Personal Finance

  • A plethora of cool sounding companies are raising money from the public, but is crowdfunding the new wild west for investors?

    By Gareth Vaughan

    Light touch, too easy and too lax.

    These were three ways New Zealand's equity crowdfunding regime was described in a recent Australian Financial Review article. They're not descriptions that fill you with confidence, making crowdfunding sound like the new wild west of the NZ investment scene.

    So let's take a look.

    The Government gave the Financial Markets Authority (FMA) the power to grant crowdfunding licences through the Financial Markets Conduct Act 2013. To date five licences have been awarded with the recipients being PledgeMe, Snowball Effect, Crowdcube, Equitise and My Angel Investment.

    Then Commerce Minister Craig Foss trumpeted the awarding of the first crowdfunding licences last July, saying NZ needed more innovative businesses to increase economic growth and this was one way for early stage and growth companies to source the risk capital they need to flourish.

    NZ was leading the way in the Asia-Pacific region with a "robust framework" that would give these services the best chance of succeeding, Foss boasted. And, according to Foss, the initiative was part of the Government’s Business Growth Agenda to build NZ’s capital markets and drive business growth, exports and jobs.

    $8.3mln raised to date

    According to the NZ Crowdfunding Association, to date we've had 14 companies raise $8.3 million via campaigns on licensed NZ equity crowdfunders. Note, by equity crowdfunding I'm talking about money obtained by companies from investors via crowdfunding platforms to fund their business. We're not talking about donations or charity crowdfunding here.

    Equity crowdfunding is a fledgling industry in NZ and there's plenty of pro-active public relations about it and upbeat media coverage on funky companies and entrepreneurs with big dreams raising money. To my somewhat cynical Generation X eyes some of this comes across as predictions of endless blue skies being peddled by smiling Gen Yers. Perhaps we can blame the Dot-com bubble for this, but I digress.

    So just what are the punters investing in companies via crowdfunding getting themselves into?

    They're buying shares in a small or start-up business and thus becoming a part owner. That means they take on all the risk, and potential rewards, alongside the other shareholders. It's not like buying bonds or putting your money in bank term deposits. There'll be no interest paid to you by the company for the privilege of getting your money. And unlike buying shares in an established, sharemarket listed business, there's unlikely to be any dividends paid for a considerable time, if at all.

    The companies seeking money through NZ crowdfunding platforms aren't required to publish audited financial accounts, and there are no ongoing reporting requirements. And the FMA points out it doesn't check the companies raising money through crowdfunding, rather it merely checks and licences the crowdfunding service provider. Here's the FMA's conditions for crowdfunding licences.

    Selling your shares, should you wish to, could be difficult, and investing in new or rapidly growing companies can be a speculative punt, with the real risk of losing your money.

    "We won't be able to help you get your money back if the company fails," the FMA warns.

    Basic checks

    Licensed crowdfunding services must have systems in place to run "some basic checks" on the companies who want to raise money, including checking company senior managers or directors aren't bankrupt, or that they don't have convictions for fraud or dishonesty. They must also have a system in place to handle complaints and belong to an independent dispute resolution scheme.

    And, by law, the companies raising money are supposed to be truthful about who they are and what they're planning to use the money for. Here's more crowdfunding information from the FMA.

    All the crowdfunding platforms carry warnings for investors. The Snowball Effect one here is very detailed.

    And here's what PledgeMe says;

    Equity crowd funding is risky. Issuers using this facility include new or rapidly growing ventures. Investment in these types of business is very speculative and carries high risks. You may lose your entire investment, and must be in a position to bear this risk without undue hardship. New Zealand law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision. The usual rules do not apply to offers by issuers using this facility. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment. Ask questions, read all information given carefully, and seek independent financial advice before committing yourself.

    The International Organization of Securities Commissions, or IOSCO has published a working paper on crowd funding. This includes a sobering case study.

    Bubble and Balm was a fair trade soap company. In 2011 it became the first company to raise funding for its start-up through the equity crowd-funding platform Crowdcube, based in the UK. It raised £75,000 from 82 investors, who each contributed between £10 and £7,500 in return for 15 per cent of the company’s equity.44 In July 2013 the business closed overnight, leaving investors with no way of contacting the company or to recover losses. The investors lost 100% of their investment.

    IOSCO also notes there probably won't be a secondary market for the equity of start-up companies and the equity itself is difficult to value. It goes on to discuss investor protection.

    As most are private companies, start-ups face no requirements for disclosure or transparency. And if the company does survive its stock is likely to be diluted through further issues. Generally, the only realistic chance an investor has of liquidating their holding in a start-up investment is if the company survives until a public float. But the probability to do this is not high given the high attrition rate among start-up companies.

    Liquidity risk will depend on the type of investors involved. In essence the lack of liquidity is similar to other seed capital investments such as private equity. If the investors have experience with low liquidity investments, and are aware of the risks of being locked-in, the lack of liquidity will be of little concern. However, if the investors in equity crowd-funding are inexperienced and unaware, they might overreact in times of stressed market conditions or difficult personal circumstances.

    This raises concerns about investor protection and has led to many jurisdictions placing limits on who can invest in such equity. In some cases platforms are only allowed to market to sophisticated investors, and/or are limited to the number of individuals such investments can be marketed to.

    Interactive & transparent

    On the opposite side of the coin investing in a small company with big ambitions could get you in at, or near, the ground floor in what might one day turn out to be a big, successful business.

    PledgeMe lists, as the benefits of crowdfunding; democratised funding decisions, lowering the barriers for companies to seek funding and for investors to invest, more transparency, making the process easier, widening the reach, being more interactive, creating long term relationships with investors. And points out "you could make a return."

    PledgeMe also points out crowdfunding makes it easier for investors to invest.

    "All you have to do is register with us (so we can check you are really a person!) and then pledge to the campaign you want to invest in."

    So what about the companies raising money, or seeking to raise money, through crowdfunding? They're a diverse bunch. For example, whilst working on this article three press releases landed in my email inbox promoting new crowdfunding campaigns. One's about Red Witch, a maker of guitar effects pedals, another's about vegan food company Angel Food, and the third is about taxi application, Tapp a Taxi.

    The most a company can seek to raise through equity crowdfunding is $2 million in any 12 month period. There's no legislative restriction on how much a person can invest through a crowdfunding platform within any given time period. However, licensed crowdfunding providers are able to impose their own limits.

    Vouchers with your shareholding

    Mad Group is one of the companies currently seeking to raise money through crowdfunding. It's the operator of the Habitual Fix and Mad Mex food stores.

    Mad Group is looking to raise at least $750,000,and up to $1.5 million through the sale of between 7.11% and 13.27% of the company's equity. Mad Group has provided quite a lot of financial information including financial projections out to 2018 and details on potential exit strategies for the current shareholders.

    It outlines what it plans to use the money raised for and provides information on how Mad Group's board values the business. It also includes offers of vouchers for investors to use in the group's stores.

    Mad Group's chairman and group managing director James Tucker tells me the financials haven't been independently audited, but the annual accounts and tax filings are prepared by external accountants. 

    "These projections were prepared by Mad Group and then reviewed and tested by our external accountants, which was a requirement of Snowball Effect. All up we've spent about $25,000 on external advisors and many months of our time to get the offer live on Snowball," Tucker said.

    The Retirement Income Group, which has just successfully sold 3.3% of itself through Equitise raising $455,300, plans to use the money raised to fund working capital and to meet Reserve Bank insurance solvency capital requirements.

    What those who've bought into the Retirement Income Group have bought are so-called Class B shares, which give the owners the same economic rights as ordinary shares, i.e. the same risk and reward potential as everyone else, but no voting rights to try and change things if they become unhappy.

    Financial information available from the Retirement Income Group includes forecasts out to 2021 by which point the company expects to deliver a net profit after tax of just under $5.5 million.

    'The process is made too easy in New Zealand'

    The aforementioned AFR article quotes Chris Gilbert, who is co-founder of the Sydney-based Equitise, in a discussion about what Australian regulations should look like. He reckons the NZ regime is too lax and has apparently lobbied the Australian government for a tougher regime over there.

    "The thing that scares me is that the process is made too easy in New Zealand," Gilbert is quoted saying in the AFR article. "It should be difficult to get a licence to operate an equity crowdfunding platform. We don't want to make it too loose with what's required [in Australia] because that could result in Ponzis going through. We don't want retail investors to be fleeced."

    But it doesn't sound like his concerns will be addressed. In a separate, later, article the AFR quoted Australia's Communications Minister Malcolm Turnbull blaming bureaucrats for delaying crowdfunding legislation. And it appears Turnbull wants to copy NZ lock, stock and barrel.

    "I'm very attracted to just taking the New Zealand law, deleting New Zealand and inserting Australia. Imitation is the sincerest form of flattery and I'm happy to flatter the Kiwis as much as we can on this one," the AFR reported Turnbull saying.

    Yet another AFR article says Aussie entrepreneurs are divided over the Productivity Commission's recommendation for a two-tiered approach to crowdfunding separating sophisticated investors from 'mum and dad' retail investors.

    'Not without restrictions'

    Closer to home, what does our government make of its crowdfunding regime being described as a light touch and lax? I asked Commerce and Consumer Affairs Minister Paul Goldsmith.

    Via a spokesman, Goldsmith said equity crowdfunding in NZ isn't without restrictions. There were no plans to require the provision of audited financial accounts, he added.

    "However, an equity crowdfunding platform could require the provision of audited financial accounts as a condition of the service. This reflects the approach of giving platforms flexibility to develop an appropriate mix of mechanisms to meet the regulatory objectives," Goldsmith's spokesman said.

    Goldsmith also notes that an investor’s confirmation, which the provider must obtain from each investor, must state they understand the risky nature of crowdfunding, that they may lose their investment and that they could bear that loss without undue hardship.

    Ask lots of questions

    In the internet and social media age, equity crowdfunding is here to stay. Albeit perhaps, and hopefully, with stricter regulations over time. Independently audited accounts would be a good start. Hopefully both NZ companies and NZ investors will, on the whole, have a good experience. But there will be business failures and investors will lose money.

    A concern I have is some companies may turn to crowdfunding because they can't raise money anywhere else.

    I'm not a financial adviser. But for those considering investing via crowdfunding it seems key to me to really believe in the company's management, and preferably also in their business plans. If you're not sure, go and meet them, look them in the eyes and ask lots of questions.

  • Elizabeth Kerr digs through the detail of Budget 2015 to find beneficiaries, working families and pets are the winners, while tourists and KiwiSavers are the losers

    By Elizabeth Kerr

    If you think managing the cash in your own wallet is challenging, then imagine what it’s like balancing the books for the entire country.  Imagine for a moment that it is your job is to work out what they can and can’t have.

    “More elective surgery, more bridges, more for vulnerable kids, better roads, more train tracks, change the flag…..no don’t change the flag…feed the kids… no don’t you have to support the parents…look after the elderly but reduce house prices first….” oh blimey what a headache!   Just like your own home budget –tough choices need to be made and you can expect at least one of your kids will be crying by the end of the day.

    This year's Government budget will wind up exactly like that.  There will be at least one person crying because they missed out on what they were hoping for.   At first glance through the documents most will have a little extra money, continue going to the doctors without charge, be supported into child care or new classrooms, have parents supported into work and hopefully benefit from a few extra dollars in the family kitty each week; so lets not pass the tissues out just yet.

    If you’re working, or a working parent, then you might be interested in the following:

    • If you weren’t in Kiwisaver before today then it sucks to be you.  There is no $1000 kick-start anymore, but you will still get your extra $521 per year for making contributions so get yourself in Kiwisaver quick-smart.  Free money is not to be sneezed at so get in there!!!
    • Your ACC levies are likely to be reduced giving you some extra pocket money come time to pay your car rego.
    • Anyone going on holiday overseas can expect to pay an extra NZ$6 to get out and NZ$16 to get back in for the new border clearance levy for bio security and customs activities.  (Expect more x-rays and sniffer dogs too by the way.)
    • If you earn over $88,000 per year then your Working For Families tax credit will likely reduce by about $3 per week.
    • Families on less than $36,350 per year before tax will get an extra $12.50 per week from Working for Families and those much lower will get $24.50 extra.
    • Those earning between $36,350 and $88,000 then don’t worry you are not left out but it will likely be pro-rated and capped at $12.50 per week.
    • Average wage is expected to rise by $7,000 to $63,000 a year by mid-2019.

    Education

    • If you have young kids you can kick up your heels a bit as there is $74.9million for early childhood education to enable more children to attend from a younger age for more hours.  “Hurrah” I hear some of you shout.
    • If your teenagers are hanging around home a bit too much then rest assured the 300 extra Trades Academy places could take care of their spare time.
    • $62.9mil extra for children with special needs.
    • 7 new schools and Kura Kaupapa, expansion of 4 schools and building of an extra 241 classrooms at existing schools.
    • $2.1mil for Maori suicide prevention.

    Health

    • More money for health than ever being spent on health we’re told.   Palliative care, bowel cancer screening and more funding for elective surgeries are the major winners to the tune of $186.5mil.  
    • Free doctors’ visits and prescriptions for kids under 13 are still destined to take effect from 1 July 2015.

    “Get back to work!” they said.

    If you’re on a benefit then you need to be available for 20 hours part-time work from the time your youngest turns 3.   (Unemployment is expected to fall below 5% in 2016).   But if you’re struggling to get work then, they will give you some extra money to help you make ends meet in the meantime.

    This year’s budget had the following for beneficiaries, which are without doubt in my opinion the biggest winners this year:

    • Benefit rates for those with children increase by $25 per week (after tax).  That is actually quite a decent increase considering it’s more than inflation BUT don’t breathe out yet – its implementation is 9 months away.
    • An extra $1 per hour for Childcare Assistance for up to 50 hours per week per child.
    • Have a dodgy-dead-beat mum or dad not paying their fair share?   Well they’re throwing some money at that situation as well to get better compliance from those shirking their responsibilities here.   If you’re one of those people who want to pay, but haven’t been because you owe more than you can stomach in debt, then its possible that debt will be forgiven in order to get you paying going forward.
    • A warning to those who are receiving Sole Parent Support though, you now have to reapply every year for your benefit.
    • If you’re studying and have children then your Student Allowance will increase by $25 per week.
    • Vulnerable children are especially targeted with over $67mil being set aside for supporting CYF, the Children’s’ Action Plan and keeping at risk students in education or training.

    Lets discuss this surplus…

    The government earned $67.3 billion dollars last year (2013/14), but spent $71.5 billion.   As you know the secret to wealth is to spend less than you earn so they get an F grade from me here.   However to give you some context it’s the equivalent of someone earning $50k per year but putting $3100 on their credit card.   It’s not great but it’s not really a complete disaster.   Basically this level of deficit says to me “Son, we could have got that surplus but we might have had stop your swimming lessons”.  I.e.: they could have gone harder and really driven for that surplus, but what’s the harm in keeping a few ‘nice to haves’ and getting better results in some areas, at the risk of waiting just one more year?

    Also worth noting is that there are two ways to create a surplus.   You could spend less or just earn more.   And I think it’s fair to say that this governments Budget is intending to work on the later as well by continuing to invest in the Governments Business Growth Agenda including tertiary education, Regional Research Institutes, R&D growth grants, increasing tuition subsidies for some science subjects and increasing engineering places, building more houses and continuing the UFB rollout.   A few more initiatives in this growth space would have been nice, but that’s just me.

    Non-negotiable expenses and everything else

    You all know that in order to be financially successful you need only two things - a pot for your ‘non-negotiable’ expenses and a pot for everything else.   This is based on the fact that there are some things in life which you have to spend on in order to keep yourself safe and healthy, and the rest is used for thrills and giggles.

    SO this budget has its own version of non-negotiable costs laid out but I can see there are a few thrills and giggle items that could possibly have been delayed to achieve that surplus if they really wanted to.

    Okay maybe they could have done away with the $40 million for urban cycle-ways.   Whilst I love them, they are a ‘nice to have’ and come well below meeting the needs for families in hardship and hungry children in my opinion.   As with the new $52 million wharf on the Chatham Islands and the $40 million for Te Papa for capital works on its Wellington buildings.   The $49.8 million to continue funding Whanau Ora could have been set aside until squabbling was set aside on how to measure what it is that they set out to achieve, and more money towards Security Intelligence, Lincoln's new science lab, $13mil to relocate the Archive NZ Christchurch office and the $12.1m investment for the NZ Business Number initiative…*deep breath*.... and possibly the extra $53.3 for Novopay (over 4 years) and the $11.2m to secure the future of the kiwi could have waited.   But they are included and that should make those affected very happy.  

    So that’s it folks – there appears to really be something in here for everyone - even the family pet is part of a $10 million package for animal welfare protection.   

  • Squirrel's John Bolton reports back from San Diego on what's keeping US financial markets heavyweights awake at night

    By Gareth Vaughan

    Bonds or equities, in which of these asset classes could we see the next major market correction?

    This was a key question raised by the recent Strategic Investment Conference in San Diego run by economist John Mauldin, according to John Bolton, the managing director of Auckland mortgage broker Squirrel, who attended.

    The speakers included a range of heavy hitters from the US financial markets including hedge fund manager Kyle Bass of Hayman Capital Management, who successfully predicted and benefited from the US subprime mortgage crisis.

    In a Double Shot interview Bolton said one key message he got was everyone's scared of bonds.

    "There's a real sense that the bond market is going to blow up, risk is being completely mis-priced in that market, that the people buying bonds are basically having to buy them. People aren't in that market by choice, and at some point the bond market will go. And it's a huge, huge, huge market," said Bolton.

    "Certainly from a hedge fund perspective it was very difficult to find anyone that was even lukewarm on bonds."

    Another view was that the sharemarket, after a strong run up in recent years, may be facing a correction. Proponents of this view, Bolton said, see weak aggregate consumer demand as the key concern.

    These people are worried about ageing populations, little or no real income growth, and a mountain of debt that needs to be repaid that people are struggling to repay even with very low interest rates.

    With fuel thrown on the fire through the likes of weak commodity and oil prices and low interest rates, those with this view suggest it's alarming there hasn't been stronger economic growth or stronger inflation coming through.

    "And the issue is that if aggregate demand doesn't come back and we don't get growth, the concern is that what it means is the sharemarket's completely overvalued in terms of future corporate earnings. And as corporate earnings get revised down over time with all that underlying weak growth, that ultimately could end up in some sort of sharemarket correction," said Bolton.

    Ultimately Bolton said the theme he took away was that nearly seven years on from the collapse of Lehman Brothers, credit markets aren't the major concern.

    "All this money printing that central banks did around the world, and all the additional regulation we've got now in that market has made that market a bit boring. So a lot of the hedge funds are not knowing what to do anymore."

    "But of course they (central banks) have inflated all of these asset markets and so the sense I got is the real risk now is probably sitting in the bond market and there's some potential risk sitting in the sharemarket," said Bolton.

    "They are slightly different risks and driven by different things. But ultimately one of those is probably going to be the next correction. The bond market because it's completely mis-priced if we see inflation come back into the economy. If we don't see that inflation come through and we have real deflationary forces take over, then it will be the sharemarket."

    There's more from Bolton on the conference here.

  • Labour's Andrew Little says rising cost of NZ Super 'scares the bejeesus out of me'; says unfair that those working over 65 get NZ Super when asked about means testing; but still committed to 65 retirement age

    By Bernard Hickey

    Labour Leader Andrew Little has stumbled into a political hornets' nest by appearing to say for the first time that Labour could deny or reduce New Zealand Superannuation to people who were also working over the age of 65

    Little spoke this morning at a post-Budget briefing for business leaders in Wellington and was quoted by the New Zealand Herald's Claire Trevett as saying Labour would consider means testing the currently universal pension, or at least that he thought that working pensioners should not receive the full New Zealand Superannuation.

    Little's office later denied that means testing was being considered, but confirmed he had said it was unfair and costly to pay New Zealand Superannuation to workers earning income over the age of 65.

    Little said the rise in the cost of New Zealand Superannuation towards NZ$30 billion a year was "terrifying."

    "If there's one thing that scares the bejeesus out of me, it's the looming cost of superannuation. That's a significant chunk of the Budget," Little was quoted as saying.

    When asked about means testing, Little said there were some elements of unfairness in universal superannuation, pointing to an example of someone over the age of 65 who was still working and receiving the benefit. He was reported as saying Labour would look at the issue, which he considered unfair.

    However, Little said he was committed to his previously expressed view that the age of eligiblity for New Zealand Superannuation should not change from the current 65, even though Labour's policy before the election was to progressively lift it to 67.

    "I have a personal view that I don't want to see the age of eligibility raised," Little said.

    He added that Labour's focus would be on pre-funding New Zealand Superannuation by resuming contributions to the New Zealand Superannuation Fund, although he would not say when that would begin.

    "I'm confident we could manage the future cost without changing the role of eligibility," he said.

    Then came the denial...

    A spokeswoman for Little later denied he had suggested Labour was considering means testing New Zealand Superannuation.

    "He said superannuation was a looming issue requiring $30b by 2030 and the Government has failed to even consider what to do about it," she said.

    "He said our policy was under review and offered as an example someone working and receiving super and spoke about the fairness of that. Means testing was not mentioned nor is it a policy option we’re looking at."

    "There was a question from the floor and Andrew responded about the need to do something about Super, spoke about the complexities of it as an issue and about the fairness of current policy. He did not mention means testing and he wasn’t referring to it. It is not being considered in any review."

    ACT welcomes debate

    ACT Leader and Epsom MP David Seymour offered to help Little out of a tight spot by repeating his suggestion of a referendum to reform the cost of NZ Super.

    “He has shown why an issue with such important long term implications might better be better handled under ACT’s referendum proposal," Seymour said.

    "All parties can put aside their political positions, join together to form a cross party working group – like the flag committee – and appoint an expert group to identify workable options for the long term sustainability of NZ Super. These options, including no change, could then be put to referendum for the voters to decide," he said.

    “I have confidence in the common sense of voters to support an option which would ensure the fiscal sustainability of NZ Superannuation, an option which is fair across the generations of taxpayers.”

    (Updated with spokeswoman denying Little had mentioned means testing, Seymour's comments).

  • Simon Swallow says all the options have suddenly become bad for QROPS transfers to KiwiSaver. Is there something you can do?

    If you have transferred your UK pension to KiwiSaver you have lots to worry about

    By Simon Swallow*

    Two and a half years ago we wrote about the risks of transferring your UK pension to KiwiSaver and it seems the chickens have come home to roost.

    On Monday this week the HMRC removed all KiwiSaver schemes from the list of recognised overseas pension schemes.

    This is a move with massive and potentially dire implications for those in the process of transferring to, or already transferred to, a KiwiSaver scheme.

    The reason KiwiSaver schemes have been removed from the list is because they offer benefits to people before the age of 55 through withdrawals like financial hardship, first home buyers and permanent migration, and no scheme that receives UK pension transfers is allowed to do that from 6 April 2015.

    Firstly, if you are in the middle of transferring to a KiwiSaver scheme then you should stop the transfer immediately.  If you do not and the transfer goes ahead under current rules you could be liable for a 55% tax charge from the HMRC because the transfer will be deemed an unauthorised payment.

    This is a complete body blow for all those that were hoping to transfer their UK public sector pensions, like NHS, Teachers, Armed Forces, Police and Civil Service pensions to New Zealand because your transfers may now be rejected.  And due to the rule changes on 6th April 2015 if you have one of these pensions you do not have the ability to go back and resubmit a new transfer request so your pension will now be stuck with the UK scheme.

    If your UK pension transfer arrived with a KiwiSaver between 6th April and 18th May 2015 (when the HMRC list was updated) you may find yourself with a 55% tax liability. The HMRC indicated well in advance of the 6th April 2015 that it was changing the rules to mean that schemes that allowed access prior to 55 would no longer qualify as schemes that could receive UK pensions. Therefore, KiwiSaver schemes should have been warning people in the middle of transferring that if the transfer was not complete by 6 April then they should stop.

    For those that transferred their pensions into a KiwiSaver prior to 6 April 2015 the implications are equally as disastrous.

    Under the previous rules KiwiSaver schemes got a special exemption but they still needed to agree to follow QROPS rules, one of the most onerous of which is that they should only allow a member to transfer back to another UK scheme or another qualifying recognised overseas pension scheme (QROPS).

    However, under KiwiSaver rules you can only transfer to another KiwiSaver and if no KiwiSavers are now QROPS you are effectively stuck in your existing KiwiSaver scheme under current New Zealand rules until you turn 65.

    It would appear that the only solution to this issue is if the Government allows for a temporary exemption to allow everyone that has transferred his or her UK pensions into a KiwiSaver scheme the option to transfer out to a non-KiwiSaver QROPS scheme in New Zealand.

    The only way this will happen is if the magnitude of the issue is exposed to the New Zealand government.

    So if you or anyone you know is affected we are starting a petition to take to New Zealand law makers to ensure that you do not end up trapped by a previous well intentioned decision decision now being affected by some cross border rule changes you have no control over. A petition for an urget rule change is here: http://qropsnz.com/kiwisaver-qrops-petition/

    -------------------------------------------------------------------------------------------------

    Simon Swallow is a director of Charter Square. You can contact him here.

  • Augusta's latest commercial property syndicate offers high returns but there's a sting in the tail with high set up costs

    The Birmingham Rd property Augusta is syndicating.

    Augusta Funds Management's latest property syndicate is offering a forecast cash return of 9%, but investors also need to consider the effect its high upfront fees will have on their equity.

    The syndicate is being structured as a proportionate ownership scheme, which will acquire an industrial property on 30-32B Birmingham Rd, in the Middleton industrial estate in Christchurch.

    The property is leased to PMP (NZ) Ltd and is the South Island base for the company's printing and magazine distribution activities.

    The lease is for 10 years (plus two rights of renewal of five years each) and is guaranteed by PMP's ASX-listed parent.

    The minimum investment is $50,000 and Augusta is forecasting the scheme to provide an initial pre-tax cash return to investors of 9% a year, with distributions to be paid monthly.

    That's significantly higher than banks are currently offering on term deposits and better than the dividend yields of any of the listed entities in the NZX Property Index.

    Which means the scheme is likely to appeal to investors such as retirees and others who are dependent on their investments for a substantial part of their income, and its monthly distributions will make that even more attractive.

    Of course property syndicates are subject to the same general risks as any other commercial property investment, such as a downturn in the market or the loss of a tenant and the effect they could have on its income stream and capital value.

    But two of the most important risks investors in property syndicates need to consider are the uncertainty about how long the scheme will run for and the effect that upfront costs can have on their equity.

    Investors in property syndicates get their money back when the property is sold and the scheme is wound up.

    Like most syndicates, the Birmingham Rd scheme does not have a fixed termination date - it will be wound up when 75% of its investor interests (each $50,000 investment parcel is entitled to one voting interest) vote to do so.

    Investors who want to cash up early can try to sell their interest in the scheme privately, but there is no guarantee they will be able to do so, especially if market conditions are unfavourable.

    Most property syndicates tend to be wound up within 5-10 years, so investors should be prepared to have their money tied up in them for a long haul.

    Upfront costs

    They should also take a close look at the scheme's upfront costs, because these will affect how much money they get back when the scheme is eventually wound up.

    The Birmingham Rd scheme has set up costs of $975,000, equivalent to 10.4% of the property's $9.4 million purchase price.

    The biggest of these costs is the offeror's fee of $329,000 which is paid to Augusta for pulling the scheme together.

    The next biggest cost is the underwriter's fee of $300,000, which is split between Augusta Capital (Augusta Funds Management's NZX-Listed parent) and Riddell Enterprises, a company owned by brothers Brett and Ross Lornie, whose interests include a substantial portfolio of investment properties.

    Then there's $120,000 in brokerage commissions (Bayleys Real Estate is selling the scheme to investors), $100,000 in legal fees (Chapman Tripp), $75,000 in printing and advertising costs, and $17,500 in fees to ASB Bank which is providing the mortgage.

    After that there's sundry fees to be paid to accountants, auditors, valuers and so on, so there's quite a few people taking a clip, which all adds up $975,700.

    Funding for the scheme is coming from two sources; a $4,475,700 interest only mortgage from ASB and $6 million from investors, which will raise $10,475,700 in total.

    That will be used to pay the property's $9.4 million purchase price, the $975,000 in set up costs and provide a $100,000 sinking fund for capital improvements.

      Fee $ Recipient
    Offerors fee 329,000 Augusta
    Underwriting fees 150,000 Augusta
      150,000 Riddell
    Legal fees 100,000 Chapman Tripp
    Brokerage 120,000 Bayleys
    Loan fees 17,500 ASB Bank
    Other fees 109,200 various, incl printing, advertising
      ========  
    Total fees $ 975,000  

    Investors pay

    Because the bank will always expect to be repaid in full and will have first call on the scheme's funds, the upfront costs are effectively paid by the investors because there is a corresponding reduction in their equity.

    This shows up in the scheme's Net Tangible Asset Backing (NTA).

    If you assume the value of the property was its independent valuation $9.75 million, the NTA would be 89.6 cents for every dollar invested.

    But some investors prefer to use the actual purchase price to calculate NTA, because that is the figure that feeds into the valuation system and that valuers would use to prepare valuations on other properties.

    If the actual selling price is used to calculate NTA, it would come out at 83.7 cents per dollar invested.

    Another way of looking at that is this: If the property was immediately resold for the same price it was purchased for, investors would only get back 83.7 cents for every dollar they put into the scheme.

    If they invested the minimum $50,000, they would only get back $41,869.

    Actually it would be a bit less than that because real estate agent's commission of 2% would have to be paid and whenever the property, or any part of it is sold, Augusta will deduct a termination fee of 1% of the sale price from the proceeds.

    When those costs are factored in, it would reduce the payout to investors to $39,519 for every $50,000 they put into the scheme.

    Fortunately, as detailed above, property syndicates are set up as long term investments and when they are eventually wound up, the investors will share any capital gains (after expenses have been deducted).

    The benefits of a capital gain

    Hopefully, by the time the Birmingham Rd scheme is wound up, the property's value will have increased sufficiently to have recovered the scheme's set up costs and pay for any additional selling costs and the termination fee, and also provide a bit extra for the investors.

    But it does have quite a bit a bit of ground to make up before that happens.

    And if it declines in value, the high set up fees will magnify investors' losses.

    So while investors might be attracted by the scheme's high returns, they should also pay attention to its set up costs, because they could have a significant effect on the size of their capital payout when the scheme is wound up.

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  • Elizabeth Kerr talks Budget values ahead of this Thursday’s announcement

    By Elizabeth Kerr

    This Thursday is ‘Budget day’ and I’ll be sporting my most tantalising pony-tail (that joke will never get old) down at Parliament with other “media” for the early sneaky-peek at what cheques Key and his team intend to write this year.  

    Journalists, economists and financial analysts are locked away together from 10.30, under embargo conditions, which basically means we perform a secret handshake, read the document and promise not to tell anyone anything until the veil of secrecy is lifted at 2pm, which coincides with English delivering the details in his speech.  

    Ok, you got me, there is no secret handshake but writing that made it sound way cooler!!! There is also no Wifi, no cellphones are allowed and we are even escorted to the bathroom. Perish the thought I happen to smuggle a wadding great A4 copy between my legs on my way to the toilet. And who would I give it to? – all the journalists worth talking too are supposedly stuck in a room together competing to see who can identify an angle to write about that no one has spotted. As a mum of two busy boys; being in a lock-down without Peppa Pig and Elmo sounds’ bloody awesome!!! Bring it on!!!

    The purpose of embargo is actually quite ingenuous. The theory is if we are all reading it at the same time, and no one can send out a press release until 2pm, then no one is going to cut any corners interpreting the information because of pressure to get the scoop over the competition. It’s like being in a race where we all cross the start and finish lines at the same time.

    If ever there is an exam for journalists…. this is it. But seeing as I'm not one I'll leave the big words to them and just tell you how I see it, what this could mean for your Money Machine (and what everyone secretly talks about in the “lock-up”).

    Inspired by this weeks’ event, today’s column is a story about the values of budgeting.

    Once upon a time…..

    … when I was young and financially ignorant a colleague and I were shopping at lunch time. She was a highly paid consultant and I was very much …not! Both admiring the (first generation) iPhone my response was “It’s too expensive for me”…. And she said “I can’t afford it”.

    At $1200 it was the equivalent of half my month's wages; but for her, well I was all like “WHAYAT!!?? What do you mean you can’t afford it, you earn like a gazillion dollars?”

    Of course I didn’t say that out loud, back then I was like everyone else – talking about money was akin to social suicide. “Don’t worry, it won’t take off – the Nokia has everything you could need” might have escaped my mouth.

    But she wasn’t saying “I can’t buy it” she was saying “I can’t afford it” and that is totally different.  

    Buying vs. Owning

    These days it is rare that one can’t physically make an over the counter purchase because there are a variety of credit cards, finance options, and overdrafts to use in lieu of your own money. Patience has totally gone out the window – no one even lay-bys anymore.  (For those too young to remember lay-bys, it’s when you decide you want something and pays it off over time. But the store keeps the goods until you have paid them off). 

    People tend to purchase the other way around nowadays. Firstly they decide they want something, they buy it using a finance facility (credit cards, loans, store credit etc..) and then commit to paying it off after they have the goods at home. The thing is that hedonic adaptation usually means we are bored of the item before we have paid it off and tend to go hunting for the next happiness purchase right away.

    So, back to my colleague. She could have bought the phone if she wanted to, she probably had credit cards or overdrafts which would have facilitated the purchase if her enormous salary couldn’t cover it. But still she said “I can’t afford it”. What does that mean?

    Spending choices = Personal Values

    A budget is an attempt to align our spending choices with our personal values. What she was really saying is “I am choosing not to spend my money on this phone”. She could have physically bought the phone but she wanted to honour her financial goals more.   At that time in her life spending $1200 on a phone was not going to help her Money Machine.

    Was it hard to say “No” to buying it?  Maybe…. Sometimes it is hard to say no to something we really like, but I truly believe that what you focus on becomes bigger. What that means is that if you walk around focused on what you can’t have you will quickly become dissatisfied with what you do have. But if you focus on the progress, no matter how slowly it goes, and of the benefits of your money machine, then you will find that becomes much more important to you.

    Depravation is NOT failure!

    People rarely say out loud “I can’t afford it”. You might feel like a failure to admit that you might not have enough money to buy yourself everything that you really like. But that is simply just not true. Going without is not failure… it merely opens up a void for the things that you really want.  

    Life is about choices and you just can’t have it all because you will always be tempted by beautiful, useful things. It is a neverending wish-list out there in the big wide world.  

    Not spending money on that phone kept my friend's money available for financial successes that she did want. It might have only been a small decision in the scheme of things but that is where people become unstuck… because it’s the small decisions that add up over time.

    Pot calling the Kettle black

    So this week as we watch earnestly to see how the Government is going to budget this year – let us remember that a budget is our best attempt to align our spending with our values. Before you throw stones at Key and his team firstly ask yourself if your personal budget and recent spending decisions are 100% aligned to your values. See, it’s hard isn’t it?!

    As always I like to hear your thoughts and so if there is something particular you’d like to know about from the pomp and ceremony of Budget Day please email me at Elizabeth.Kerr@interest.co.nz.

  • Low rates allow low repayments. So do longer terms. But neither seem rational. Irrational expectations of long term capital gains keep the structure together

    Rates can go either way over the very long term

    By David Chaston

    High house prices cause mortgage payment stress.

    Low interest rates give buyers a better ability to afford those prices.

    However low interest rates allow buyers to bid up prices to their loan repayment affordability level.

    That is why many analysts point out that it is low interest rates that 'cause' high prices when there is limited supply. That is, low interest rates expand the pool of buyers who can 'afford' higher priced houses.

    This is the basis of the claim that there is an 'asset price bubble' in the housing markets, especially in Auckland, Canterbury, and the Central Otago Lakes region.

    But from an individual buyer's perspective, keeping weekly or monthly mortgage payment levels within a household's budget are an essential criteria for deciding whether to try and buy, or not.

    Interest rates may currently be low (in fact, there is an outside chance they could even go lower), but they are not the only technique you can use to keep weekly or monthly payments low.

    You can also push out the term of the loan.

    Twenty five years ago, a standard home loan term was 15 years.

    But since then we have seen it creep up to 20 years, then more recently 25 years.

    Now many banks will accept 30 year terms for their mortgage documentation.

    The longer the term, the lower the regular repayment amount.

    But there are two serious catches.

    Firstly, if you want to have your home loan fully repaid by the time you retire at say age 65, you would need to start repaying that loan by age 35.

    Secondly, 'going long' on the repayment will mean you will be paying the bank seriously more in interest.

    It is eye-watering.

    Before you choose to take out a longer mortgage, take a look at this table.

    It only shows the interest component of what you will pay back. You will need to add the loan principal to get the total repayments you will need to make.

    Home loan interest costs
    based on a $300,000 loan, plus  
    An interest rate of ... 5.60%* 6.00% 6.50% 7.00%
    over ... $ $ $ $
    15 years will cost ... 144,096 155,683 170,398 185,367
    20 years will cost ... 199,354 215,830 236,813 258,215
    25 years will cost ... 258,066 279,871 307,686 336,101
    30 years will cost ... 320,005 347,515 382,633 418,527
    * the current average bank two year fixed rate is 5.58%

    This table also shows what will happen if interest rates rise. The downside to household budgets will be serious if rates over a 25, 30 or 35 year period rise even one or one and a half percent.

    Over a long period you have contractually accepted the obligation to pay back the principal. But you have also opened yourself up to accepting market rates over that period. Who knows what and when rates will do over such a long period.

    A thirty year loan at the current two year fixed rate of 5.6% (the bank average) will see you pay more in interest ($320,005) over that period than you borrowed in the first place ($300,000).

    A relatively small rise in interest rates to just 6.5% would see a 25 year mortgage require more in interest than the original borrowed amount.

    No wonder there is a reliance on capital gains. Such prospects are a mental salve to justify taking on such a large interest-paying obligation. But that is irrational over such a long period.

    However, long term rationality does not feature much when housing markets get exuberant.

  • RBNZ kicks plans to develop specific bank capital requirements for reverse mortgages into touch, for now

    By Gareth Vaughan

    The Reserve Bank's plans to introduce specific bank capital rules for reverse mortgage loans are on ice.

    In March, in the same consultation paper that detailed its proposals for new asset class treatment of residential mortgage loans to property investors, the Reserve Bank said it was also working on new risk weight proposals for reverse mortgage loans. There are currently no explicit capital requirements for reverse mortgages.

    The Reserve Bank estimates there are about $400 million to $500 million worth of reverse mortgage assets held by New Zealand banks, with Heartland Bank, SBS Bank and ASB, currently offering them.

    Although last week's Financial Stability Report detailed the prudential's regulator's plans for loans to residential property investors, and changes to its restrictions on high loan-to-value ratio (LVR) residential mortgage lending, there was no mention of reverse mortgages.

    Asked about this a Reserve Bank spokeswoman told interest.co.nz; "The (Reserve) Bank is currently focused on the property investor asset class and macroprudential policy proposals announced this week, and any announcements on reverse mortgages will be further down the track."

    Reverse mortgages, or reverse equity mortgages, enable asset rich but cash poor home owners to borrow money against part of the equity they have in their home. An Auckland District Law Society paper, issued in 2007, concluded unless the borrower is over 70 years old and intends to borrow only a small proportion of their equity, they should be very circumspect about entering into such a mortgage.

    Growth expected

    In March the Reserve Bank said that with more people reaching retirement age in coming years and decades, there was the potential for reverse mortgage lending to increase.

    "One key risk to the lender stems from the borrower staying in the property longer than anticipated. Another risk arises from a fall in the value of the property. Both of those happening at the same time would pose the greatest risk for the lender."

    The consultation paper listed three potential options for reverse mortgages being the status quo, an exposure based net present value calculation which is the UK Financial Services Authority approach, or specific risk weights for reverse mortgages, which is the Australian Prudential Regulation Authority's approach.

    The Reserve Bank says it favours APRA's approach. This links the risk weight for a reverse mortgage loan to the exposure's LVR.

    "Given the close connections between the New Zealand and Australian banking sectors, there is an a priori case for aligning the prescribed risk weights with those in Australia," the Reserve Bank said.

    Most recently APRA has said a 50% risk-weight applies for reverse mortgages with LVRs of 60% or less, and a 100% risk-weight applies for reverse mortgages with LVRs above 60% and up to 100%. Where the LVR rises above 100%, the exposure should be treated as impaired, APRA says.

    A Deloitte report issued last August said New Zealand’s reverse mortgage market comprised 5,300 loans, with a total book of $444 million as at December 31, 2013, compared to 6,613 loans valued at $447 million four years previously.

    This article was first published in our email for paying subscribers early on Monday morning. See here for more details and how to subscribe.

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