In the current economic climate, defined in part by low interest rates and high inflation, those approaching retirement age are being forced to reconsider their financial position, and seek alternatives to traditional income investments.
In the past 20 years, annuity rates for UK pensioners have halved as life expectancy has increased, whilst the yield on traditional fixed income investments made by pension funds has declined. A pension pot worth £100,000 would have been able to secure a pension income of £16,500 every year for life. Today, the same size pot will secure an income of only £6,500 a year.
As concerns of future income and cost of living grow, many are choosing to take a tax free lump sum, and invest in alternative assets that generate income which is not reliant on the performance of financial markets or interest rates.
Traditionally, the most popular investment alternative for income-seekers has been property. Both residential and commercial property investments are capable of delivering substantially better yields than cash or bonds. Nowadays there are a diverse range of alternative income investments; form renewable energy assets such as wind turbines or solar panels; through to agricultural land investments where income is derived from lease payments or crop revenues.
Whilst many sectors and assets might seem appealing to the income investor, there are risks endogenous to the acquisition and operation of real assets such as property and moveable assets like fine wine, rare stamps or precious metals. In the majority of cases, asset-specific expertise and experience is required in order to properly assess the opportunities and risks associated with investment in alternatives. For example, to properly assess a potential investment in an agricultural production project, where income is derived from agricultural operations, would require the input of a party with sufficient knowledge and experience of assessing such assets and the business plans.
Due to the spike in demand for alternative income investments, a number of schemes have cropped up offering smaller investors participation in farmland or forestry investments where invariably, investors take ownership of a small plot within a larger assets which is then managed by the operator and income derived from the land is paid in part to the investors and in part to the operator. This allows some smaller operators to raise early stage development capital from private investors by letting them share in the actual asset, as well as the risks.
Investors considering property-based alternatives to substitute their income are best advised to seek the support of both a financial advisor, who can assist with investment suitability recommendations, and a consultant with experience of identifying, assessing and delivering successful investment projects in the area of interest, and can demonstrate a solid track record and due diligence process.
Only invest in a project if enough due diligence has been undertaken so that you properly understand the asset class, sector, location and counterparty risks you might be taking on. Once identified and understood, risk impact can be planned for and mitigated, so only invest once you are happy with the asset (valuations, surveys etc), location (geo-political or trade risk), sector, and management team of the project (track record etc).
David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.
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