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By Martin Hawes, AFA Financial Writer
If you think big, you could have your money working for you among the high-rises of Sydney, New York, or London.
When most people think of investment property, they think of buying a house to rent: perhaps a little brick-and-tile unit in Mt Roskill or St Albans. You can think bigger than that.
Take a look at New Zealand property trusts – large commercial-property portfolios that are listed on our stock exchange, the NZX. They invest in some of the best real estate in the country.
The beauty of these trusts is that they own top-quality property in the best locations. The tenants are strong and the leases are long. Unlike that brick-and- tile unit, these listed property trusts (LPTs) give good returns. On average, they earn around 7 per cent per annum.
New Zealand listed property trusts make very good investments. But when people start to invest in them and see the value, their next step is usually to look overseas.
Commercial property in New Zealand is, and always has been, an excellent investment. But investors needn’t limit themselves to New Zealand.
You could consider spreading your money across countries and moving it into markets that are less vulnerable than ours. Investment in international property does just that.
Australia is the obvious first place to look, and yes, there are some good property trusts there. Australian property trusts may have lower yields than those in New Zealand, but they do enable you to diversify geographically – spreading your risk across two countries.
But what about the world’s major capital cities? Is there an opportunity to put your money into commercial property in London, New York, Singapore, or Tokyo? The answer is yes.
Investing in overseas markets
So how do you go about investing in commercial property outside New Zealand? It’s hard to find independent research on the best of many options for global property investment. But when it comes down to it, investors are faced with three choices.
1. Use a share broker
The first option can be to use a share broker, who will have access to excellent information. Research is not always easy to find, so a share broker’s advice can be invaluable. Most of the full-service share brokers buy research from offshore finance houses (perhaps an international brokerage firm). This research is available to share brokers’ clients, should they wish to buy listed property trusts directly.
Listed property trusts are known as Real Estate Investment Trusts (REITs) outside New Zealand. The average dividend yield (before tax) for listed property trusts in New Zealand is about 7 per cent. But internationally, the dividend yield on REITs is usually lower; it may be 4.5 per cent a year in the United States and 2.5 per cent a year in Britain. As well as the cash dividend, investors should also expect some capital and income growth over time from the investment.
You can buy and sell REITs on international share markets, but you need reliable research to tell you which ones to buy. The quality of both REITs and listed property trusts does vary – remember you are buying big portfolios of real estate.
A share broker will help you invest in REITs that have the best property assets and management. So although you could invest directly yourself, I wouldn’t recommend it – you could go badly wrong.
2. Use exchange-traded funds
The second way to get into international property is through exchange-traded funds (ETFs), which track property indexes.
An index is a grouping, based on a certain class of property (such as office or residential) or a geographic location. Or it may be a much wider cluster, comprising different types of property from around the world.
I would recommend investors who don’t have a broker or adviser, and can’t get hold of research, to buy ETFs instead.
These funds own lots of REITs, giving you ready-made diversification. Fund managers don’t try to pick the best REITs. Instead they invest passively and simply try to follow a particular property index.
Passive investing is characterised by limited buying and selling, and is the opposite of active investing. Passive investors hold investments for the long term.
Whatever their aim, ETFs simply buy REITs in the same proportion as the index, aiming to follow the index as closely as possible. ETF fees are lower than actively managed funds.
The Vanguard REIT Exchange Traded Fund – which is listed on the New York Stock Exchange – is an example of an ETF. Vanguard owns $57 billion worth of REITs in the United States, so it provides very good diversification. Because it’s a passive fund, its management fee is low (0.12 per cent). The Vanguard’s dividend yield is 4.2 per cent, which is not bad in a country where you get virtually no interest on bank deposits.
3. Use a New Zealand managed fund
The third way to invest in global property is through one of three New Zealand managed funds: OneAnswer (ANZ), AMP, or relative newcomer, boutique fund-manager Pathfinder.
The Pathfinder fund is still very small. Its advisers take a big-picture view, rather than trying to pick the best individual REITs. Instead Pathfinder buys stocks directly that appear in indices tracked by ETFs. In this way Pathfinder can invest in the property type (such as retail or industrial) or countries (such as the US or UK) that they choose. This makes their fees lower. AMP and OneAnswer fees are about 1.3 per cent and Pathfinder’s are 1.0 per cent.
One advantage of a managed fund is that investors may feel more comfortable with a manager based in New Zealand. Another benefit is that the three available funds are able to ‘currency hedge’, which is like having insurance against currency fluctuations. Hedging like this increases returns to Kiwi investors and means less uncertainty about the impact of exchange-rate volatility of the New Zealand dollar.
Picking a winner
Personally, commercial property is my favourite investment. It seems to me to offer the best bang for my buck, on both risk and returns. If I could invest in just one thing, it would be commercial property. And I see no reason to limit myself to investing only in New Zealand.
Martin Hawes is an Authorised Financial Adviser. Martin’s disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.
DIVIDEND YIELD: The return on an investment in shares. It’s written as a percentage and calculated by dividing the market price of a share by the annual dividend payment per share.
CASH DIVIDEND: A distribution to shareholders of a company’s earnings. A cash dividend is a financial payment, and the most common way for a company to share profits with investors.