For many Kiwis, the default investment strategy involves parking their savings in bank term deposits. While safe and relatively straightforward, these options often yield modest returns. However, New Zealand’s dynamic financial market offers a diverse array of alternative investment opportunities potentially capable of generating higher returns and diversifying risk. This article explores some of these options, providing practical insights to help you navigate the world beyond traditional banking.
Exploring the Alternative Investment Landscape in New Zealand
The term “alternative investments” encompasses a wide range of assets that fall outside the realm of standard stocks, bonds, and cash. These investments typically require a deeper understanding and a higher risk tolerance but can offer diversification benefits and the potential for superior returns. Let’s delve into some popular options in New Zealand:
Property Investment: More Than Just Bricks and Mortar
Real estate remains a cornerstone of many New Zealand investment portfolios. Beyond simply buying a house to live in, property investment can take various forms:
- Residential Property: Investing in rental properties remains a popular strategy, fuelled by a long-term housing shortage and relatively stable rental yields. However, potential investors should consider factors like mortgage rates, property taxes, insurance, and property management costs. The Reserve Bank of New Zealand website provides data on current mortgage rates and housing market trends.
- Commercial Property: Investing in commercial properties such as office buildings, retail spaces, or industrial warehouses can offer higher rental yields than residential properties. However, the initial investment is typically larger, and the vacancy rates can fluctuate depending on the economic climate.
- Property Syndicates: For those who cannot afford an entire property, joining a property syndicate is an option. Syndicates pool funds from multiple investors to purchase a larger property, allowing individuals to own a fraction of a high-value asset and share in the rental income and capital appreciation. As property syndicates vary in risk and structure, careful due diligence is necessary. You’ll need to fully understand the syndicate’s management fees, the property’s financial projections, and the exit strategy.
- REITs (Real Estate Investment Trusts): Similar to property syndicates, REITs are companies that own and operate income-producing real estate. REITs offer liquidity as they’re typically listed on the stock exchange, making them easier to buy and sell than physical property. However, REIT returns are subject to market fluctuations.
Practical Example: Consider an investor looking to invest $100,000. They could purchase a small residential rental property in a regional town, aiming for a rental yield of 5% per annum. Alternatively, they could invest in a commercial property syndicate specializing in industrial warehouses, aiming for a slightly higher yield but also accepting higher vacancy risks. Careful consideration of personal risk tolerance and investment goals is crucial.
Peer-to-Peer Lending: Borrowing and Lending Made Easy
Peer-to-peer (P2P) lending platforms connect borrowers directly with lenders, bypassing traditional financial institutions. Investors can earn interest by lending money to individuals or businesses. While P2P lending can offer attractive returns compared to bank deposits, it also carries the risk of default. Before investing, thoroughly assess the borrower’s creditworthiness and the platform’s risk management policies.
Key Considerations:
- Due Diligence: Before lending, carefully review the borrower’s profile, credit score, and the purpose of the loan. Platforms typically provide some level of due diligence, but investors should also conduct their own research.
- Diversification: Spread your investment across multiple borrowers to reduce the impact of any single default.
- Platform Fees: Understand the platform’s fees, which can include origination fees, servicing fees, and collection fees.
- Liquidity: P2P loans are generally illiquid, meaning you may not be able to access your funds until the loan matures.
Case Study: An investor allocates $10,000 to a P2P lending platform, diversifying their investment across 50 different borrowers. The average interest rate on the loans is 8% per annum. After accounting for potential defaults and platform fees, the investor achieves a net return of 6% per annum, significantly higher than the return on a bank term deposit.
Angel Investing and Venture Capital: Funding the Future
Angel investing and venture capital involve providing capital to early-stage companies with high growth potential. This type of investment is inherently risky, as many startups fail. However, the potential returns can be substantial if the invested company succeeds. It’s crucial to conduct thorough due diligence, assess the company’s business model, and evaluate the management team’s expertise. Angel Association New Zealand provides resources and networking opportunities for angel investors.
Understanding the Risks:
- Illiquidity: Investments in early-stage companies are typically illiquid, meaning it can be difficult to sell your shares.
- High Failure Rate: A significant percentage of startups fail, resulting in a complete loss of investment.
- Long-Term Horizon: It can take several years for a startup to achieve profitability or be acquired, so angel investors need to have a long-term investment horizon.
- Due Diligence Imperative: Thoroughly investigate the company’s business plan, market opportunity, and management team before investing.
Practical Advice:
- Invest in What You Know: Focus on industries or sectors where you have expertise or experience.
- Build a Portfolio: Diversify your investments across multiple startups to reduce risk.
- Network and Learn: Attend industry events and connect with other angel investors to learn from their experiences.
Example: A group of angel investors invests $500,000 in a promising tech startup with a disruptive technology. After five years, the startup is acquired by a larger company, generating a significant return for the investors.
KiwiSaver: More Than Just Retirement Savings
KiwiSaver is New Zealand’s national retirement savings scheme. While its primary purpose is to help New Zealanders save for retirement, it can also be viewed as an investment vehicle. KiwiSaver offers tax benefits and government contributions, making it an attractive option for long-term saving. Different KiwiSaver funds invest in a range of assets, including shares, bonds, and property. Selecting the right fund type is important to match your risk tolerance and investment goals.
Fund Types:
- Conservative Funds: Primarily invest in low-risk assets like cash and bonds, offering lower returns but also lower risk.
- Balanced Funds: Invest in a mix of shares, bonds, and property, providing a balance between risk and return.
- Growth Funds: Primarily invest in higher-risk assets like shares, offering potentially higher returns but also greater volatility.
The Sorted website provides comprehensive information about KiwiSaver, including fund performance data and a KiwiSaver fund finder tool.
Maximizing Your KiwiSaver:
- Choose the Right Fund: Select a fund that aligns with your risk tolerance and investment timeframe.
- Contribute Regularly: Consistent contributions, even small amounts, can significantly impact your long-term savings.
- Take Advantage of Government Contributions: Ensure you’re eligible for and receiving the maximum government contributions.
Cryptocurrencies: Navigating the Volatility
Cryptocurrencies, like Bitcoin and Ethereum, are digital or virtual currencies that use cryptography for security. They represent an investment that divides opinions sharply. Cryptocurrency investments can deliver substantial returns in short periods, but the price volatility is considerable. Investing in cryptocurrencies should only be considered if you have a high risk tolerance and are prepared to lose your entire investment. Thorough research is essential before investing in any cryptocurrency.
Key Concerns:
- Volatility: Cryptocurrency prices can fluctuate dramatically, leading to significant gains or losses in a short period.
- Security Risks: Cryptocurrency exchanges and wallets are vulnerable to hacking and theft.
- Regulatory Uncertainty: The regulatory landscape for cryptocurrencies is still evolving, which can impact their value and use.
- Complexity: Understanding the technology and economics of cryptocurrencies can be challenging.
If you choose to invest:
- Only Invest What You Can Afford to Lose: Given the high risk, only invest an amount you’re comfortable losing.
- Do Your Research: Thoroughly research the cryptocurrency, its underlying technology, and its potential use cases.
- Use a Secure Wallet: Store your cryptocurrencies in a secure wallet, preferably a hardware wallet.
- Diversify: Don’t put all your eggs in one basket; spread your investment across multiple cryptocurrencies.
Important Note: Due to cryptocurrency’s volatility, it is often not recommended as a retirement savings vehicle.
Collectibles: The Passion Investment
Investing in collectibles, such as art, antiques, rare stamps, or vintage cars, can be both a passion and a potential investment. The value of collectibles is driven by scarcity, demand, and condition. However, investing in collectibles requires specialized knowledge and a good understanding of the market. The market can be illiquid, making it difficult to sell your items quickly.
Essential Considerations:
- Expertise: Develop a deep understanding of the specific collectible you’re interested in.
- Authenticity: Ensure the item is genuine and has proper provenance.
- Condition: The condition of the item significantly impacts its value.
- Storage and Insurance: Protect your collectibles from damage and theft.
- Market Knowledge: Stay informed about market trends and auction prices.
Case Study: An investor passionate about vintage cars spends several years researching and collecting classic vehicles. Over time, the value of his collection appreciates significantly, generating a substantial return on his investment.
Farmland and Forestry: Investing in the Land
New Zealand’s agricultural sector offers opportunities for investment in farmland and forestry. Farmland can generate income through crops, livestock, or leasing arrangements. Forestry investments can provide returns through timber harvesting and carbon credits. These investments require a long-term perspective and a thorough understanding of agricultural practices and forestry management.
Key Considerations:
- Land Suitability: Assess the land’s soil quality, climate, and water availability.
- Agricultural Expertise: Understand the specific crops or livestock you plan to farm.
- Forestry Management: Develop a sustainable forestry management plan.
- Environmental Regulations: Comply with all relevant environmental regulations.
- Market Conditions: Monitor market prices for agricultural products and timber.
Benefits:
- Tangible Asset: Farmland and forestry represent tangible assets with intrinsic value.
- Inflation Hedge: Agricultural commodities and timber prices tend to rise with inflation.
- Diversification: Farmland and forestry can provide diversification benefits to a portfolio.
Example: An investor purchases a block of farmland and leases it to a local farmer. The investor receives rental income and benefits from potential appreciation in the land’s value over time.
Unit Trusts and Managed Funds: Professional Management
Unit trusts and managed funds pool money from multiple investors to invest in a diversified portfolio of assets. These funds are managed by professional investment managers who make investment decisions on behalf of the investors. Unit trusts and managed funds offer a convenient way to access a wide range of asset classes, including shares, bonds, property, and international investments. The Financial Markets Authority (FMA) regulates unit trusts and managed funds in New Zealand.
Choosing the right fund:
- Investment Goals: Align fund selection with financial objectives.
- Risk Tolerance: Assess personal risk appetite.
- Fees: Consider fees and expense ratios.
- Performance: Evaluate historical fund performance.
- Fund Manager’s Expertise: Research manager background and track record.
Practical Action: An individual with limited investment experience invests in a balanced managed fund. The fund invests in a mix of shares, bonds, and property, providing the investor with diversification and professional management.
Due Diligence and Risk Management
Before venturing into alternative investments, taking the time to research and understand the risks involves is important. Never invest more than you can afford to lose, and always seek professional advice if you are unsure. Due diligence is the cornerstone of successful alternative investing. Each investment option carries unique risks and potential rewards, so it’s essential to conduct thorough research and seek professional guidance before making any decisions.
Essential steps include:
- Define Your Investment Goals: What are you hoping to achieve with your investments? Are you saving for retirement, a down payment on a house, or something else?
- Assess Your Risk Tolerance: How much risk are you willing to take with your investments? Are you comfortable with the possibility of losing money?
- Research Investment Options: Understand the different types of alternative investments and their associated risks and returns.
- Conduct Due Diligence: Thoroughly investigate any investment opportunity before investing. This includes reviewing financial statements, assessing the management team, and understanding the market.
- Seek Professional Advice: If you are unsure about any aspect of alternative investing, consult with a qualified financial advisor.
- Diversify Your Portfolio: Don’t put all your eggs in one basket. Spread your investments across multiple asset classes to reduce risk.
Tax Implications
Understand the tax implications of alternative investments. Different investments are taxed differently, impacting overall returns. Seek advice from a tax professional.
Key information to consider.
- Tax on Investment Income: Income from alternative investments like rental property, P2P lending, and dividends from unlisted shares may be taxable.
- Capital Gains Tax: New Zealand does not have a comprehensive capital gains tax. However, certain gains from the sale of investment properties, shares, and other assets may be taxable in specific circumstances, such as if the property was purchased with the intention of resale.
- KiwiSaver Tax Benefits: KiwiSaver offers tax advantages, including employer contributions and government contributions. However, KiwiSaver funds are taxed at your Prescribed Investor Rate (PIR).
Seek Professional Financial Advice
Navigating the world of alternative investments can be intricate. Consulting with a qualified financial advisor is crucial for personalized guidance, risk assessment, and aligning investment strategies with your financial goals. A financial advisor can help you assess your financial situation, understand your risk tolerance, and develop an investment plan. They can also provide advice on specific investment opportunities and help you manage your portfolio.
FAQ Section
What are the main benefits of investing in alternative assets?
The main benefits of alternative investments include the potential for higher returns, diversification from traditional asset classes, and the opportunity to invest in unique and specialized areas.
What are the risks associated with alternative investments?
Alternative investments can be illiquid, more complex than traditional investments, carry higher fees, and be exposed to specific risks related to their asset class, such as market volatility in cryptocurrencies or valuation challenges in collectibles.
How much capital do I need to start investing in alternative assets?
The amount of capital required varies greatly. Some options, like P2P lending or managed funds, can be started with relatively small amounts, while others, like commercial property or angel investing, may require significant capital.
Where can I find more information about alternative investment options in New Zealand?
Resources like the Financial Markets Authority (FMA), Sorted.org.nz, and professional financial advisors can provide detailed information and guidance on alternative investment options available in New Zealand.
References
Sorted. (n.d.). KiwiSaver. Sorted.org.nz.
Angel Association New Zealand. (n.d.)
Financial Markets Authority (FMA), New Zealand.
Reserve Bank of New Zealand.
Don’t let your money sit idle in low-yield accounts. Explore the diverse landscape of alternative investments in New Zealand. With thorough research, expert advice, and a clear understanding of your risk tolerance, you can unlock the potential for higher returns and build a more resilient financial future. Take the first step today – reach out to a financial advisor and start exploring the opportunities that await you beyond the banks.
