Home truths
What should mum-and-dad investors do for their retirement? Sir Bob Jones says the traditional approach of scrimping and saving is no way to go.
What should mum-and-dad investors do for their retirement? Sir Bob Jones says the traditional approach of scrimping and saving is no way to go.
Ever since the Western world decided it would soon become impossible for the state to provide meaningful pensions, mainly because people are living longer, and that everyone must save and invest for their retirement, I’ve watched what I believe is a disaster evolving. Asking lawyers, plumbers, nurses and the rest to effectively become investment experts is plainly absurd, more so given the regular failures of so many supposed financial gurus, particularly those handling other people’s savings.
The unaffordability argument is nonsense. Of course, the modern state can and should provide meaningful pensions; it’s a question of spending priorities, not affordability. For example, we could shed the numerous silly government departments and agencies and abandon the Ministry of Foreign Affairs and Trade’s many pointless overseas embassies and activities.
The financial advice columns aimed at Joe Citizen in our newspapers have common themes, a standard one being the desirability of regular saving. But I’d venture at least half of households have no income surplus for saving and most of the rest have a relatively meaningless ability.
Readers can work it out for themselves. Tot up how much you think you can put aside and apply 5% in interest or dividends, which is about what you’ll earn a year if you’re lucky and it’s not blown through fund mismanagement – a common event – or other mishaps that characterise finance and investment activities. All going well, you will find it still adds up to a poor retirement outcome. That also applies to KiwiSaver, despite its tax subsidy and employer contributions, which are effectively in lieu of salary.
Last year, the chairman of Australian fund manager Altair Asset Management, Philip Parker, decided to pay off staff and, forfeiting tens of millions of dollars in annual fees, liquidate the several hundred million dollars invested in Australian shares, returning the proceeds to his investors. The fund had done well, thanks to the much-vaunted past five years of spectacular sharemarket growth. Parker was an honest man who recognised the salient factors.
First, current sharemarket growth had come off a collapsed base price level following the 2008 financial crisis, but measured over a much longer period, a ho-hum result emerges.
But second, and of greater significance, he also recognised that with the millions of global funds all piling into the sharemarket – or worse, into one another – the major current price-growth impetus is driven by the “greater fool” principle. He said “crazy” markets were “massively overstretched” and the Australian east-coast property market was a “bubble”, adding that “I’ve never been more certain of anything in my life”.
The current assumption, more like hope or blind faith, is that fund managers, with money flooding in and nowhere sensible to put it, will continue piling in and driving the market up yet further. History and common sense are very clear on that, and a major sharemarket collapse lies ahead. When this eventuates, sharebrokers, fund managers and the like will describe it as a “correction”, a back-covering term if ever there was one.
That said, feel for them: they have an impossible job. For example, they can’t rely on fixed-interest investments, as rates – spawned by America’s depression-averting quantative easing – are at such historically low levels to be pointless. Again, history and common sense say this won’t last, and as
I’d venture at least half of households have no income surplus for saving and most of the rest have a relatively meaningless ability.
interest rates inevitably return to historic norms, debt will incur large capital losses.
New Zealanders wisely rubbished the Winston Peters-instigated referendum to introduce compulsory savings. No such democratic action occurred in Australia; rather it was forced on all employers, on behalf of their employees, in the early 1990s, creating a massive funds industry in the process.
The compulsory employer contribution was allowed to rise from 3% of an employee’s salary to 9% in 2002/03, where it stayed until 2010. That’s when Prime Minister Kevin Rudd was shown a study of the mediocre investment results and, noting they would never achieve their purpose, came up with the hare-brained solution of raising the compulsory savings rate by a third to 12%.
COMMERCIAL REALITIES
My field is commercial property. I’ve been in it longer than anyone in New Zealand, having put my hand up in 1962, at age 22, for what is still Lower Hutt’s tallest building. Luck rather than knowledge was on my side, so I did well out of it, making commercial property look easy on the face of it. It’s not and it’s an activity littered with failure, arguably more than any other apart from restaurants.
An excellent study by the New Zealand Reserve Bank a couple of years ago recorded that over the past 30 years throughout the Western world, all regular cyclical downturns – without which the market economy isn’t working, and I’ll join the sharebrokers and call them corrections arising from overzealous activity – have been turned into major financial crises through commercial property developer excesses and, to a lesser degree, commercial property investor misjudgments.
At my age, my current involvement is a hobby activity. But with about 40 staff in New Zealand, Australia and Britain, I do not employ commercial types in the senior positions. It’s a field dominated by cavalier spirits and always has been. I employ thinkers and readers. By way of example, my company’s chief executive is a historian.
But I unashamedly claim I now do know a lot about it and shudder at the propositions promoted to mumand-dad investors. Take syndicates, especially those for office buildings. If these had investment value, companies like mine, with first-cab-off-the-rank status among commercial agents, would snap them up. Invariably, they’re marketed on the basis of a longish lease. This is foolhardy, as illustrated by this tale.
In recent years, we’ve been approached by foreign and New Zealand government funds with joint-venture proposals, doubtless in the hope we can help them with their main problem: getting rid of their inflow of cash. We’re not interested, for good reasons.
However, for amusement, I sat in when, out of curiosity, we entertained the managers of one of our government funds. I asked the boss what they were in. (Most funds spread their investments in locations and categories, usually the largest portion going to the sharemarket, followed by commercial property.) When he mentioned forestry, I expressed horror. “Surely you know the story,” I said. “Oh yes,” came the reply. “But we like to spread it about.” The old saw of other people’s money leapt to mind.
A few months later, some of my team hosted another of our government entities seeking a partnership. I urged them not to waste their time, which they ignored. This just confirmed my aforementioned detached hobbyist involvement, now confined to the fun of buying new office buildings, something I once tried to explain to my now-late mother. This elicited the response: “It’s utterly childish. It’s time you found something sensible to do.” I was 65 at the time.
But back to my chaps’ government fund overture. The following day, they were shellshocked. It transpired that after pleasantries were exchanged and drinks poured, that entity’s (yours, actually, readers) commercial property manager opened the batting with a memorable remark: “What we seek are off-centre, high-rise office buildings with long leases.”
I’m told this was greeted with a minutelong stunned silence before one of our chaps piped up with: “What we seek are empty, prime location office towers.” Never the twain will meet, but trust me, theirs is about the worst commercial-property-investment policy imaginable. Location is the golden rule, and given a number of other considerations, leasing can then be taken for granted.
Still, it remains the biggest mistake by amateurs. Study the regular newspaper full-page commercial property advertisements placed weekly by our major commercial agencies. The salient selling point is invariably “new six-year lease” and the like. You’re buying a building, not a lease, for goodness’ sake, but consideration of that goes out the window.
History and common sense are very clear on the current assumption: a major sharemarket collapse lies ahead.
NOT SO GOLDEN RULES
Back in March, I was aghast to read about a investor ignoring property’s golden rule and (in the Listener) urging mum-and-dad investors to buy commercial property in our provincial cities. I do not know him, but I certainly know of him, as he’s been a source of mirth in Wellington commercial property circles. Having made a bit abroad, he returned home
and ventured into commercial property. First, he bought into a shockingly bad deal, although it transpired he saw the light and wisely flicked it on. (The “bigger fool” principle is not peculiar to the sharemarket.)
Subsequently, he bought a nationwide chain of chicken farms with a 25-year lease to a company with a currently collapsing share price. He was lured by the lease and, in my opinion, ignored the actual asset he was purchasing – unless he fancies taking on chicken farming himself.
But that aside, my horror lay with his advice – undoubtedly the worst I’ve read in my near six decades in commercial property – namely, to invest in provincial commercial buildings. Investment is about that increasingly difficult task in a volatile world of reading the future. Seemingly, he is ignorant of the world’s demographic trends.
Globally, for a host of reasons, people are flooding into the big cities, and small towns are slowly dying. Five years ago, Russian demographers predicted that theirs would become a nation of ghost towns with perhaps four or five massive metropolises. This is in the world’s largest country, which apart from Moscow and St Petersburg has no city with Auckland’s population. That population shift is happening everywhere – here, Australia, the UK, China, the US – and all for very good reasons.
Furthermore, this is not just for economic reasons but arguably lifestyle ones as well, as increasing attention is being focused on boosting the attractiveness of city living. Young people will not leave, say, Dannevirke, Invercargill or New Plymouth for a few years at a big-city university and then return home, even if they’ve studied something as conventional as accountancy, law or medicine. I hardly need to spell out the reason. Recall the media attention given last year to a Tokoroa doctor’s inability to attract another, despite the lure of a far-above-market income.
Visit a lawyer in Whanganui, Feilding or Timaru and the odds are he’s someone way past retirement age. Why? Well, traditionally provincial towns’ lawyers’ retirement funds came from the sale of their partnerships or firms; now, understandably, there are no takers. All this is a consequence of the increase in tertiary education, once the prerogative of the few, now half the population and rising.
CHANGING PLACES
The argument of the investor touting the benefits of provincial commercial property was that yields are significantly higher. What he hasn’t considered is why.
Precisely what category of commercial property – that is, offices, shops or industrial buildings – he had in mind wasn’t explained. Surely, he can’t seriously suggest offices. Our provincial cities are filled with empty office buildings.
Forty years ago, prime corners on Palmerston North’s Square were dominated by attractive high-rise towers bearing their insurance company and bank owners’ names. Those institutions have gone, for good reasons, and I’ve watched those towers subsequently sold for a fraction of their cost, usually to farmers, I’m told. I particularly fancied the city’s modernistic new BNZ building built back in the 1980s and tried to buy it on lease-back from the bank. Today, it’s a backpackers hostel.
So what’s he talking about? Industrial buildings? Why buy a Gisborne, Greymouth or Masterton industrial building when you can buy one in Auckland where the demand is massive and growing, unlike in the provinces? I assume, therefore, he’s talking of retail property. Can he really be ignorant of what’s happening worldwide with retail?
My company owns the most shops in the central Wellington CBD and – thanks to owning the David Jones store, bought because we wanted the two office towers
Luck rather than knowledge was on my side, making commercial property look easy on the face of it. It’s not.
that went with it – the most prime CBD retail space.
We own these shops not because we want to but because we own the most prime CBD office buildings and they go with it. We constantly read reports of how hot demand is for Lambton Quay premises, but trust me, most of the conventional occupants are struggling.
The most recent failure was one of our lessees, Banks Shoes, established in 1938. Book stores have disappeared, dress shops, always the most desirable for office buildings because of their gaiety and colour, will soon be a thing of the past. Only jewellers seem immune, so our shops fill up with cafes and suchlike, patronised by office workers escaping the ghastliness of open-plan premises.
Much is made of Australian chains coming in, as if somehow they’re immune to the internet’s assault on conventional retailing. In the past year, my company has borne the cost of three major Australian chain retailer collapses, two in Queen St and one in Lambton Quay – the two supposedly hottest locations in the country.
I’m surprised the provincial commercial property investor is unaware of this catastrophic destiny facing conventional retailers. Furthermore, if he bothered to actually visit these provincial cities he cites, he would see empty shops everywhere.
I’ve owned hundreds of our provincial cities’ buildings – in the 1980s, for example, more than 50 in Hamilton and Rotorua. We did well out of them then; indeed, Hamilton’s main thoroughfare, Victoria St, in which we owned dozens of shops in the early 1970s was, in my view, the best commercial property proposition in the country at the time. Today, it’s a wasteland, bereft of shoppers and filled with empty shops.
But equally, we did well in Whangarei, Tauranga, Napier, New Plymouth, Palm- erston North, Whanganui, Masterton, Christchurch, Timaru and Dunedin, but for excellent reasons, we’ve cut and run.
He suggested Dunedin, easily my favourite New Zealand city outside the capital. If I were Methuselah, I’d be in today. But I’m not, and it’s a poor investment proposition.
So, too, with another of his suggestions, Nelson. A few weeks back, Nelson was recorded as enjoying the largest economic growth over the past year. Be that as it may, it’s littered with empty shops and offices and is a poor commercial property investment location.
He also points to escapees heading to Hamilton and Tauranga from crowded Auckland, an understandable phenomenon occurring worldwide from congested big cities, usually for lifestyle reasons. But the numbers are insignificant compared with the continuing inflow.
THE ELEMENTARY WISDOM OF EPICURUS
So what should mum-and-dad investors do for their retirement? For homeowners in Auckland, Wellington, Hamilton, Tauranga and arguably Christchurch, take the wisest approach to the one life you have and adopt the elementary wisdom of Epicurus. Ignore the often self-serving condemnation of fund managers and the well-meaning puritanical scolding of Don Brash and other commentators and put your spare cash into your home. It will bring you pleasure as you constantly upgrade while raising a family and will prove the best investment proposition, so long as the people inflow continues, which it will.
As you approach retirement – and as has always been done – sell up and downsize, either to a city apartment or the likes of Nelson. That will leave a cash surplus more than would been have achieved through enduring a spartan lifestyle through saving. Only then should investment arise as an issue.
As for the remainder living in the likes of Te Kuiti, Oamaru and Hastings, you choose to live there, presumably content to forgo the pluses of big-city life, and can continue relying on your chosen low-cost lifestyle. So, too, with home renters, the majority of whom have partly lived off their fellow citizens via diverse welfare subsidies and will simply continue to do. That’s a statement of reality, not a judgment. I grew up in a state house and am grateful for it.
None of this is a criticism of small-town living, but there will be quite a price to pay, given the population exodus. As I once wrote, I love spending nights in our provincial towns and observing the Under Milk Wood- like morning stirring as they come to life, in raw contrast to the big cities’ threehour bumper-to-bumper stream of cars. But there’s a voyeuristic aspect to that, and this article is about investment. Future ghost towns offer no financial solace when it comes to that.
Visit a lawyer in Whanganui, Feilding or Timaru and odds are he’s someone way past retirement age. Why?