to the safety of their cash. Whereas money in a savings account up to £80,000 is guaranteed by the Financial Services Compensation Scheme (FSCS), the same does not apply for retail bond holders. Should Regional Reit go bust, those holding it may receive little or nothing back.

Potential investors may also want to ask themselves why they would wish to invest in Regional Reit’s bond and not in the trust itself. Regional Reit’s shares have a yield of 7.7 per cent, much higher than the 4.5 per cent offered by the bond.

However, advantage is significantly reduced when the trust’s unusually high OCF (ongoing charges figure) of 4.36 per cent is accounted for. Regional Reit does claims that this charge is the result of recent acquisitions and should come down in the near future.

Even if that is the case, there are still some advantages of going for the retail bond instead of the trust. While riskier than a savings account, the bond is safer than investing in equities. The higher yield on Regional Reit shares is not guaranteed, unlike the redemption price and annual income from the bond. At the same time, the bond comes ahead of equities in the credit stack.

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