Mr Brownett will be responsible for increasing investment in Centuria’s range of unlisted property trusts, and in its refreshed investment bonds product, Centuria LifeGoals, by building relationships with financial advisers.

Jason Huljich, Head of Real Estate and Funds Management for Centuria, said Mr Brownett’s appointment coincides with significant growth in Centuria’s business.

“We have successfully continued to grow our property and investment bond businesses. A key element of that success is our commitment to supporting financial advisers, particularly during the ongoing structural changes in the industry as a result of the Royal Commission.

“Dave has over 15-years’ experience distributing financial services across a range of bank-aligned, independent and corporate dealer groups – which means he understands the challenges and opportunities in the market intimately – and his relationships are second-to-none,” said Mr Huljich.

Mr Brownett will be a key member of the national distribution team – focused on promoting both LifeGoals investment bonds and Centuria’s unlisted property funds to financial advisers.

“I’m excited to be working with advisers in Victoria and Western Australia to help them address the challenges and opportunities that the current market represents. In my view experience and reputation count more than ever in today’s rapidly changing financial services landscape, and I look forward to introducing advisers to Centuria’s range of products, track record of consistently strong returns, and ongoing commitment to its investors,” said Mr Brownett.

Centuria is one of the fastest-growing Australian real estate fund managers in its peer group, with annualised assets under management growth of 54.1% to $5.6 billion for the 2.5 years to 31 December 2018.^[1] The investment bond business has recently relaunched a new product, Centuria LifeGoals, with a broader range of specialist, market-leading, active and index investment options.

David’s appointment is the latest in a series of new hires to bolster Centuria’s distribution capability, with Ben Harrop, Kylie Scrivener and Julia Desimone having joined Centuria in the past nine months.

[1] Past performance is not a reliable indicator of future performance.

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John McBain

Centuria Capital Group (Centuria, ASX: CNI) has announced full-year financial results to 30 June 2018, demonstrating continued positive momentum for the growing property funds manager.

FY18 highlights include:

• Assets under management up 29% to a new peak of $4.9 billion
• Operating earnings per share rose 58% to 16.3 cents^[1], above the revised guidance of 15.8–16.2 cents per stapled security
• Distributions per stapled security grew to 8.2 cents in FY18, a 9.3% increase on FY17
• Net operating profit after tax was $45.1 million, up 191%
• Investors benefitted from a total securityholder return (TSR) of 23.3%^[2] [3] for FY1

John McBain, Centuria Group Chief Executive Officer said: “After a transformational 2017, I am pleased to report this momentum has continued with strong FY18 results. We achieved an operating net profit after tax of $45.1 million and total securityholder returns of 23.3% – the second consecutive year this has exceeded 20%.

“With our funds management platform now significantly larger following last year’s corporate activity, we have been able to utilise our benefits of scale to drive strong AUM growth of 29% to $4.9 billion. This includes $1.1 billion in organic property acquisitions and revaluations and 12.5% growth in our investment bonds business to $900 million.”

“Significant performance fees of $25.8 million (pre-tax) from our unlisted business, along with a 77% year-on-year growth in recurring revenues to $67 million, were also key contributors to our FY18 results.”

Divisional overview

The property platform, comprising a range of listed and unlisted property funds, acquired 11 investment grade properties for $0.8 billion and together with revaluations of $0.3 billion enabled property assets under management to grow to $4 billion at year end.

The business established three new unlisted funds and four debt funds which were met with very strong investor demand through broadened distribution channels. The open-ended Centuria Diversified Property Fund also grew to over $37m AUM.

The two listed entities, Centuria Metropolitan REIT (CMA) and Centuria Industrial REIT (CIP) grew to $2.1 billion AUM, with CMA also joining its partner fund, CIP, on the ASX 300 index during the period.

Mr McBain explained: “While some of the growth in the value of our property portfolio can be attributed to market fundamentals, the strong result was also driven by our in-house management team focusing on solutions that meet the needs of our broad tenant base – both today and into the future.”

“With over 20 years’ experience in the market, we also have extensive knowledge and solid industry relationships that enable us to make off-market purchases on very attractive terms. In fact, eight of the past 10 acquisitions were off-market or followed failed sale campaigns.”

“This is good for our investors: the better we are at buying and managing quality assets, the better the portfolio performance and return to investors,” said Mr McBain.

Centuria Life, the company’s investment bond business, also saw solid growth of 12.5% to $0.9 billion AUM. The business is the fourth largest in its sector, which represents an 11% share of a $7.6 billion market.

Mr McBain said: “We are investing heavily in our investment bonds business – both in product development and through strengthening our distribution capabilities.”

“We’re finding advisers and investors turning to investment bonds as an attractive alternative to superannuation, given recent regulatory changes and headwinds in the sector.”

“With the benefit of 35 years’ experience in this sector, we are well positioned to take advantage of growing investor interest in this alternate asset class.”

Outlook

In conclusion, Mr McBain said his intention was to continue to expand Centuria’s property fund and investment bond platforms.

“We believe investors remain hungry for quality, well-yielding investment opportunities. We’re positioned to meet this need through our listed and unlisted property platforms, and to offer sustainable growth for investors.”

“To do this, our focus remains on growing organically through active management of our existing portfolios, and via mergers and acquisitions which complement our strategy and which we believe will contribute positively to returns for our investors,” Mr McBain said.

[1] Operating EPS is calculated based on Operating NPAT of the Group divided by the weighted average number of securities.
[2] Past performance is not indicative of future performance.
[3] Source: Moelis & Company.
[4] Operating NPAT of the Group comprises of the results of all operating segments and excludes non-operating items such as transaction costs, mark to market movements on property and derivative financial instruments, the results of Benefit Funds and Controlled Property Funds.
[5] Operating EPS is calculated based on Operating NPAT of the Group divided by the weighted average number of securities.
[6] Attributable to securityholders.

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The Bank of Mum and Dad is the fifth largest lender behind the big four banks.

It’s a recent addition to the lexicon, but this phrase has become widely used and is one that a growing number of Australians can relate to. In this article, Centuria examines the rise of the ‘Bank of Mum and Dad’ and looks at strategies to help your clients avoid dipping into their savings to help their kids achieve their property aspirations.

According to research^[1] undertaken by financial comparison website Mozo, the Bank of Mum and Dad is the fifth largest lender behind the big four banks – collectively, these ‘bankers’ have lent approximately $65.3 billion to their offspring.

Mozo concluded that 29 per cent of parents – or more than one million families – assist their children to buy a home. On average, the Bank of Mum and Dad lends $64,000 per family, a sum that 67 percent of lenders don’t expect to see repaid. What effect might this have on their retirement?

What is the Bank of Mum and Dad?

Quite simply, the ‘bank’ is any family willing to lend their kids money…and this could be any number of your clients. These ‘loans’ – which may or may not be repaid, in part or in full – can be for anything as agreed by the parties involved. While generally used for property related transactions, the Bank of Mum and Dad is also used to support business start-ups and entrepreneurial ventures. The terms are generally much easier than with a traditional bank!

Defined by the Oxford Dictionary, the Bank of Mum and Dad is:

“(especially in the context of property purchase) a person’s parents regarded as a source of financial assistance or support.”

There are two ways the Bank of Mum and Dad provides financial assistance:

1. Allowing the kids to live rent (and bill) free while they save for a deposit (or start a business) – according to Mozo’s research, that’s worth approximately $25,000
2. Providing cash support for the deposit and/or repayments.

A survey^[2] published last year found that conserving capital to leave money for the next generation is no longer a key consideration for older Australians; in fact, only 3% of respondents intended to preserve all their savings for the next generation, but only 10% expect to spend all their money on themselves. Instead, the report noted the trend away from a bequest motive in saving, to one that moved towards helping children with their first home during their lifetime. Importantly, the report also noted that becoming a Bank of Mum and Dad increased the risk of reduced savings and financial hardship for the older person later in life.

Research^[3] from the United Kingdom, which has also experienced a housing affordability crisis, found the proportion of prospective buyers who expect to get help from family has risen 30 percent in one year. Nearly half (48 percent) of prospective first-time buyers expect to get some help from the bank of mum and dad.

What’s driving the next gen to the bank of mum and dad?

The prime reason for the emergence of the Bank of Mum and Dad is housing affordability. The cost of housing is being forced upward by a range of factors – the housing shortage, the relaxation of foreign ownership laws, historically low mortgage rates attracting investors into the market, favourable tax concessions and finally, the banks themselves, which have been offering interest only and other packages to attract investors into the residential property market.

Housing affordability – or lack thereof – has been dominating headlines for several years. The first hurdle is the requirement for, at minimum, a 20 percent deposit. That equates to a deposit of $173,142 based on Melbourne’s median house price, or nearly $250,000 based on Sydney’s median house price. This makes it increasingly difficult for first timers to get their foot on the first rung of the property ladder.

A report^[4] published by researchers from RMIT and Curtin University for the Australian Housing and Urban Research Institute (AHURI) found the way the baby boomer cohort chooses to pass on their housing wealth to their children could prove to have an increasingly important influence on the welfare of generations X and Y.

The results suggested that 25 to 45-year-olds who received a cash gift from parents had home ownership rates 15 percent higher than their peers, lifting the proportion who owned a home from 45 percent to 60 percent.

Impacts on the ‘bankers’

According to Mozo’s research, two-thirds of families providing financial assistance do so from their savings. Nine per cent delay their retirement to help their children. Other reports show parents drawing down on their own mortgage to fund those of their children. While helping one’s children to get started on the property ladder is very noble, what happens to the retirement plans of the lenders?

Superannuation assets amounted to $2.5 trillion at 30 September 2017, yet another historical record. Despite this, there is plenty of media coverage suggesting that many Australians will not have sufficient savings to fund their retirement. According to the ABS, the average superannuation balance for Australians aged between 55-64 is $310,145 for men and $196,409 for women^[5].

Figure one outlines the retirement lump sums required to fund a ‘comfortable’ retirement according to ASFA. The calculation assumes the retiree owns their home outright, draws down all their capital and receives a part Age Pension. These sums are significantly higher than the average balances projected by the ABS.

Source: ASFA – All figures in today’s dollars using 2.75% AWE as a deflator and assumed investment earning rate of 6 per cent. They are based on the means test for the Age Pension in effect from 1 January 2017.

The ASFA retirement standard assumes the retiree owns their own home outright; if a parent has borrowed against the family home to finance one or more children, they will need more retirement savings that those suggested by ASFA for a comfortable retirement.

In short, there are two potential outcomes for ‘bankers’:

1. Parents defer their retirement to a later date
2. Parents retire with reduced savings and/or an ongoing mortgage to service.

Is there a better way?

The better way is, of course, to plan ahead and save. Parents may establish a regular savings program when their children are young, or work with young adult children to undertake a co-savings program to reach a specific goal, such as the deposit for a first home. The benefit of the latter approach is to instil a savings mindset in the younger generation.

Using a savings account or term deposit to save for a first home has two drawbacks; the first, incredibly low rates of return, the second, a tax liability on income received. With such low rates, on an after-tax basis, the savings will struggle to keep pace with inflation.

There is however, a viable alternative – using an investment bond.

An investment bond is an insurance policy, with a life insured and a beneficiary, and it operates like a tax-paid managed fund. As with a managed fund, you can make recommendations to your client from a broad range of underlying investment portfolios. These typically range from growth oriented through to defensive assets, and may include:

• domestic and global equities
• property
• fixed income

Underlying investments may comprise a single asset class, such as Australian equities, or a blended portfolio with a specific objective, such as a balanced, growth or high growth option.

Benefits of investment bonds as a savings vehicle

Investment bonds have a range of features that make them ideal longer-term savings vehicles.

Tax effective structure

An investment bond is a tax effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate. This makes investment bonds a particularly attractive savings vehicle for high income earners.

If the investment is held for 10 years, no personal tax is paid by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure two.

No annual tax reporting

As long as the client’s money remains invested, the manager of the investment bond will pay tax on investment earnings; there is no requirement for your client to declare those earnings in their annual tax reporting.

No limit on investment amount

There is no limit on the amount that can be invested to establish an investment bond. Importantly, investors can make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten-year period. Additional investments can be made annually or as a regular contribution. This way, parents can initiate an investment bond to help their children save toward a home and make either regular or ad-hoc additional contributions. As the children get older and start working, they too can contribute.

Transfer of ownership

The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes.

Paid tax-free to nominated beneficiary/ies

Once the ten-year investment period ends, or in the event of the death of the investor, the investment bond is paid tax-free to the nominated beneficiary/ies.

Case Study

Matthew and Jane are a hard-working professional couple with a 15-year-old daughter called Chloe. They have been concerned about rising property prices and have heard from friends first-hand about the difficulties faced by first home buyers to afford a property. In fact, a number of their friends have drawn down on their mortgage to assist their children buy their first home, something Matthew and Jane would like to avoid.

Matthew and Jane’s goal is to fund a deposit for Chloe’s first home. Based on a national median house price of $780,877 and the median unit price of $546,422, a 20% deposit of approximately $110,000 would be needed to buy a unit without the need for lender’s mortgage insurance.

Mathew and Jane have saved $25,000 in a cash account for Chloe. They both pay the highest marginal tax rate and want to access the investment in 10 years’ time when Chloe is 25 and ready to take on the responsibility of a mortgage.

They consider other options such as gifting or loaning the deposit to Chloe or acting as guarantor and signing as joint borrowers on Chloe’s loan. Their adviser explains the advantages and disadvantages of each option and recommends they invest the $25,000 into the growth option of an investment bond.

Matthew and Jane believe they can afford to add between $5,000 – $10,000 to the investment each year. As illustrated in figure three, either way they should at least cover the deposit – and where they can make higher contributions, they can provide Chloe an especially good start with her mortgage.

While being a lender in the Bank of Mum and Dad is noble and understandable, it’s worth considering Shakespeare’s wise words in Hamlet, when Polonius utters the famous phrase –

“Neither a borrower nor a lender be / For loan oft loses both itself and friend.”

In other words, encourage your clients to not lend (or borrow) money from friends or family; they may lose both friend and money. Alternatively, they may have to defer their retirement while they build up their savings or pay off a mortgage; alternatively, they may have to embark on this new chapter with fewer savings and a mortgage to service, neither of which is an ideal start to retirement.

———

[1] https://mozo.com.au/home-loans/articles/bank-of-mum-and-dad-the-fifth-biggest-home-loan-lender-report-2-17
[2] Seniors more savvy about retirement income, National Seniors & Challenger, June 2017
[3] The bank of mum and dad, Legal & General, August 2017
[4] A new look at the channels from housing to employment decisions, March 2017
[5] ABS 4125.0 – Gender Indicators, Australia, September 2017

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John McBain

Market leading momentum in property acquisitions Sydney, 15 February 2018: Centuria Capital Group (ASX: CNI) today announced strong half-year results for the period to 31st December 2017. Following a transformational FY17 in which the nature and scale of earnings shifted significantly, Group momentum grew into the first half of the 2018 financial year.

Highlights for 1H18, versus prior corresponding period, are as follows:

• 19% total return1 to investors (1H18)
• 19% increase in AUM to $4.6 billion2
• $770 million organic growth in property funds management (acquisitions and revaluations)
• $54 million (7%) investment bonds growth; AUM up to $0.9 billion
• Recurring revenue growth to $32.1 million, up $18.9 million
• 25.8 million net performance fee (pre-tax) on sale of 10 Spring Street, Sydney
• 13%3 operating gearing ratio
• Successful raise of $98.6 million in equity and $25 million in corporate bonds
• Reaffirm FY18 earnings guidance of 15.8–16.2 cents per stapled security (cps) (previous FY18 guidance 10.8 cps)
• FY18 distribution guidance of 8.2 cps

Centuria has delivered a record 1H18 result, with the business continuing its strong growth momentum on a transformational FY17.

John McBain, Group CEO, said: “FY18 will be the first opportunity for investors and the market to see clearly the benefits of the large property fund platform we acquired in January 2017 over a 12 month period. The acquisition significantly transformed the nature and composition of our earnings, markedly increasing recurring revenues and tripling the group’s market capitalisation.”

“We are very pleased with the 1H18 outcome, which has significantly improved our operating NPAT to $30.2 million representing an operating EPS of 12.1 cents.”

Across the property platform, Centuria acquired ten A-grade properties for $655 million and saw an uplift in asset revaluations of $115 million.

Mr McBain expanded on this, saying: “The scale of property acquisitions in 1H18 was virtually unmatched in our peer set and we continue to review attractive investment opportunities.”

The Investment Bonds business also experienced above market growth of 7% over the six-month period from new business and asset growth.

Overall Group AUM grew strongly by 19% to $4.6 billion.

The Group has also been rewarded with strong annualised returns of 12.7%4 from co-investments in Centuria Metropolitan REIT, Centuria Industrial REIT and other investments, as well as a net performance fee of $25.8 million from the sale of 10 Spring Street, Sydney.

To account for that performance fee, the previous forecast operating EPS of 10.8 cps was significantly increased to 15.8–16.2 cps. The Group expects further embedded performance fees within the unlisted portfolio to be realised on an ongoing basis.

FY18 outlook

Mr McBain said: “We will continue to deliver investment opportunities and further value creation through the expansion of our property fund platforms. We believe conditions remain favourable for the continued creation of property fund opportunities.”

“This includes leveraging our strong real-estate credentials to identify ‘pockets of value’ for our long-standing investor base, and improving our distribution capacity to accelerate growth in the Investment Bond business.”

“We also remain focused on improving our security holder returns, underpinned by stable recurring revenue and embedded performance fees. Moreover, we continue to actively broaden our access to capital sources and remain attentive to earnings growth within core businesses.”

———

[1] Past performance is not indicative of future performance.
[2] Includes post 31 December 2017 acquisitions
[3] Gearing ratio is calculated based on (Operating Borrowings less cash) divided by (Operating Total Assets less cash)

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Strategies to help fund gap years expenses.

The gap year is fast becoming a rite of passage for many young Australians, as they seek a break between the rigours of their final year of school and commencing further studies at tertiary level. Some students take a break to work and earn money to help them through uni, while others seek experiences – some for fun, others related to their tertiary studies and career goals.

In this article, Centuria looks at the opportunities a gap year can provide to young adults and provides some strategies to help your clients provide for an exciting and relevant gap year experience for their children or grandchildren.

More than 220,000 students completed year 12 Australia-wide in 2017. From secondary school there are many pathways, including apprenticeship, employment or tertiary education. In 2009, university places were changed from fixed to demand-driven and, as a result, by 2015 the number of (local) students going to university had grown nearly 30 percent. While numbers vary from year to year, it seems more than three quarters of the class of 2017 is expected to apply for further education.

What is a gap year?

While common in the United States, United Kingdom and Europe, for many years the notion of taking a gap year had negative connotations in Australia. A ‘gap year’ is time taken out of formal education; mostly it occurs between finishing school and taking up tertiary study, although some students take a gap during a course or between completing a qualification and seeking work.

According to research undertaken by the National Centre for Vocational Education Research (NCVER)[1], the incidence of gap-taking by Australian students has increased – it is estimated that approximately 25 percent of Australian students who complete high school will take a gap year before they go on to further education.

Interestingly, the research found that the most common activities of Australian gap students were part-time (28%) or full-time work (23%), or training (10%) – only 6% reported travel as their main activity. This is significantly lower than the incidence of travel reported for students taking gap years in the United Kingdom or United States.

The benefits of a gap year

Because there are so many opportunities and experiences available to gap-takers, there are likewise, a range of benefits. These might include:

• Time to identify and explore their education and career goals
• Development of organisational and work skills
• Undertaking non-university courses or training to support tertiary studies
• Development of a broader world view, particularly among those students who go abroad for travel or volunteer work
• Deferring and working is the only way that many students can qualify for Youth Allowance; students from regional areas who earn a designated sum during their gap year may qualify as independent and receive Youth Allowance during their studies.

A study by the University of Sydney found that Australian students who had taken a gap year as a result of lower academic performance and motivation in secondary school were more motivated during their tertiary education than those who had not taken a gap year.

The findings of this and other research suggest gap-takers are often more motivated and successful in their courses, have wider interests and are more easily able to socialise with a diverse range of people. If the gap year experience is valued by prospective employers, they may gain employment advantages – for example, where students gain relevant work experience, or combine travel and voluntary work, this can add to their skillset and increase their employability after university. Given the competition for jobs, this can only be a positive thing!

Some gap year opportunities

Interestingly, fewer Australian students travel or undertake voluntary work, despite the benefits it can deliver. In many cases this will come down to financial reasons – either the student needs to work to save money for their university years, or simply does not have the savings to head overseas. For those with the means to travel, there’s a variety of opportunities they can take up, such as volunteering for projects across a range of countries and ‘themes’. These might include:

• Teaching English to children and adults in developing nations
• Working on an African game reserve to help conserve wildlife
• Contributing to the lives of young Buddhist monks in Nepal
• Building homes and schools in developing nations
• Coaching sport
• Working in childcare or undertaking medical internships.

While most volunteer positions are available in developing nations, there are also opportunities in other parts of the world. This can be a boon for students wanting to learn or develop a second language.

These are great opportunities for those who can afford it – how can you help your clients provide a positive gap year experience for their children or grandchildren?

Funding the gap year

One strategy to fund a gap year experience is a regular investment plan using an investment bond. As detailed in our last article published by AdviserVoice – Resolutions for a new year – regular investment of savings harnesses the benefits of compound interest and dollar cost averaging, and enables clients to build up a nest egg over time. While many managed investments have savings plans attached to them, investment bonds have a range of features that make them especially attractive to regular savers with a longer-term savings goal.

#1 Start small and add regularly

An investment bond can be initiated with as little as $500, and regular investments of up to a total of 125% of the initial investment can be made each year.

#2 A tax effective investment

An investment bond is a tax effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate.

There is no tax liability on maturation after 10 years, and no capital gains tax liability when switching between investment options.

However, if necessary, the investment is accessible earlier; if redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure one.

#3 No annual tax reporting

No one likes paperwork and while the client’s money remains invested, the manager of the investment bond will pay tax on investment earnings; there is no requirement for your client to declare those earnings in their annual tax reporting.

#4 Investment choice

Centuria’s investment bonds offer a choice of investment options:

• Australian shares
• Balanced
• Cash
• Growth
• Guaranteed
• Imputation

Earnings are automatically reinvested in the bond and because investors have no capital gains tax liability, reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.

#5 Beneficiaries

Investment bonds provide investors with freedom to nominate anyone as a beneficiary in the event of their death. As an investment bond falls outside of the estate, it is not distributed according to the will, nor is it affected if the owner dies intestate.

Once the ten-year investment period ends, or in the event of the death of the investor, the investment bond is paid tax-free to the nominated beneficiary/ies.

Illustrative Case study

Kerrie and Sam have two children in primary school and want each of them to have the opportunity to take a gap year, to see the world and make a contribution through voluntary work. They invest $1,000 to start a regular investment plan using an investment bond.

Each month, Kerrie and Sam add $100 through a regular investment plan, and each year, the regular savings amount is increased by 25%.

Source: Centuria – figures assume investment returns of 4% income (70% franked) and 3% growth, and that the investment is held for 10 years. This example is for illustration purposed only and does not purport to represent the return achievable in any particular investment bond. Investments are subject to risk, including the risk of negative return. Changes to the assumptions given in the illustrative example will alter the outcome.

If the outcome in this illustrative example is achieved, Kerrie and Sam’s investment will have grown to a little over $49,000, tax paid, by the time their first child finishes school. That way, both of their children will have a funded gap year to explore the world and take up opportunities that will help them develop skills to benefit their future employment.

Saving and investing regularly over the medium to long term can translate into a growing nest egg. Your clients’ children and grandchildren can benefit from the power of compounding returns and have a fund to support them during a gap year between school and university – or between university and starting work. After all, everyone wants the best for their children – this way, your clients can be sure that their children can make the most of every opportunity available to them.

———-

[1] Who takes a gap year and why? – NCVER, 2015

The examples provided in this article are illustrative only. Suitability of a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this whitepaper. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any investment bond and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in any of Centuria’s Investment Bonds. An investment in any of Centuria’s Investment Bonds is subject to risk as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867

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How do you encourage clients to build their investments in the year ahead?

As the end of the year rapidly approaches, clients will be planning for 2018. In this article, Centuria looks at ways to encourage clients to build their investments in the year ahead, whatever their longer-term goal.

Year end is a time for people to take stock and plan for the year ahead. This often involves a few resolutions for the coming year – researcher Neilson has found common new year resolutions to involve health, fitness and ‘spend less, save more’. Unfortunately, statistics – and lapsed gym memberships – suggest that many new year resolutions don’t last long into the new year. How can you help clients develop a regular investing focus in 2018?

Track the spend

Until they track their spend, many people don’t realise how much money is frittered away on discretionary items. Australians love their coffee and according to ASIC’s MoneySmart^[1], spent $1.1 billion on coffee in 2012, a figure that has undoubtedly grown since then. On an individual basis, those who order a medium takeaway coffee each day spend approximately $1,642 a year on their habit…add a muffin or breakfast sandwich, and suddenly the annual spend exceeds $3,000.

The first step to regular investing is being able to identify spending that can be reduced or eliminated. Encourage clients to track spending for at least six months, whether using a notebook and pen, or an app such as ASIC’s TrackMySpend (available for Apple and Android, and free). This should enable them to identify essential and non-essential spending, and make decisions about where they can cut spending and free up money to save.

Manage a budget

A surprising number of people don’t have, or don’t stick to, a budget. A budget is a blueprint for your clients’ financial success, and will help them determine the appropriate balance between spending and investing. There are many programs and apps available for budgeting, or you may have a preferred format for clients to follow. There are five steps to a successful budgeting process:

• Income from all sources – include wages, dividends, interest or rental income
• Necessities – mortgage or rent payments, credit or loan repayments, utilities, car and transport expenses, insurances, education, food and clothing
• Non-essential or ‘wanted’ items – buying coffee and lunch each day, eating out, entertainment, travel, luxury items, gym membership
• A regular comparison between the spending tracker and the budget
• Evaluation – strategies to increase and invest savings

Some budgeting apps recommend a system, such as ‘50/30/20’, which splits income across three major categories: 50% to necessities, 30% to non-essentials and 20% to savings and/or debt repayment.

Regular investing plans

A regular investing plan is an excellent way to build up a significant investment. Encouraging clients to commit to investing a specific amount each month not only encourages an investing mindset, but creates a nest egg outside of superannuation to meet medium to long-term financial goals.

While some people are very disciplined, for many, investing doesn’t come naturally…for every dollar in the bank, there are many ways to spend it! A regular investing plan, through which a regular sum is automatically deposited into a designated investing vehicle provides a range of benefits to your clients:

• Quick and easy – most regular investing plans have direct debit system by which money is automatically transferred from a bank account to investment or savings account on a specific day each month.
• Enforced investing – it can be tempting to skip a month in favour of a new pair of shoes, a mini-break or dinner at Heston’s latest restaurant, items not provided for in the budget. By automating investing, your client does not have to rely on their financial discipline to keep growing that nest egg.
• Self first – it’s natural to pay creditors first; loan repayments, gas and electricity, credit card bills. A regular investing plan provides your clients with permission to pay themselves first and prioritise their financial future.
• Growth – each month, there are two key advantages of a regular investing plan – while neither concept is new to advisers, it is worth reinforcing the benefits of compound interest and dollar cost averaging to clients.

Compound interest

‘Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.’ Albert Einstein

Also described by Einstein as the ‘most powerful force in the universe’, compound interest is a concept that every investor needs to understand. The earlier they understand and harness its power, the better off they will be in the long term.

Compound interest means that that an investor receives interest not only on the initial investment, but also on the interest earned on the investment. The concept applies to any form of investment return. As Einstein claimed, it is a powerful force; when applied to an investment, the total return can grow exponentially over the longer term.

Example: $10,000 invested at an annual interest rate of 10%. Table one shows the impact of having the income paid out each year versus reinvesting the income and allowing the interest to compound. Note: as a simple example, this does not take into account any variance in the value of the underlying investment.

The beauty of compound interest is that it allows investors to earn interest on interest – or investment returns on investment returns. This is what working capital really means!

There are three rules to get the most out of compound interest:

• Reinvest any income from dividends, distributions or interest payments
• Regularly add money to the investment – a savings plan is ideal
• Invest over the long term.

Dollar cost averaging

While Albert Einstein did not have an opinion on dollar cost averaging, it still paints a compelling picture for regular savings.

Dollar cost averaging involves investing a regular sum of money into an investment – be it shares, an ETF, a managed fund, or an investment bond – whether prices are up or down.

Because of dollar cost averaging, investors using a regular savings plan automatically buy more units of the investment when prices are lower, and fewer when prices are higher, potentially achieving a lower average cost base. This means a greater number of units than if the total investment was made in a single transaction at an expensive entry point of the market.

Regular savings, and dollar cost averaging, can help investors to focus on long term savings goals and avoid them trying to time the market and make emotionally-driven decisions, something that often ends badly for investors.

Table two provides a simple dollar cost averaging example. If the $6,000 used in the example had been invested as a lump sum in January at a price of $1.05, the investor would have received a total of 5,714.28 units – through regular savings of $500 per month, the investor has nearly 200 more units purchased at an average price of $1.02.

Choosing a regular investing plan

Once your client has committed to regular investing, it’s time to determine the most appropriate investment strategy. Low interest rates, barely covering tax and inflation, make bank accounts attractive. Many managed investments have regular investing plans available, as do investment bonds…and the latter has five features that make them especially attractive to regular investors.

#1 An investing discipline

An investment bond can be used to develop an investing discipline. With an initial investment as low as $500, regular investments of up to a total of 125% of the initial investment, per year, can be made. It couldn’t be easier for your clients to start saving in 2018.

#2 A tax effective investment

An investment bond is a tax effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate.

There is no tax liability on maturation after 10 years, and no capital gains tax liability when switching between investment options. That’s an incentive for long term investing!

However, if necessary, the investment is accessible earlier; if redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in table three.

#3 A long term view – and the power of compounding

Behavioural finance studies have shown that a tendency to make short term decisions on investments that have a longer-term time horizon often end badly for the investor. The power of compounding is best illustrated over the longer term. Figure one illustrates the power of compounding using an investment bond regular investment plan. Starting with an initial investment of $25,000 into the growth option of an investment bond, and making annual contributions of $5,000 or $10,000, results in a sizable investment pool at the end of the 10-year period.

This illustrative example does not purport to represent the actual return possible in any of Centuria Investment Bonds. An investment is subject to risk, the degree of which depends on the assets in which the bond invests. Assumptions: total returns of 7.5%, comprised of 4.0% income, 3.5% capital growth per annum, and a 21% tax rate in the bond.

#4 No annual tax reporting

No one likes paperwork and while the client’s money remains invested, the manager of the investment bond will pay tax on investment earnings; there is no requirement for your client to declare those earnings in their annual tax reporting.

#5 Investment choice

Centuria’s investment bonds offer a choice of investment options:

• Australian shares
• Balanced
• Cash
• Growth
• Imputation
• Property

Earnings are automatically reinvested in the bond and because investors have no capital gains tax liability, reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.

When your clients tell you that investing is on the 2018 to do list, consider the advantages of investment bonds. For those clients who like to see modelling, Centuria has an Investment Returns Calculator that enables you to model a range of investment parameters across different bond portfolios. This provides a tangible incentive for clients to find that discretionary income and redeploy it from coffee and cocktails to a strategy that will meet their long-term investment objectives.

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[1] https://www.moneysmart.gov.au/managing-your-money/budgeting/spending/australian-spending-habits

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Help your clients teach important financial lessons to their children and grandchildren.

The importance of financial literacy is recognised worldwide, with programs in most OECD countries and many developing nations, to help people better manage their financial circumstances.

In this article, Centuria examines financial literacy in Australia and discusses strategies to help your clients teach these important lessons to their children and grandchildren.

What is financial literacy?

Financial literacy is taken seriously in Australia and there are a wide range of programs available; in fact, ASIC did an audit in 2013 and found 112 financial literacy programs in operation, conducted by 64 different organisations^[1].

What is financial literacy and why does it have so much importance? According to Financial Literacy Australia, a not-for-profit organisation with a focus on advancing financial literacy, it can be defined as:

“…the ability to make informed judgements and to take effective decisions regarding the use and management of money.”

Financial literacy is a combination of a person’s skills, knowledge and behaviours in relation to decision making with respect to money.

In 2014, ASIC launched its National Financial Literacy Strategy (2014-17) with a vision to “improve the financial wellbeing of Australians by advancing their financial literacy.”

The strategy sets out a national direction for financial literacy and a framework for action under five strategic priority areas^[2], primarily focused on training and providing resources to teaching, and integrating financial literacy across the curriculum to ensure students are equipped with basic knowledge and skills to make good financial decisions. It is an essential everyday life skill; arguably more important than algebra, correct grammar or understanding plate tectonics.

This is not uniquely Australian – it has been internationally recognised that building the financial literacy of young people is critical. Research confirms that most children form money habits by the time they are seven years old and that parents can play a powerful role in influencing the attitudes and habits of their children around money.^[3]

Since the GFC there has international recognition of the need to ensure at least basic financial literacy concepts are understood – things like budgeting and the use of credit, to longer-term retirement planning and an understanding of investment concepts including asset classes, diversification, and the risk and return trade-off.

ASIC is currently undertaking a consultation process to update the strategy for 2018 and beyond; it released a consultation paper in October 2017 and has embarked on the process to garner feedback to refine and update the National Strategy for 2018.

Financial literacy in Australia

Whether looking to save money for a home deposit or an overseas trip, choosing between bank accounts or credit cards, deciding on a mortgage provider or a super fund, it’s important to have a fundamental understanding of a variety of factors that drive the decision-making process.

Despite the focus on financial literacy, 42% of Australians do not feel confident about managing their money on a day-to-day basis. Add to that, 36% find dealing with money stressful and overwhelming, and 21% have difficulty understanding financial matters.^[4] While literacy programs start in schools, not everyone has had the benefit of that educational focus.

Despite this lack of confidence in matters financial, every Australian holds one or more financial products – mortgages, super accounts, bank and savings accounts, credit cards. At end August 2017, there were 16,717,777 credit cards in Australia, accruing a massive interest bill of $31,470,071,044.^[5]

That leads into one of the biggest issues for Australians – managing debt. Around 20% say they are struggling to meet their mortgage repayment obligations.^[6] This is at a time of record low interest rates and a record high ratio of household debt to household income.^[7] It’s evident that Australians need support to understand their finances and manage financial risk – once interest rates start to rise, there could be many people under financial stress.

Is financial literacy in education working?

The approach adopted by the National Financial Literacy Strategy (2014-17) draws on similar programs adopted in other countries within the Organisation for Economic Cooperation and Development (OECD). Unfortunately, its research suggests that thus far, it is not enough. According to an OECD report^[8] released earlier this year, one in five 15-year-old Australians do not have basic financial literacy and as illustrated in figure one, only 15% of students are ‘top performers’ in financial literacy, marginally ahead of the OECD average.

Some of the report’s findings include:

• Students who hold a bank account perform 20 points better in financial literacy
• Students who receive money as gifts perform 13 points better in financial literacy
• At least 50% of students state they would save if there was something they really wanted to buy; not surprisingly, the savers perform better
• In several countries, including Australia, the top performers were 70% or more likely to expect to complete university education.

Given that school curriculums are full, and teachers are busy getting through the mandated education requirements, is relying on schools to produce a financially literate cohort going to be sufficient?

The OECD report provides evidence of a positive relationship between financial literacy and holding a bank account or receiving gifts of money. This suggests that experience with money or financial products can provide ‘real life’ opportunity to reinforce the basic tenants of financial literacy. How can your clients support their children or grandchildren in their financial literacy journey?

Investment bonds and financial literacy

While gifting money into a savings account obviously aids financial literacy, taking it one step further and using a slightly more complex financial product – with a range of features and benefits – could further enhance financial literacy. Using investment bonds, a tax efficient savings vehicle, can provide a range of lessons as follows.

#1 A savings and investment discipline

An investment bond can be used to develop a savings and investment discipline. With an initial investment as low as $500, regular investments of up to a total of 125% of the initial investment, per year, can be made.

#2 All about asset classes

Unlike a bank account, investment bonds can teach future investors about the characteristics of different asset classes. With a choice of investment options, the owner of the investment bond can learn about Australian and global shares, fixed income, property, as well as cash. A multi-asset investment bond provides an excellent snapshot of each asset class and can become a springboard for discussion about the importance of diversification. There is, after all, more to investing than cash.

#3 The risk/reward trade off (aka if it’s too good to be true, it probably isn’t!)

One of the disturbing findings of a several studies into financial literacy, including the OECD’s PISA study, is that many people do not understand the trade-off between risk and return. Consequently, the financially illiterate have more trouble discerning between a genuine investment and a scam. According to the ACCC’s Scamwatch website^[9], 138,291 Australians have lost just shy of $73 million to scams so far in 2017; approximately one third ($23.5 million) of this resulted from investment scams. A sound understanding of risk and return should help all investors avoid losing money to ‘get rich quick’ schemes that are too good to be true.

#4 Tax effective investment

Interest earned on bank accounts is subject to tax which, in the current low rate environment, results in little growth over time. Although minor’s generally pay no tax unless earning more than a certain amount; if this threshold is breached, the tax can be highly punitive.

On the other hand, an investment bond is a tax effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate.

There is no tax liability on maturation after 10 years, and no capital gains tax liability when switching between investment options.

#5 A long term view – and the power of compounding

Because the ideal term of an investment bond is 10 years, it can teach young investors to take a long-term view. Behavioural finance studies have shown that a tendency to make short term decisions on investments that have a longer-term time horizon often end badly for the investor. The power of compounding is best illustrated over the longer term; figure one in the following case study demonstrates the potential outcome of a relatively small initial investment and ongoing savings plan.

Case study

Eight-year-old Susie’s parents and grandparents want to teach her the value of money and the power of investing, so they gift her $1,000 to start an investment bond regular investment plan that can’t be accessed after she turns 18.

Her grandparents and parents together also provide her with a monthly amount of $100 to invest into the investment bond through a regular savings plan. Each year, the regular savings amount is increased by 25%. When Susie gets her first job, she is encouraged to contribute to the monthly savings.

Source: Centuria – figures assume investment returns of 4% income (70% franked) and 3% growth, and that the investment is held for 10 years. This example is for illustration purposed only and does not purport to represent the return achievable in any particular investment bond. Investments are subject to risk, including the risk of negative return.

If the assumptions in the illustrative example above are achieved, Susie’s investment would grow to just over $49,000 tax paid by her 18^th birthday…whether she uses it to buy a car, pay university fees or towards a deposit on her first home or apartment, that’s a terrific way to start adulthood!

Saving and investing regularly over the medium to long term can translate into a growing nest egg. Your clients’ children and grandchildren can benefit from the power of compounding returns and learn some valuable lessons along the way, lessons that will stand them well throughout their financial journey. While financial literacy may form part of their curriculum, real life experience is always the best teacher – and a positive real life experience the best lesson.

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[1] Source: http://finlit.org.au
[2] http://www.financialliteracy.gov.au/strategy-and-action-plan
[3] Money Advice Service (UK), Habit formation and learning in young children, 2013
[4] ASIC, Report 541 Australian Financial Attitudes and Behaviour Tracker: Wave 5 Key Findings
[5] https://www.finder.com.au/credit-cards/credit-card-statistics
[6] Australian National University, ‘Attitudes to house and affordability: Pressures, Problems and Solutions’, May 2017
[7] Reserve Bank of Australia, ‘Household debt, housing prices and resilience’, speech, 4 May 2017
[8] OECD The Programme for International Student Assessment (PISA) Test, Financial Literacy, 2015
[9] https://www.scamwatch.gov.au/about-scamwatch/scam-statistics

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John McBain

Centuria Capital Group (ASX: CNI or Centuria) yesterday announced an FY17 operating EPS of 10.3 cps in line with previous guidance. Centuria also confirmed a distribution of 7.5 cents per share for the financial year ended 30 June 2017 as per guidance and up 43% on FY16 results. Funds under management increased by 118%, from $1.9 billion to $4.2 billion during FY17 and market capitalisation grew from $80 million to $290 million over the same period.

During FY17 securityholders enjoyed total returns of 24% and Centuria expects that its operating EPS will grow approximately 5% during FY18 assuming performance fee contribution is consistent with the long term average.

Talking about Centuria’s performance over the 2017 financial year, Group CEO John McBain described the year as ‘transformational’, with an unprecedented level of activity across all divisions, including the acquisition of the $1.4 billion 360 Capital real estate platform.

“This acquisition was a very significant contribution to growth in funds under management and our consequent increase in scale and market presence. The result has been a step-change for Centuria Capital, bringing our business to scale and this activity should enable near-term ASX 300 inclusion.”

“In addition, the majority of 360 Capital’s funds were listed funds which were highly complementary to our platform which was previously skewed toward unlisted property funds,” Mr McBain said.

Mr McBain went on to say that since FY16 Centuria had purchased ten properties for $721 million across the listed and unlisted businesses, of which $517 million were acquired by unlisted funds.

“Our unlisted business had a bumper year, growing by 106% in its own right. It now manages property assets of $1.6 billion, and this year made the largest purchase in our history – the Zenith office tower in Chatswood, which was acquired for $279 million in a joint venture with global investor BlackRock.

In other significant initiatives undertaken during the year, Centuria merged its two office Real Estate Investment Trusts: Centuria Metropolitan REIT (CMA) and Centuria Urban REIT (CUA); and acquired the management of Centuria Industrial REIT (CIP).

Mr McBain said that as a result, CIP is now Australia’s largest pure rent-collecting REIT, with a market capitalisation of $563 million, and CMA is Australia’s dominant metropolitan office REIT, with a market capitalisation of $420 million

“We are very pleased with the performance of both funds this year. The merger of CMA and CUA resulted in a larger and more efficient fund, which went on to acquire a further $150 million in assets since the merger”

“Our aim going forward is to actively grow both funds, as we identify suitable assets,” Mr McBain explained.

The Centuria Diversified Property Fund (CDPF) was also launched this year. CDPF is an open-ended, unlisted diversified property fund which is invested in nine quality office trusts.

“CDPF gives investors all the benefits of direct property exposure from an unlisted fund, but with the addition of daily unit pricing and liquidity via a monthly redemption feature.

“CDPF has performed really well this year. Returns to investors are 19.5% for the 12 months to 30 June 2017, and it has been rated ‘Recommended’ by Lonsec and Core Property. This means it qualifies for inclusion in bank and other large dealer group’s approved product lists,” Mr McBain said.

The investment bonds business also performed strongly this year, with unitised bonds growing by 28% over the 2017 financial year and the business continuing to diversify its distribution channels.

Centuria is the fourth largest player in the market, with $799 million in funds under management, and Mr McBain said that he expects further growth in the coming year.

“We’re seeing accelerated, above-market growth in the investment bond business, supported in part from an increased interest from advisers looking to create, transfer and protect their clients’ wealth. Changes to superannuation regulations and uncertainty regarding negative gearing and family trusts also factor in peoples decision to consider our investment bonds,” he said.

In conclusion, Mr McBain said that FY17 was a year which had seen Centuria significantly increase its scale in the Australian funds management landscape, while retaining a sharp focus on reliable, growing securityholder distributions.

“Our focus moving forward is to utilise our market-leading real estate and financial services capabilities to identify growth opportunities and to use our balance sheet strength to accelerate growth across our listed and unlisted property and investment bonds businesses.

“We have a long track record of creating value for securityholders, and we now have a strong platform to deliver another successful year in FY18,” he said.

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