Residential property has been a great investment for Kiwis over the last 20 years and has helped build wealth for people saving for their retirement. But there are increasing headwinds for this popular investment class which is leading to a re-assessment by some people as they approach retirement.
To get an overview of the alternatives to residential property, we talked to two experienced investment advisors at JMI Wealth. JMI is a North Shore-based company which has provided sound investment advice for over 30 years on $3 billion of client funds. It has a reputation for high quality advice and is proud of its North Shore heritage.
Neville Giles and Bruce Ross have many years' experience in investment services and both have strong links to the Shore with Neville growing up in Sunnynook and Bruce settling in the Bays. They offer their thoughts on residential property as an investment.
Bruce says that the housing market is likely to come under pressure in the coming years. “Some of the tailwinds that have helped the market historically are starting to unwind. House prices have benefited from low interest rates, strong migration, and lack of supply. All of these factors are now reversing.” This does not mean that house prices will necessarily fall, but the strong growth of the past few years is unlikely to continue. Investors also face increasing regulation in the sector with the Healthy Homes initiative following changes to tenants’ rights and increases in loan-to-value ratios used by the banks in assessing loans.
Direct property is a great way to accumulate wealth, but investors’ objectives change as they head into retirement with income and preservation of wealth becoming more important. It becomes important to consider the disadvantages of property as an investment as investors move towards retirement.
As residential property is illiquid, it’s difficult to sell a property quickly if monies are needed urgently. A house is also not divisible – it is not possible to sell off one room if you want to fund a holiday! Another consideration is the unexpected cost of urgent repairs which is a factor on the Shore with an aging stock of housing. Lastly, there is the concentration risk of having all retirement savings invested into one asset class.
There are alternatives to residential property investment. If an investor wants to remain in the property market, then listed property trusts are an option. These entities are listed on the NZX and manage a diverse portfolio of properties while paying regular income. Neville notes the ease of accessing multiple types of properties via a small number of investments. “You can own high quality office buildings through Precinct Properties, leading shopping malls investing in Kiwi Property and an outstanding collection of industrial properties via Property for Industry.” The yield from these investments ranges from 4–6% p.a. which is a significant premium to term deposits.
Another sensible strategy is selling one or more rental properties and investing into a more diversified portfolio which includes property but also bonds, shares and cash. This has the advantage of retaining an interest in property but adding liquidity and diversification. Bruce is a strong advocate of clients seeking diversification as they move towards retirement. “The best way to manage your wealth in the long term is with a diversified portfolio. This can provide income and growth while preserving your wealth over the long term.”
Modern investment portfolios are a shrewd strategy because they also give exposure to companies and countries other than New Zealand. New Zealand is a great place to live but having all your savings in one country can be risky and means missing out on investing in growth regions like Asia or missing the opportunity to invest in some great companies like Disney, Nestlé or Apple.
Investing in property has been a successful strategy over time but as circumstances change, a more diversified portfolio to complement or replace a residential property investment might be sensible. "Talking to an expert financial advisor can be a real help in determining the best investments to reach your financial goals".
Neville Giles on 027 257 5711 firstname.lastname@example.org or
Bruce Ross on 021 0267 0897 email@example.com
“The information in this publication is provided for general information purposes only. It contains selective information that may be incomplete for your purposes and does not constitute financial advice. Its contents should not be relied on or used as a basis for investing in any products described in it.”