Real Estate Bonds: What to Buy

Despite the flurry of activity, many investors remain cautious about bonds issued by property companies.

One of the biggest sectors in the Israeli bond market today is real estate. Its weighting in the General Corporate Bond Index is 24% a figure that is likely to grow during this year’s reawakening of new issues from property companies.

The long list of new issues this year includes, Alony Hetz, which raised NIS 340 million; Ashtrom Group’s Ashdar unit, which raised NIS 100 million; and Industrial Buildings Limited, which raised NIS 330 million. But despite the flurry of activity, many investors remain cautious about bonds issued by property companies.

The real estate sector is very different from banking, communications or food. While the others are relatively homogenous, the property sector is characterized by a wide range of companies, activities and risks. Collateral and other backing is a much more important factor for investors.

And there is a very wide range of yields and maturities in the sector, too. Still, the sector can be broken down into three types, some of which are appropriate for every investor while others are largely for those willing to accept a high level of risk.

The first group includes companies most of which are rated AA-minus and have income-producing portfolios, mainly in Israel. They are lightly leveraged and carry less risk. Among them are British Israel, Bayside (locally known as Gav Yam), Amot Investments (which is owned by Alony Hetz) and Airport City.

The low level of risk for this group means their yields are relatively low, too. For instance, a British Israel bond with 2.9 years to redemption trades at an inflation-linked 1.5%.

The second group is made up of companies with an A rating. This includes a wider range of companies, most of which undertake real estate development projects overseas and/or in Israel. They are more highly leveraged, which affects their ratings.

The list includes Industrial Buildings Corporatino, Dori Group, Africa Israel Residences and Ashdar. Industrial Buildings Series 9 bonds, with a maturity of 3.6 years, trades at an inflation-linked yield of 4.2%. Other series trade at higher yields; for instance Series 14, with 4.6 years, carries a yield of 5.3%.

The third group is made up of high-risk companies, with ratings of BBB or none at all. These companies operate in commercial real estate or property development. Adgar invests in Canada and Poland while B. Yair is highly leveraged. The risk can be offset by examining the extent of collateral. Thus B. Yair Series 10 bonds, with a maturity of 2.9 years and backing by collateral worth twice the debt, yield 5.2%.

Bloomberg