Mary Holm: Time to take bull by the horns

We have a lovely home and only five years left to pay off the mortgage.

A few years ago, we were constantly badgered with calls to buy a second home to rent, which we were told was going to help in our retirement and also reduce a little tax. We resisted for almost a year and then, fearing we may be left behind (silly, I know) we relented and bought a new townhouse outside Auckland with a company that specialises in this sort of deal.

We own a small business that has been suffering in the economic times and considered selling the renter, only to discover it's worth approximately $60,000 less than our mortgage over it - which was 100 per cent at the time of purchase.

We are really finding it hard to meet the shortfall of mortgage after rent. Would you advise selling now and taking the loss or holding on? It's costing us about $17,000 a year. Wish we hadn't succumbed.

If it's any comfort, I'm sure you have plenty of company. And at least you have lots of equity in your home, so you have a buffer there.

I could ask you about the value of the rental property and so on, so that we could do a bit of analysis on your situation. But we would have to guess what will happen to house prices, mortgages and rents over the next few years. And they really would be guesses rather than estimates. With one set of assumptions selling would look better; with another, holding on would look better. How helpful is that?

I reckon you should take the bull by the horns and put the rental on the market now. Why?

If you don't, you could find yourselves desperate to sell sometime down the track. And desperate sellers often end up losing heaps.

You'll get the whole thing out of your lives. Wouldn't it feel good to stop worrying about it?

Make up the shortfall between the sale proceeds and the mortgage by adding to your home mortgage. Then try to put the $17,000 a year into getting that loan down again as quickly as you can.

Re ASB, Origin Energy and Rabobank perpetual preference shares with annual interest resets, the answers to recent letters to your column have shown how risky an investment they are. I feel this was unclear in the original prospectuses.

I do not have the ASB prospectus here, but all Origin Energy has to say, as a specific risk is: "Investors should be aware there are risks associated with an investment in preference shares generally. Some of these risks arise from the nature of preference shares." Vanilla!

This is a meaningless statement and does not even refer to the actual product being offered; that is, perpetual preference shares with annual interest rate resets.

I read the prospectuses and struggled, unsuccessfully, to understand how the shares would react to interest rate changes. However, I did invest in all three issues because they were being offered by highly reputable companies. How naive can one be?

If the true risk of capital loss had been described in those prospectuses, nobody would have touched them with a barge pole.

In my opinion, the Securities Commission and the New Zealand stock exchange should have ensured a fairer and clearer warning of risk was included in these prospectuses.

Both the government and the stock exchange exhort us to invest in productive activities, rather than property. If they are serious, how about levelling the playing field by ensuring we have true, clear and full information on which to base investment decisions?

As you've learnt, a strong company can be a lousy investment.

It's certainly good to know you are in a company that is not likely to go belly up. Origin Energy says the security of its preference shares "has not diminished, and the capacity to pay dividends remains as strong, if not stronger than that at the time the prospectus was issued in August 2007. The reduced price is therefore a result of market factors only" - something that probably applies to all three companies.

But beyond being confident that a company will stick around, what matters is the return you get - which is affected by the price you pay and/or the interest, dividends or rent you receive.

With these perpetual preference shares, the numbers no longer stack up well, and their value has fallen. Did the three companies adequately warn investors that this might happen? I asked them to email me excerpts from their documents that outline that risk.

The following are key quotes from their investment statements or prospectuses.

ASB: "The market price of perpetual preference shares may also decline, and holders may receive less than the issue price they paid for their perpetual preference shares." And, "A holder of perpetual preference shares may, on sale or other termination of that holder's investments, receive less than the issue price."

Origin: "Holders may receive less than the issue price they paid for their preference shares if they choose to sell them." And, "The only way a holder can realise their investment is to sell the preference shares on the NZDX. The price a holder obtains will depend on the market for the preference shares at the time of sale."

Rabobank: "If a holder transfers their capital securities before they are redeemed ... the price at which they are able to sell their capital securities may be less than the price paid for them. This is because changes in the market interest rates and other factors can affect the market value of the capital securities. For example, if market rates go up, the market value of the capital securities may go down, and vice versa."

So they all said it. And while the quotes were often on page 20-something or even page 50-something, the companies pointed out that contents lists should have guided would-be investors to the relevant sections.

Is this good enough? Recent correspondence to this column suggests that lots of people didn't appreciate that their preference share values could fall as much as they have. They might not have bothered to read the prospectuses. But even if they did - as you did - the wording doesn't exactly yell out, "Beware - you could lose lots!"

In defence of the companies, they probably didn't foresee such radical market changes. As a Rabobank spokesman puts it, "As events unfolded in 2008/09, investments with a rate that resets annually became less popular following the RBNZ's decision to cut official cash rates.

"In addition, the market re-evaluation of bank credit saw a fall in the traded prices of all longer term bank securities, whether they were perpetual or not."

The spokesman goes on to say, "It should also be noted that this is only the value of the securities if sold today. Rabobank has an option to buy the securities back in 2017. If Rabobank were to exercise that option, investors would receive 100 per cent for their investment at that time."

ASB and Origin Energy could similarly buy back their preference shares. But will they? There is certainly no guarantee.

In the end I think it's fair to say the three companies should have more clearly warned investors about price falls. Relying on investors to find - and then to understand - a couple of sentences of legalese deep in a document doesn't work. And this hurts issuers too, because once-bitten investors are hardly likely to line up for the next round.

As you point out, the government, stock exchange and others trying to steer New Zealanders away from property investment would also benefit from investors' being better informed.

The great news is that change is on the way. There are moves afoot to force companies to attach brief summaries to the front of their investment documents that would explain, simply and clearly, important issues like risk. Watch for more info shortly. Such a change can't come soon enough.

One tricky aspect of all this is education of would-be investors. You "struggled, unsuccessfully, to understand how the shares would react to interest rate changes", despite Rabobank's brief explanation.

Basically, any bonds - and preference shares are the same in this respect - will lose value if newer bonds offer higher interest rates. People won't want to buy the older lower-interest bonds unless they can get a bargain price.

Should a company that issues bonds or preference shares be obliged to explain that? Probably not.

But it would be great if they did. A company that treats investors well should be rewarded by greater investor interest in their securities.

I have been in KiwiSaver almost from the start. I am approaching 60 (later this year). I am moving overseas to England to live and would like to know what my options are re KiwiSaver?

If your "principal place of residence" is overseas, you have three choices with KiwiSaver:

* Keep contributing, and continue to run your KiwiSaver account much the same as now - although you won't receive tax credits and your overseas employer won't have to make contributions. The main difference between doing this and saving elsewhere is that the KiwiSaver money is tied up, which may or may not appeal to you. When you reach NZ Super age, you can take all your KiwiSaver money out, regardless of where you live at the time.

* Stop contributing, but just leave the account sitting there. With any luck, your average returns over the years will be higher than the fees, and your account balance will grow. Again, you can take out all the money at NZ Super age.

* After at least a year overseas, withdraw all the money in your KiwiSaver account except the tax credits, which will be claimed back by the government.

If, for example, you've received two tax credits of $1043 each, the government will take back $2086. However, you will keep the $1000 kick-start, all your own contributions, compulsory employer contributions and in some cases voluntary employer contributions. You'll also keep the returns earned over the years on all the money, including returns on the tax credits.

To withdraw the money before NZ Super age you must provide proof that you plan to stay overseas permanently - although this doesn't preclude your returning here if you later change your mind.

KiwiSaver basics

The KiwiSaver Basics page on www.maryholm.com includes the answers to many readers' questions about the scheme.

Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot give financial advice.