You might be wondering, what is a capital guarantee product? And the simple answer is it’s an investment where you are promised that you will not lose the money you put into a product.
Let’s take the example of property. There are those who believe property will always go up, and there are others who are worried that with all the ups and downs maybe their investment property might be down when they go to sell it and they will lose money.
So property investors might want to know that their property is capital guaranteed for a specific time period, 10 years for example.
The usual way this is currently done is instead of buying property directly, an investor buys into a property trust that is capital guaranteed. The guarantee costs roughly 3 percent of the investment and the investor has no control over the property trust.
Given the perceived complexity of this type of investment, I asked private wealth manger David Darmali, financial planner from Invest Partner how he constructs a capital guarantee and he provided an example of how he might do this for his clients.
“Say for example* they had $1 million. They spend $600,000 on a bank bond that guarantees to pay them $1 million in 10 years time. With the other $400,000, they put down a deposit on a commercial property that has an 8 percent return,” Darmali said.
“The commercial interest rate is currently around 7 percent and the commercial property value grows by 2 to 3 percent per year, in line with rental increases with inflation (as commercial properties are valued according to the rent and rental contracts are usually indexed to CPI),” he said.
“Over 10 years, that would be at least a 10 percent increase in capital gain and assuming the tenant is secure, with a positive cash flow from day one. Their capital is also guaranteed by the bank bond.”
*These figures are for educational purposes only, not current actual figures.