Tough times for retirees who have cash in term deposits
Gross yields in the listed property sector vary between around 8-12 per cent a year and, in many cases, distributions are made quarterly. DESPITE two recent lifts in the official cash rate during June and July, the headline rate at 3 per cent is still a long way below the highs of 8.25 per cent through 2007 to 2008.
More interesting were the latest comments by Reserve Bank governor Alan Bollard when he spoke of a fragile recovery, prospects for growth have deteriorated and domestic demand is subdued.
Indeed, over recent weeks, we have seen New Zealand's swap rates decline sharply, which indicates lower economic activity and confirms the Reserve Bank's view of a subdued economy.
The evidence is everywhere, from low turnover in residential property to the rising unemployment rate, and business confidence surveys turning negative.
Internationally, we have seen another round of quantitative easing in response to weak economic data in developed countries.
This makes it tough for investors, not only looking to grow their capital but even to obtain a decent yield.
Many retirees will be watching their term deposits being renewed at substantially lower interest rates than previously, with little prospect of them returning to the 8 per cent a year or better, as experienced two to three years ago.
Although the New Zealand equity market has many securities paying higher dividends, investors are wary of the capital losses suffered on shares since the onset of the recession in 2008 and are reluctant to place their funds where the capital is at undue risk.
There is, however, one sector of the economy where yields are high and risks are comparatively low. This is the listed property sector where the assets are generally commercial property, gearing is low and investment can be well-diversified.
Gross yields vary between around 8-12 per cent a year and, in many cases, distributions are made quarterly.
Also, listed property companies are structured as PIEs (portfolio investment entities), which provide advantages for higher marginal rate taxpayers.
Listed property trusts do provide investors with the opportunity for capital gain - when the underlying leases within the property portfolios are renewed, the level of inflation will be taken into account.
The difference in yield between a bank term deposit (currently about 5.5 per cent over two years) and a listed property trust (circa 10 per cent a year) would make a substantial difference to many investors' annual incomes.
But, more importantly, it would also go some way to preserving long-term capital value after the effects of tax and inflation are taken into account.
The real return (net of tax and inflation) on term deposits is low. Over time, this can lead to a reduction in effective wealth and will impact directly on income as well. In these uncertain times, the best solution is to take professional advice regarding your savings.
Disclaimer: The above comments are for general information purposes only. This article is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your investment adviser. Disclosure statements for Forsyth Barr and any of its investment advisers are available on request and free of charge
Russell Garland is an investment adviser with Forsyth Barr in Tauranga. He can be contacted on phone: 0800 367 227 or email: russell.garland@forbar.co.nz.
MANAGING WEALTH: Signs of subdued economy are everywhere
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