Investing in Shares or Property
Investing in Shares or Property New Zealanders have traditionally had a strong affinity with property investment. However, as an investment option, direct property investment is not necessarily an optimal investment alternative. This note explores the differences between direct ownership in residential and commercial property, and an investment portfolio which incorporates allocations to property but also shares, fixed interest and cash.
Property investment in New Zealand New Zealand is quite unique in our approach to asset ownership. In New Zealand, housing (including family home and investments) represents around 75% of New Zealand’s household assets. This compares to 60% in Australia.
These factors have led to a large proportion of New Zealanders investing into property, resulting in an over-exposure to this sector, which could expose investors to unnecessary risk. If we compare New Zealand with traditional western markets (see graphs below) it is obvious that investments and savings (including life insurance) have represented a far higher weighting of the overall household asset distribution in these western markets than in New Zealand. This confirms New Zealand’s very limited exposure to sectors other than property.
So why does New Zealand have this reliance on housing? There are a number of reasons which have funnelled investment savings into property; Property has been viewed (rightly or wrongly) as a safer, more secure investment in New Zealand. Credit to purchase investment properties has been freely available from financial institutions (such as banks and mortgage brokers) during the early to mid 2000’s, and increasing house prices have encouraged high leverage (debt). New Zealand has operated with a taxation system that favoured property investment. Additionally no capital gains tax exists, with most value capitalising into asset prices tax free. The equity market experience of the late 1980’s and early 1990’s tainted the view of investment markets for potential investors (Investment in companies with poor governance standards resulted substantial losses for investors). No compulsory or incentive based retirement savings products were available for New Zealand salary earners prior to KiwiSaver.
Performance of property versus other asset classes The graph below shows performance of major investment assets since 1998. It demonstrates that investment in New Zealand housing has in fact underperformed compared to a balanced portfolio, a portfolio which includes a mix of cash, fixed interest, property and shares. Whilst return is one aspect to consider when investing, investment risk is another important factor to take into account when comparing different investment alternatives.
A scarcity of high quality investment products (companies) being available on the New Zealand market for people to invest in.
1
Relative Return from Key Investment Assets (NZD) September 1998 - October 2011 4000 3500 Australian All Ords 9.07%pa NZSX All Gross Index 8.26%pa Balanced Portfolio 7.46%pa
3000 2500
NZ House Prices 5.97%pa Wholesale Interest Rates (90 day) 4.04%pa Inflation 2.51%pa World Share Prices 0.41%pa
2000 1500 1000 500 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 NZSX All Gross
MSCI World Gross (NZD)
90 Day Bank Bill
REINZ NZ Avg House Price
Inflation
Aust All Ords (NZD)
Balanced Portfolio
Note: The NZSX All Gross Index is a gross index and from 1 October 2005 assumes the reinvestment of cash dividends. Prior to this date, the NZX gross indices assumed the reinvestment of gross dividends (ie including imputation credits). The Australian All Ords Index is an accumulation (or gross) index and assumes he reinvestment of cash dividends. The MSCI World Gross Index is a gross index and assumes the reinvestment of cash dividends (ie it does not include tax credits). The NZ house price return shown above does not include any income that may have been derived from owning such property. It is purely a measure of capital return. The Wholesale Interest Rate return is after tax (now 30%). The Balanced Portfolio currently comprises 10% NZ Cash, 26% NZ Bonds, 6% NZ Property, 20% NZ Shares, 19% Australian Shares, and 19% Global Shares.
3 reasons to invest beyond property 1. Diversification
2. Liquidity
A balanced and well diversified portfolio acts to reduce risk by spreading an investor’s money across different investment options. If an investor placed all their money in one sector, in one country and that sector performed poorly, then the investor would be exposed to unnecessary risk.
A balanced portfolio offers the ability to buy or sell parts of the portfolio at short notice. In contrast, investment properties normally take a period of time to buy or sell and this is therefore a much more illiquid investment.
A diversified portfolio of investments provides access to a variety of asset classes, sectors and markets which can substantially reduce the risk and volatility of a portfolio. This is because shares in different industries and countries are affected in different ways, and to greater or lesser extents, by local or global events. The risks associated with investing in one location or market, is an important consideration. Whilst this risk may sound low, natural disasters including floods, fires and earthquakes in the last two years in Australasia brings this into focus. Resource consent processes, neighbours or other local factors can impact value. Insurance can cover losses, but it won’t account for lower market values, should that be the outcome of such issues. An investment property also bears the risk of a single tenant (or a handful of tenants) and loss of income, or dishonesty, can leave investors out of pocket for a period of time.
A balanced portfolio can still offer exposure to the property sector and an investor can still own property by investing in for example a property trust. These also offer ongoing management relieving the investor of these sometimes time consuming duties. Please refer to our note on Listed Property for more information. 3. Pricing transparency risk A portfolio of listed securities are often very liquid and can trade regularly between buyers and sellers, providing a fair and transparent market price. In contrast investment property, can trade irregularly and sometimes be driven by emotional factors. The value of a property, which is largely determined by comparative sale prices, is therefore not necessarily the fair value. The price of a share is instead driven by the supply and demand of the market and offer much more transparency.
2
A balanced approach is the best approach
Craigs Investment Partners Investor Education
As demonstrated by the graph on page 2 comparing the performance of different asset classes, a balanced approach with investment in cash, fixed interest, property and shares can produce a strong return whilst smoothing the effects of market volatility.
Craigs Investment Partners offer those new to investing, the opportunity to develop an understanding of the fundamentals of investing through our Investor Education program; Investor Basics. Investor Basics offer interactive workshops in different locations around New Zealand and a range of online resources including booklets, tools and calculators.
New Zealanders are traditionally drawn to property investments, however investing beyond property can offer many advantages. Whilst property is still one of the main components of a balanced portfolio, diversification across different sectors and markets is a widely recognised method to reduce investment risk and a key tenet of sustainable investing. For more information please contact an Investment Adviser by phoning 0800 272 442.
To learn more about the different investment options available visit our website, www.craigsip.com or talk to an Investment Adviser by phoning 0800 272 442.
Disclaimer: This report is a private communication to clients of Craigs Investment Partners Limited (“Craigs Investment Partners”) resident in New Zealand and is not intended for public circulation or publication or for the use of any third party, without the express prior approval of Craigs Investment Partners. This communication is not intended for distribution in the United States or any other jurisdiction outside of New Zealand. While this report is based on information from sources which Craigs Investment Partners considers reliable, its accuracy and completeness cannot be guaranteed. Craigs Investment Partners, its partners and employees, do not accept liability for the results of any actions taken or not taken upon the basis of information in this report, or for any negligent mis-statements, errors or omissions. Those acting upon information and recommendations do so entirely at their own risk. Craigs Investment Partners and/or its partners and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject, securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views contained in this research report. An analyst who participated in the preparation of this report, or a prescribed person of that analyst, has a shareholding/financial interest in this company. Please note that any advice in this report is class advice and that your personal circumstances have not been considered when providing you this advice. You should, before acting on such advice, consider the appropriateness of the advice, having regard to your relevant personal circumstances and financial objectives.
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Property investment in New Zealand New Zealand is quite unique in our approach to asset ownership. In New Zealand, housing (including family home and investments) represents around 75% of New Zealand’s household assets. This compares to 60% in Australia.
These factors have led to a large proportion of New Zealanders investing into property, resulting in an over-exposure to this sector, which could expose investors to unnecessary risk. If we compare New Zealand with traditional western markets (see graphs below) it is obvious that investments and savings (including life insurance) have represented a far higher weighting of the overall household asset distribution in these western markets than in New Zealand. This confirms New Zealand’s very limited exposure to sectors other than property.
So why does New Zealand have this reliance on housing? There are a number of reasons which have funnelled investment savings into property; Property has been viewed (rightly or wrongly) as a safer, more secure investment in New Zealand. Credit to purchase investment properties has been freely available from financial institutions (such as banks and mortgage brokers) during the early to mid 2000’s, and increasing house prices have encouraged high leverage (debt). New Zealand has operated with a taxation system that favoured property investment. Additionally no capital gains tax exists, with most value capitalising into asset prices tax free. The equity market experience of the late 1980’s and early 1990’s tainted the view of investment markets for potential investors (Investment in companies with poor governance standards resulted substantial losses for investors). No compulsory or incentive based retirement savings products were available for New Zealand salary earners prior to KiwiSaver.
Performance of property versus other asset classes The graph below shows performance of major investment assets since 1998. It demonstrates that investment in New Zealand housing has in fact underperformed compared to a balanced portfolio, a portfolio which includes a mix of cash, fixed interest, property and shares. Whilst return is one aspect to consider when investing, investment risk is another important factor to take into account when comparing different investment alternatives.
A scarcity of high quality investment products (companies) being available on the New Zealand market for people to invest in.
1
Relative Return from Key Investment Assets (NZD) September 1998 - October 2011 4000 3500 Australian All Ords 9.07%pa NZSX All Gross Index 8.26%pa Balanced Portfolio 7.46%pa
3000 2500
NZ House Prices 5.97%pa Wholesale Interest Rates (90 day) 4.04%pa Inflation 2.51%pa World Share Prices 0.41%pa
2000 1500 1000 500 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 NZSX All Gross
MSCI World Gross (NZD)
90 Day Bank Bill
REINZ NZ Avg House Price
Inflation
Aust All Ords (NZD)
Balanced Portfolio
Note: The NZSX All Gross Index is a gross index and from 1 October 2005 assumes the reinvestment of cash dividends. Prior to this date, the NZX gross indices assumed the reinvestment of gross dividends (ie including imputation credits). The Australian All Ords Index is an accumulation (or gross) index and assumes he reinvestment of cash dividends. The MSCI World Gross Index is a gross index and assumes the reinvestment of cash dividends (ie it does not include tax credits). The NZ house price return shown above does not include any income that may have been derived from owning such property. It is purely a measure of capital return. The Wholesale Interest Rate return is after tax (now 30%). The Balanced Portfolio currently comprises 10% NZ Cash, 26% NZ Bonds, 6% NZ Property, 20% NZ Shares, 19% Australian Shares, and 19% Global Shares.
3 reasons to invest beyond property 1. Diversification
2. Liquidity
A balanced and well diversified portfolio acts to reduce risk by spreading an investor’s money across different investment options. If an investor placed all their money in one sector, in one country and that sector performed poorly, then the investor would be exposed to unnecessary risk.
A balanced portfolio offers the ability to buy or sell parts of the portfolio at short notice. In contrast, investment properties normally take a period of time to buy or sell and this is therefore a much more illiquid investment.
A diversified portfolio of investments provides access to a variety of asset classes, sectors and markets which can substantially reduce the risk and volatility of a portfolio. This is because shares in different industries and countries are affected in different ways, and to greater or lesser extents, by local or global events. The risks associated with investing in one location or market, is an important consideration. Whilst this risk may sound low, natural disasters including floods, fires and earthquakes in the last two years in Australasia brings this into focus. Resource consent processes, neighbours or other local factors can impact value. Insurance can cover losses, but it won’t account for lower market values, should that be the outcome of such issues. An investment property also bears the risk of a single tenant (or a handful of tenants) and loss of income, or dishonesty, can leave investors out of pocket for a period of time.
A balanced portfolio can still offer exposure to the property sector and an investor can still own property by investing in for example a property trust. These also offer ongoing management relieving the investor of these sometimes time consuming duties. Please refer to our note on Listed Property for more information. 3. Pricing transparency risk A portfolio of listed securities are often very liquid and can trade regularly between buyers and sellers, providing a fair and transparent market price. In contrast investment property, can trade irregularly and sometimes be driven by emotional factors. The value of a property, which is largely determined by comparative sale prices, is therefore not necessarily the fair value. The price of a share is instead driven by the supply and demand of the market and offer much more transparency.
2
A balanced approach is the best approach
Craigs Investment Partners Investor Education
As demonstrated by the graph on page 2 comparing the performance of different asset classes, a balanced approach with investment in cash, fixed interest, property and shares can produce a strong return whilst smoothing the effects of market volatility.
Craigs Investment Partners offer those new to investing, the opportunity to develop an understanding of the fundamentals of investing through our Investor Education program; Investor Basics. Investor Basics offer interactive workshops in different locations around New Zealand and a range of online resources including booklets, tools and calculators.
New Zealanders are traditionally drawn to property investments, however investing beyond property can offer many advantages. Whilst property is still one of the main components of a balanced portfolio, diversification across different sectors and markets is a widely recognised method to reduce investment risk and a key tenet of sustainable investing. For more information please contact an Investment Adviser by phoning 0800 272 442.
To learn more about the different investment options available visit our website, www.craigsip.com or talk to an Investment Adviser by phoning 0800 272 442.
Disclaimer: This report is a private communication to clients of Craigs Investment Partners Limited (“Craigs Investment Partners”) resident in New Zealand and is not intended for public circulation or publication or for the use of any third party, without the express prior approval of Craigs Investment Partners. This communication is not intended for distribution in the United States or any other jurisdiction outside of New Zealand. While this report is based on information from sources which Craigs Investment Partners considers reliable, its accuracy and completeness cannot be guaranteed. Craigs Investment Partners, its partners and employees, do not accept liability for the results of any actions taken or not taken upon the basis of information in this report, or for any negligent mis-statements, errors or omissions. Those acting upon information and recommendations do so entirely at their own risk. Craigs Investment Partners and/or its partners and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject, securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views contained in this research report. An analyst who participated in the preparation of this report, or a prescribed person of that analyst, has a shareholding/financial interest in this company. Please note that any advice in this report is class advice and that your personal circumstances have not been considered when providing you this advice. You should, before acting on such advice, consider the appropriateness of the advice, having regard to your relevant personal circumstances and financial objectives.
3
