Issue Three | Twenty Nineteen
MAGAZINE
INTRODUCTION:
NIGEL SMITH Founder - Covisory Group
Welcome to our latest Covisory Connect. The year is certainly flying which may be a welcome thing for many of you given its been a very volatile year to date on the investment markets. The recent 0.5% cut in the OCR may be good for the economy, but its not for investors. A further reduction in fixed interest returns is bad enough, but at the moment the massive volatility in world sharemarkets makes moving mainly into shares and unit trusts less attractive. Moreover, hedge funds simply have not performed as they were supposed to in these uncertain times. This issue we welcome an insight from NZ Funds
as a previous head of private equity at ANZ he also brings significant strength and capability to the team for business sales and advisory. On the 14th November 2019 we will be running a seminar on business valuations, sales and family options for ownership and succession. Finally, I have had several excellent and enlightening conversations with CEO’s of sports clubs. Its great to see strong business skills and fundamentals developing in this area. For too long too many clubs have been run by a committee of weekend warriors, who may have enthusiasm but very little skill. Modern sports clubs are businesses and need to be run as such. That requires vision, leadership and strategy. Until next time
following on from last month’s client seminar. It’s always good to get an insight from someone else who is experienced in order to challenge your thinking. This month we also highlight the considerable depth we have in business valuations. With Barry Tuck having been joined by Mike Bradley we have a very strong valuation practice. With Mikes background
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Nigel Smith www.covisory.com nigel@covisory.com
CONTENT
Business - 04
The state of business sales in New Zealand
Feature Article- 08
Locking in 2019 returns General Interest - 12
Opinion - 15
The last
When do you have a “Taxable Activity”?
minute Will
Trusts – 16
New Trust Laws have finally been passed
Lifestyle/Travel – 18
Discover the Orient Express
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BUSINESS
The state of business sales in New Zealand Since the baby boomer generation has begun reaching retirement age, the number of older business owners looking to sell their enterprises to the next generation has spiked particularly with main-street businesses such as small food & hospitality, retail, franchise and personal service businesses.
A heavily inflated real estate market that reminds
Non-main street SME businesses, however, face
Currently, buyers from all walks of life and from all
a different picture. That’s because the traditional
over the world are coming to buy up business in
business broking approach, which is like real estate
New Zealand. Foreign investors from China, the US,
selling, sees a broker list a business irrespective
and other top actors in the global economy view
of whether it’s ready for sale or not, and plays the
New Zealand as a comparatively safe haven in an
waiting game to see if a purchaser shows interest.
increasingly turbulent trade war. Even as the EU,
investors uncomfortably of Australia’s housing bubble is inspiring them to look for alternatives to property investment, even as even more new investors pour in from overseas. Together with low interest rates, healthy GDP growth, and an entrepreneurially active younger generation, this has created a unique environment that caters to both buyers and sellers. Covisory’s team of advisors, for their part, are here to help.
Kiwi entrepreneurs and foreign investors are eager to buy
China, the US, and Australia face slowdowns and fears A better approach in this case is to work with a M&A
of impending recession, New Zealand’s economy has
specialist who will advise on ‘readying’ the business
continued to display strong growth.
for sale; make targeted, discrete, professional approaches to the most likely buyers to ensure the business’ reputation remains intact; then put steps in
Why are investors buying more businesses?
place to establish an effective relationship between the buyer and the seller; and act as an advisor to
Private investors and equity firms are still investing
effectively manage the process. Rather than driving
in real estate, and the construction industry has
prices down however, this increase in supply has also
continued to experience strong growth over the past
been accompanied by strong sale prices, as investors
year. Despite this, fears of a massive property bubble
and entrepreneurs jump at the opportunities offered
are likely the cause for growing investor interest in
by New Zealand’s ageing business owners.
direct business purchases as an alternative. Besides this, ongoing economic growth and increasing global interest in the country promise opportunities for future growth.
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The housing market is empowering entrepreneurs While suspiciously high housing prices might cause investors to start looking elsewhere, it provides an important opportunity to private homeowners. Highvalue real estate provides people with entrepreneurial ambitions the equity they need to finance the purchase of a business. Critically, New Zealand’s central bank has continued to hold the official cash rate at a record low 1.5 per cent, making loans
cheaper and more accessible, even as the potential size of those loans has grown with property prices.
Fast growing industries are leading the way With everyone from large equity firms, to foreign investors, to individual aspiring entrepreneurs looking to get involved, business sales are competitive across many industries, regardless of size. Hospitality, retail, real estate, and construction are leading the way as
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New Zealand’s fastest growing industries, alongside
•
Market based valuation: The business’ value is
more modest, but significant growth in technology
determined using public company comparables
and healthcare. With strong potential for future
or precedent transactions.
•
Asset based valuation: Taking the sum of
the realizable value of all the business’ assets to
determine the company’s value.
growth, these make excellent purchases for investors looking to turn a profit in the near term.
Determining what a business is worth Before either buying or selling a business, it’s
Investors, entrepreneurs, and business owners
important to understand how businesses are
looking to buy or sell a business should ideally be
valued. With our team’s considerable depth in
familiar and comfortable with business valuations.
business valuations, business di-vestments, business
This is because a business’ or an investor’s own
acquisitions and succession planning and execution
informal valuation might be very different than
means that we can work with you to accurately and
an advisor’s formal valuation. Understanding how
fairly value your businesses, to ensure that both
valuations work, and what methods are used to arrive
buyers and sellers get the best deal possible.
at a particular value, can be helpful to both buyers and sellers.
There are many valuation methods out there, but the one most commonly used in New Zealand is
Need help buying or selling a business?
the earnings based/multiplier method, also called the ‘Multiple of EBITDA’ valuation method. In this
Our experts at Covisory are available to help both
method, earnings before interest, tax, depreciation
buyers and sellers to get the fair and profitable
and amortisation, but after a market salary for a
experience they’re looking for. This November, we will
working owner(s), is multiplied by a multiplier, usually
be hosting a seminar which will take a more in-depth
between 3 and 6 depending on the size and nature of
look at the options available to business owners for
the business and how risky or attractive the purchase
ownership and succession. For more information
is. The multiplier is most appropriately derived from
please contact Nigel Smith or Mike Bradley.
comparable business sales multiple data. Some other common methods include: •
Industry ratios: The business’ sales record is
compared to industry averages to determine
how well the business is doing.
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Nigel Smith
Mike Bradley
www.covisory.com
www.covisory.com
nigel@covisory.com
mike@covisory.com
#we start where others leave off
Covisory can help you to see and understand what your company can do, how much it is worth, and how you can increase its worth.
MIKE BRADLEY
BARRY TUCK
mike@covisory.com +64 9 307 1777
barry@covisory.com +64 9 307 1777
www.covisory.com
Wealth | Tax | Business
The investment environment:
Locking in 2019 returns
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FEATURE:
The investment environment has changed.
Volatility has increased As interest rates approach zero, volatility has
Growth is slowing, geopolitical unrest is increasing and NZ Funds has transitioned clients’ portfolios to a more defensive footing in anticipation of a pullback in global share markets. We have decreased risk across the Growth and Inflation Categories, locking in the strong gains generated this year.
Market view
increased. Triggers are geopolitical, such as the United States - China trade war, Brexit, increased tension in the Gulf and South China Sea and protests in Hong Kong. Only time will tell if interest rate cuts will be enough to extend what is now the longest economic expansion in history. It is clear though that the uncertainty surrounding global economic growth and the increasing probability of no trade deal between the United States and China means the likelihood of a sharp pullback in global share markets
Global growth momentum is now slowing, and most
is possible.
major economies have progressed toward more advanced stages of the economic cycle. Global trade growth also moved into negative territory, weighed down by the ongoing United States – China trade war. Share markets have discounted slowing economic data in the hope that interest rate cuts will help avoid a recession. We have already witnessed larger than expected interest rate cuts in New Zealand, with further cuts likely in the United States, Europe, Australia and New Zealand over the coming months. While the global economy is slowing, a recession is not a forgone conclusion, especially in the United States. We are anticipating a share market pullback and increased volatility in the near future, but we still
James Grigor Chief Investment Officer, NZ Funds
Portfolio changes
expect shares and other growth assets to appreciate and provide better medium to long-term returns
Our defensive strategy seeks to lock in the strong
than term deposits.
returns generated in our Growth and Inflation Categories this year. As well as increasing our active exposure over the past six months, we have implemented three defensive measures. First, we have reduced exposure to global and Australasian
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NZ Funds scenario analysis Growth orientated client (40 year old)1 target exposure
asset class
recent exposure
current exposure
global share markets movements
31 jul 2019 14 aug 2019 5% 10%
85%
20%
10%
-20%
-30%
New Zealand fixed Interest
2.5%
2.5%
0.0%
0.0%
0.0%
0.0%
International fixed Interest
2.5%
2.5%
0.0%
0.0%
0.0%
-0.1%
Preferred Income
2.5%
2.5%
+0.1%
+0.1%
-0.1%
+0.1%
Australasian shares
29.0%
24.7%
+3.7%
+1.8%
-3.7%
-5.5%
International shares
63.0%
53.6%
+10.7%
+5.4%
-10.7%
-16.1%
Downside Mitigation
6.3%
6.3%
-0.1%
-0.1%
+1.3%
+3.8%
FX / Gold
0.0%
9.5%
-1.9%
-1.0%
+1.9%
+2.9%
12.2%2
+12.5%
+6.3%
-11.3%
-14.9%
40 year old client portfolio
Income orientated client (65 year old)1 target exposure
asset class
recent exposure
global share markets movements
current exposure
31 jul 2019 14 aug 2019 27%
34%
39%
20%
10%
-20%
-30%
New Zealand fixed Interest
13.7%
13.7%
0.0%
0.0%
+0.1%
+0.3%
International fixed Interest
13.7%
13.7%
+0.1%
+0.1%
-0.1%
-0.5%
Preferred Income
8.5%
8.5%
+0.2%
+0.2%
-0.3%
+0.4%
Australasian shares
23.5%
20.0%
+3.0%
+1.5%
-3.0%
-4.5%
International shares
39.0%
33.1%
+6.6%
+3.3%
-6.6%
-9.9%
Downside Mitigation
3.9%
3.9%
0.0%
0.0%
+0.8%
+2.3%
FX / Gold
0.0%
7.3%
-1.5%
-0.7%
+1.5%
+2.2%
11.6%3
8.4%
4.3%
-7.6%
-9.7%
65 year old client portfolio
1. Recent exposure, current exposure and global share market movements are indicative only. Actual client returns will differ from this scenario analysis. 2. Year to date performance of an indicative moderate Managed Portfolio Service 40 year old client to 14 August 2019. After fees and before tax. 3. Year to date performance of an indicative moderate Managed Portfolio Service 65 year old client to 14 August 2019. After fees and before tax. For information on individual portfolio allocations in each Category please refer to the NZ Funds Portfolio Construction Guidelines.
Income Category 27%
Income Category 5%
AGE 40
Inflation Category 10% Growth Category 85%
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AGE 65
Inflation Category 34% Growth Category 39%
share markets by 15%. Second, we have invested in
While the best form of defence against volatility
gold, a safe haven, that should perform positively
is asset allocation, the strong returns clients have
during a global share market retreat. Finally, our
enjoyed this year provide headroom to prepare
downside mitigation manager, Universa, provides
tactically for a pullback, decrease risk and increase
protection should markets suffer a violent pullback
exposure to safe haven assets. We believe this
greater than 20%.
is justified given the knife-edge the economic environment currently finds itself in.
Central banks are likely to respond quickly to a significant share market pullback. This would be a
What if markets recover
buying opportunity for those with an 18 - 24-month view. Thus, our strategy is to buy back our 15%
If we are wrong and markets grind higher, clients
underweight share market position on any pullback
will continue to participate in an appreciating share
greater than 20%. Meanwhile, gold replaces our long-
market. With no new information we will remain
held exposure to the United States dollar, which we
defensively positioned. If there is a major positive
have now fully hedged. With interest rates so low,
catalyst, such as a full and final trade deal agreed
the cost to own gold is negligible, and gold provides
between the United States and China, we will
a defensive overlay for portfolios at a time of stress
close out our defensive positioning promptly and
and market inflection. If the markets suffer a sharp
increase clients’ exposure to risk assets. We will not
pullback greater than -20%, we will immediately
take our focus off our core job to track global share
reinvest the profit from Universa back into the global
market indices over time while generating sustained
share markets, which at that point would be trading
incremental returns.
at significantly lower levels.
How could portfolios perform in a downturn? The following scenario analysis approximates how
James Grigor www.nzfunds.co.nz info@nzfunds.co.nz
NZ Funds’ defensively positioned growth orientated clients (40-year-old) and income orientated clients (65-year-old) could perform following -20% and -30% share market pullbacks. Our analysis also highlights that if markets continue to appreciate, clients’ portfolios would still generate positive returns.
James Grigor is Chief Investment Officer at New Zealand Funds Management Limited (NZ Funds). James’ advice is of a general nature, and he is not responsible for any loss that any reader
Covisor y Conn ec t Mait.gazin e l 11 may suffer from following
GENERAL INTEREST:
The Last Minute Will
It never ceases to amaze me just how many people decide that they need to update their Will, Trust or letter of wishes a few days before a major overseas trip. Often these documents have sat hidden in a dark place gathering dust for years despite frequent reminders from lawyers and accountants that you need to check they are still appropriate. Then all of a sudden, a few days before you board the plane for that lengthy overseas holiday, a sudden panic takes over and you have to recheck them. We generally recommend you at least read and check your Wills and letters of wishes, plus any powers of attorney, every 2 years. Usually no major changes are required, with only minor tweaks which can be easily done via a codicil, a secondary document which amends rather than replacing or redoing a Will. The reality is that you are often more likely to die while in a car going to the airport than on the trip itself. However, people do die on holidays so none the less it is better to check these than not. A few
years back a NZ family of 4 were all killed when a light plane crashed while on a sight seeing flight in the islands. A family friend who was the executor spent 1 year sorting out the Will but more importantly the business which the family owned. So, what do you need to think about. Firstly, a Will is a legal document and it is very fixed and inflexible. It needs to be done properly by someone who is appropriately qualified. It should cover: •
Who is your executor? This is the person who
administers the Will.
•
Bury or cremate.
•
For those with children under 18, who will
become their guardian?. This is very important
as there are a lot of factors to consider in reaching
this decision like:
• Who?
•
Their ages.
•
How busy they are.
•
Do they have kids themselves?
•
Will your kids fit into their family?
•
Financial support – what if one of them needs
to give up work to look after your kids?
•
Back up/secondary guardians.
•
Use of your house or beach house.
•
Where they live – same school zones or
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city etc.
Today most valuable assets are owned in trusts and
a. Health and Welfare which apply when you are
not part of a Will, but personal property and effects
sick or injured and unable to act for yourself; and
are still owned personally. There may be some valuable items in this, but there will always be more
b. Enduring or general powers which allows
fights over sentimental items than those of value.
someone to act for you and a company while you
Making a list of specific valuable or sentimental
are away or otherwise can’t.
items and who they are to go to is very helpful, as are pictures.
There are specific forms for both which sadly have become far more complicated in recent times.
•
Whether your executor can charge for their time.
However, we recommend that you look at having
•
Any replacement trustees or who the power to
both.
appoint and remove trustees goes to.
This is not comprehensive but is a start. By comparison a letter of wishes to your continuing trustees is an informal, non-binding document. It can be a simple letter from you. It needs to spell out who gets what and when. It can also cover various “options” or different eventualities, eg if my child does drugs, they get nothing. While non-binding trustees will usually follow it and courts will look at it to decipher a settlor’s intention.
So, these are all matters that do require some clear and deep thinking. While the urge may be there to do this quickly before you get on a plane etc, if you do then make sure you do a full and proper job when you get safely back. Nigel Smith www.covisory.com nigel@covisory.com
Again, this is a document that does need to be thought and talked about. Finally, there are powers of attorney. These fall into two distinct categories:
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COVISORY:
Meet the Team
Mike Bradley
As part of Covisory Connect over the next few issues, we will be highlighting members of the Covisory team and find out what they do outside of the Covisory family.
going on to establish its sister Development Capital
Mike is a new addition to the Parnell based Covisory
We are thrilled to have Mike join our team of experts.
business for Australia and New Zealand; then to head ANZ’s Private Equity business in NZ and also chair its global private equity management committee. Currently, he runs The MBO Group in New Zealand as a Buy-side advisor. This business specialises in advising individuals and businesses on business acquisitions.
Team where he will be assisting clients with Business Valuations and brokering Business Sales. Mike was born and bred in Auckland, before making his way down to Waikato University where he completed a Bachelor of Management Studies. Mike has a very
Mike Bradley & Family
sporty background, enjoying much success at cricket in his younger years, and is still getting around the squash court, and playing a bit of tennis and golf when time allows. He has three boys and spends a lot of time with them at the rugby fields, cricket pitches, swimming pool, and athletics sideline. He lives out in Howick, Auckland, with Kylie his wife and youngest son Fletcher who is five years old. His two other sons are 29 and 26. Kylie is the Event Co-ordinator and Chef at a popular event venue in Howick, The Lounge. Mike has a strong background in Corporate Advisory, primarily involving Mergers & Acquisitions and the valuation of private businesses; having worked for Deloitte in NZ and the United Kingdom in its Corporate Finance teams. More recently Mike was a founding member of ANZ’s Private Equity business;
Adventures on snow 14 l Covisor y Conn ec t Ma gazin e
OPINION:
Tech Corner When do you have a “Taxable Activity”? Determining whether you must register for GST is a crucial step for any property transaction. If you are registered for GST, then GST will apply to any subsequent sale of the property (including the compulsory zero-rating rules). Conversely, GST can be claimed on any costs incurred including second-hand goods input tax credits where the property is purchased from an unregistered vendor. To register for GST, a person or entity must have a “taxable activity”. The GST Act 1985 (the Act) defines a “taxable activity” as any activity which is carried on continuously or regular and involves, or is intended to involve, the supply of goods and services to another person for consideration. We have seen instances where Inland Revenue has declined to register an entity that had acquired a property for subsequent development, on the basis that there was no documented evidence of a taxable activity at the time of purchase. In this case, the entity was unable to claim back a second hand goods input tax credit at the time of purchase.
This highlights the need for purchasers of property to ensure that they are GST registered at the time of purchase. We believe Inland Revenue should also issue updated guidelines or practical examples of what should, and should not, constitute a ‘taxable activity’ in the context of property transactions.
Chris Ng www.covisory.com chris@covisory.com
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TRUSTS:
New Trust Laws have finally been passed The Trusts Act 2019 - The issues you will need to consider
3. The duties imposed on a trustee have now
The new Trusts Act 2019 was passed into law at the start of August. This has been a long journey since it was first discussed nearly twenty years ago, but at least we have clarity on what will be happening moving forward. The full law does not come into
been written into the new law as well, meaning
the consequences of getting it wrong are more
amplified going forward.
4. Alternative dispute resolution procedures
a.
One of the biggest hurdles facing the quick
resolution to trust disputes is the time and
expense it takes to have cases heard in the
compliance with the new law. It is clear that
High Court.
The new Trusts Act will have a significant bearing on
force until the end of January 2021 which leaves some time to review existing trust structures to ensure
how trusts are administered in the future. Issues that need to be considered:
b. The new Act places more of an emphasis
on alternative dispute resolution procedures
to help parties reach resolutions to disputes
in a faster and cheaper manner.
1.
Telling beneficiaries, they are in fact beneficiaries
of a Trust.
Along with the new Trusts Act the New Zealand Law
a.
relationship property. Although a proposal at this
The majority of settlors of trusts in
New Zealand have managed to keep the
existence of the Trust from its beneficiaries.
b. This now changes with the trustees having
a positive duty to inform all beneficiaries of
a trust they are beneficiaries.
Commission is currently reviewing the law regarding stage one of the recommendations is for courts to be provided greater powers to share trust property when a trust holds property that was produced, preserved or enhanced by the relationship. This will mean more careful planning from a relationship property perspective will be required when involving trusts.
2. Disclosure of Information to beneficiaries. Marcus Diprose
a.
It is widely expected the new law will allow
www.covisory.com
beneficiaries more access to trust information.
marcus@covisory.com
b. Coupled with having to tell a person they are
a beneficiary this may lead to unwanted
consequences for the trustees.
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Upcoming Seminar: An overview of the Trust Act 2019
Covisory are running a trust seminar on 24th October to outline these changes and what practical issues you will need to consider.
Please contact us if you want to attend this seminar. Covisor y Conn ec t Ma gazin e l 17
LIFESTYLE/TRAVEL:
Discover The Orient Express
If you’re looking to make a UK / Europe itinerary even more special, experiencing the famous Venice SimplonOrient-Express is high on the list.
ONE OF THE MOST FAMOUS EUROPEAN RAIL JOURNEYS
From overnight journeys to the longer Istanbul
Boarding the train is like
stepping back in time.
itineraries there is a scope to include this exceptional rail journey. Inspired by the Roaring Twenties, these luxurious rail journeys will transport you to a different era – think art deco decor, white-gloved waiters, sparkling champagne flutes, and breathtaking jazz melodies. Here are 10 things you need to know about this iconic rail journey.
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The Venice Simplon-Orient-Express is said to have transported some of history’s most notable characters in its heyday, including Leo Tolstoy, Ernest Hemingway, Agatha Christie, and Tsar Nicholas II of Russia.
It’s a must-do for any history enthusiast. Book lovers will also appreciate the experience, as the train inspired the setting for several famous novels, including Dracula, and of course, Murder on the Orient Express.
A UNIQUE WAY TO EXPLORE EUROPE
At Fine Travel our clients are increasingly
The most common route for the Venice Simplon-
itineraries. Flying to London, joining the Venice
Orient-Express is between London and Venice (from London you start your itinerary onboard another
incorporating this train journey into their European Simplon Orient Express to Venice and then perhaps boarding a cruise or a tour.
luxury Belmond train). However, you can also travel to other cities, including Paris, Vienna, Berlin, Budapest, and Istanbul (depending on the time of year). It’s an authentic way to travel, explore different cities, meet
UNIQUE YET COMFORTABLE ACCOMMODATION
local people and share their local experiences and stories!
The Venice Simplon-Orient-Express has a range of comfortable accommodation options. Single cabins are ideal for solo travellers, while double/twin cabins are a great choice for couples.
VINTAGE TRAIN WITH MODERN AMENITIES The Venice Simplon-Orient-Express may be vintage in look and feel, but it’s been updated to include modern amenities such as radiators, power outlets, and showers (showers are in suites only).
Covisor y Conn ec t Ma gaz in e l 19
You’re also welcome to use your mobile devices in your cabin and suite, although not in public (to protect the authenticity of the onboard experience for other travellers).
FANTASTIC FOOD, WINE, AND ENTERTAINMENT Passengers rave about the dining experience onboard the Venice Simplon-Orient-Express. Expect delicious 3- and 4-course meals served by attentive white-gloved waiters in a sophisticated dining carriage. For breakfast, you can choose between continental or cooked (cooked incurs an extra fee). Entertainment is also fabulous. Spend your evenings in the champagne bar or the piano bar and lounge, and don’t forget to stop by the boutique store during the day.
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Tips from other travellers
There’s no air-conditioning onboard -
keep this in mind if you’re travelling
during summer
Tipping is welcomed, but not required.
You can tip as you go or leave a final tip
on your last day aboard
Arrive early if you can so you get a great
seat in the lounge and avoid queues
The onboard currency is euros; make
sure you have ample cash
Languages commonly spoken by staff
include English, French and Italian
A FORMAL-YET-FUN DRESS CODE In the spirit of onboard ambience, a dress code is enforced. Pack your best clothes and leave your jeans and trainers at home. By day, the dress code is smart casual. By night, men usually wear black tie and ladies wear cocktail or evening dresses. Dressing up adds to the fun of the entire experience, so it’s well worth making an effort.
A WONDERFUL OPPORTUNITY TO SOCIALISE Train travel is a rather intimate mode of transport,
Are you ready to travel back in time aboard the
but that makes for a wonderful opportunity to meet
famous Venice Simplon-Orient-Express?
fellow guests who share similar interests, passions and experiences.
A NOTE ON LUGGAGE Due to the intimate nature of travelling by train, it’s best to pack light. Most of the rooms are rather small, so onboard luggage is restricted to one carry-on size
Fine Travel is a client
suitcase and one garment bag per passenger. You
of Covisory
can also check-in one larger piece of luggage.
Finetravel.co.nz Covisor y Conn ec t Ma gazin e l 21 travel@finetravel.co.nz
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