Bradford & Bingley 50/50 Property Bond

ashpole

Hi,

I had an e-mail from B&B about their new 50/50 Property Bond. It has two elements:

- A one year fixed term bond, paying a fixed 7.00% pa gross / AER* on half your investment and;
- A five year House Price Bond, paying 110% of any gain in the Halifax House Price Index on the rest

Key Features

- Capital Security – whatever you invest you get back guaranteed
- Minimum opening balance £1,000 (£500 per element) Maximum £250,000 (£125,000 per element)
- Easy to open deposit savings account
- No additions or withdrawals permitted during the term of either element

You can find more details here.

Looks like an interesting option for short and medium term savings?

Mike

homersimpson_3

Looks like an interesting option for short and medium term savings?

Not sure about this one.

A one year fixed term bond, paying a fixed 7.00% pa gross / AER* on half your investment and;

you get can 8% with instant access at tsb savings account

A five year House Price Bond, paying 110% of any gain in the Halifax House Price Index on the rest

how much gain is likely - people less likely to buy houses because (a) higher utiliity bills (b) suspected increases in council tax (c) interest rates expected to increase (just have) which usually means higher mortgages.
Or I am wrong????? (Please say so if you think I am)

ashpole

homersimpson wrote:

Not sure about this one.

you get can 8% with instant access at tsb savings account

You can, but I think that's a monthly saver with a maximum of £250 per month for two years? B&B's one year offer is on a lump sum of up to £125K (half of the £250K max investment). I believe this is a good offer but is the sweetner to get you to invest in the other element.

how much gain is likely - people less likely to buy houses because (a) higher utiliity bills (b) suspected increases in council tax (c) interest rates expected to increase (just have) which usually means higher mortgages.
Or I am wrong????? (Please say so if you think I am)

That of course is the $64,000 question and if we knew the answer there would be no risk. The maximum risk is the loss of any interest on half of your investment for five years (your capital is safe and repaid in full). To see no return the HHPI would need to go negative or stay level for five years and I think that's unlikely. But would it come close to the interest rates of savings accounts (they're giving you 110% of HHPI so it doesn't have to outperform interest rates)?

The factors you mention are all valid ones that need to be considered. But I took a look at Bank of England yearly averages vs HHPI for the last ten years and the result is here. Clearly interest rates have an impact upon HHPI and the very high HHPI increases we saw in 2002 (and to a large extent 2003/4) must be discounted.

I guess it boils down to whether one thinks HHPI will come close to savings account rates and whether you're prepared to take the risk - we'll know the answer in five years!

Mike

meanmachine_2

I think, in this case, past performance is a very good guide to what the next five years won't bring.

After all, gains above wage inflation can't continue. And, unlike a company, there's no way households can "increase their profitability", certainly not while basic living costs are soaring.

Still, it could work as a hedge if you're bearish on property I guess.

homersimpson_3

That of course is the $64,000 question and if we knew the answer there would be no risk. The maximum risk is the loss of any interest on half of your investment for five years (your capital is safe and repaid in full). To see no return the HHPI would need to go negative or stay level for five years and I think that's unlikely. But would it come close to the interest rates of savings accounts (they're giving you 110% of HHPI so it doesn't have to outperform interest rates)?

The factors you mention are all valid ones that need to be considered. But I took a look at Bank of England yearly averages vs HHPI for the last ten years and the result is here. Clearly interest rates have an impact upon HHPI and the very high HHPI increases we saw in 2002 (and to a large extent 2003/4) must be discounted.

I guess it boils down to whether one thinks HHPI will come close to savings account rates and whether you're prepared to take the risk - we'll know the answer in five years!

until this morning i had never heard of the HHPI but am always willing (and very eager) to learn. why do they use this index (above others)? do others exist? where did you get the chart from- bank of england website? it's really useful to know these things.

ashpole

homersimpson wrote:

until this morning i had never heard of the HHPI but am always willing (and very eager) to learn. why do they use this index (above others)? do others exist? where did you get the chart from- bank of england website? it's really useful to know these things.

No problem. I made the chart myself using data from the Bank of England and HHPI data from here. Some information on HHPI can be found here. There are other indexes, some can be found here at the bottom of the page.

The data was put together in a spreadsheet and a PDF document produced which was uploaded to my web space.

Hope that helps!

Mike

dunstonh

I think these are very poor investments and have said so on other threads covering similar products. They are basically GEBs using the property index rather than the FTSE.

Like the FTSE GEBs where you dont get the dividends, with this you dont get the rental income and any property investor (whether buy to let or commercial property funds) will tell you that its the rental income that comes in every month that matters.

This is a cash cow to the issuer. Not for you.

You would be better off sticking 50% on a savings account and 50% in a commercial property fund (or range of funds).

ashpole

dunstonh wrote:

I think these are very poor investments and have said so on other threads covering similar products. They are basically GEBs using the property index rather than the FTSE.

Like the FTSE GEBs where you dont get the dividends, with this you dont get the rental income and any property investor (whether buy to let or commercial property funds) will tell you that its the rental income that comes in every month that matters.

This is a cash cow to the issuer. Not for you.

You would be better off sticking 50% on a savings account and 50% in a commercial property fund (or range of funds).

Thanks - that one stopped me in my tracks! I understand what you're saying but is it really that bad? No commercial property fund will guarantee to return my capital if things go sour, which for me would be too big a risk.

Mike

dunstonh

You dont get capital security on property funds but you have to consider that the low risk nature. In 20 years, bricks and mortar commercial property funds have only suffered 2 years where there was a loss. The worst was 6% and the other was 2%. Whilst past performance is no indication of future returns it does allow you to see how things react on past issues.

Example for you on a 20k investment:

You are concerned about the capital so you put 50% earning 5% a year for 5 years. That turns 10k into £12,762. The other 10k is in property funds. This allows the property funds to make a £2762 loss and still get your £20k returned. If you take the 5 worst years in the last 20 on property funds (including the 2 negative years) you would still have turned a profit and not had a loss.

Commercial property funds are low risk. They are not zero risk but then no option is.

ashpole

dunstonh wrote:

Commercial property funds are low risk. They are not zero risk but then no option is.

Agreed, that's very helpful. Please could you point me to an example fund so that I might start looking into the various ones available.

Cheers.

Mike

dunstonh

Bricks and mortar property funds available in unit trust/OEICs include

Norwich Union Property
Morley Property
Resolution Property (ex britannic)
New Star Property
L&G property
M&G Property
Std Life Property

There are others as well but these are the ones that immediatly come to mind. Also, property funds are available on the life funds and pension tax wrappers.

Every property fund is different. Some focus on Govt, some on retail, some on manufacturing. Retail, Govt, warehousing is lower risk than manufacturing. You shouldnt compare performance directly with the funds without looking at the properties and developments they have in their portfolio. A fund with lots of lets to the Govt is going to be a safe bet and offer decent returns. I spoke with a certain property fund manager some time back who mentioned that the Govt was going into lets on a minimum 15 year term with an annual increase of 3% above inflation. The Govt always pays its bills.