GOVERNMENT's new retail bonds may attract cautious property investors who are seeking an alternative to the residential property market.

Bill Rawson, president of the Institute of Estate Agents, says the residential property market has been flooded with small investors who have lost faith in unit trusts and the share market.

"They have been looking for alternative investments which includes buying either their first or second property. I believe it is those people, who don't want to take any risk at all, that will be attracted to retail bonds," says Rawson.

Government plans to issue retail bonds in units of R1000, with a maximum investment of R1m.

Rawson says this issue will be attractive because the interest rates on offer are high, 9,25% for a twoyear investment and 10% for a fiveyear investment.

"These rates compare well with the 7% or 8% obtainable on fixed deposits and these bonds will therefore appeal strongly to investors, particularly those who prefer to avoid risks of any sort."

However, Rawson believes residential property will still be a better investment than bonds in the long term. He says investment out of property into retail bonds on the part of investors wanting to avoid risks of any sort will not slow down the residential property boom.
Property economist Erwin Rode believes the type of person who invests in property has a different risk profile to those who invest in bonds.

"They have a taste for higher risk and higher return compared to the low risk and low return that you get on government bonds," Rode says.

Property economist Francois Viruly says residential property is a good instrument for capital gain and returns on bonds are influenced by inflationary expectations. "I still believe that residential property offers a better diversification for the small investor. The small investor will not only be looking at yields but at capital growth," he says.

Viruly says that for the investor who is buying to rent out, the retail bond market may offer an opportunity to invest in another instrument. "But I believe the volatility in the bond market is significantly higher than the volatility you can expect in the property market. On a risk return basis I believe property will continue to be a more attractive investment."