Property investment: a life raft for retirement savings or a sinking ship?

Consumers are wondering if property investment is a life raft for retirement savings or a sinking ship considering the uncertain and volatile nature of investment markets as they try to find ways to enhance their retirement savings beyond employee pension funds or retirement annuities.

Property, if approached with caution, can be a valuable asset in a retirement investment plan and many consumers with retirement savings plans in place appear to use property as a way of diversifying their investments and balancing the volatility that often characterises equity investments, Samukelo Zwane, head of product development at FNB Wealth and Investments, says.

He says the bank spotted this trend in the recent FNB Retirement Insights survey, where 17% of survey respondents below the age of 60 indicated they use property as a retirement savings vehicle, while 11% had property as an asset class in their retirement portfolio.

While most respondents who included property in their retirement plans are in the ‘emerging affluent’, ‘affluent’ and ‘high-net-worth’ categories, there was a healthy representation of property in lower-income pre-60 respondents, such as Entry Banking (11%) and Middle Income (21%).

“Given that the proportion of respondents who use property as a pre-retirement savings vehicle is higher than those who use direct share investments (across all income categories), the popularity of property as a retirement savings vehicle is clear,” Zwane says.

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Is property indeed a good retirement investment?

“While there is an affinity for property in a significant proportion of pre-retiree investment portfolios, the question on the lips of many of these individuals – particularly given the current high interest rates – is whether property is indeed a good retirement investment.”

Unfortunately, Zwane says, there is no one-size-fits-all answer. “The decision to invest in property for retirement hinges on individual circumstances and income needs after retirement.”

He emphasises the importance of diversification across various investment types and assets in retirement planning. Property undoubtedly holds value as an asset class for many individuals, but Zwane underscores the need for caution and a clear understanding of the financial implications of retirement.

“Owning physical, tangible assets appeals to many as they feel a direct and personal sense of ownership, which also gives them more of a sense of control over their investment. That has made many see property portfolios or investments as a type of life raft, which means that if the rest of the plan or investment portfolio does not work out, they have physical stores of value to fall back on.”

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Think about investment security

However, he cautions against allowing property ownership to lull you into a false sense of investment security. “Buying a physical property, like a residence or a commercial building, can be a good investment if market prices continue to increase. If that is the case, the property could be sold for a handsome profit down the line or rented out to achieve a steady rental income in retirement.”

On the other hand, he points out that there is always a chance that property markets do not rise like you hoped or that prices are depressed just when you want to sell. He also points to the often-significant costs involved in buying and owning a property, including transfer duties, rates, levies and ongoing maintenance, not to mention that the sale of an investment property triggers capital gains tax.

“All these considerations and more apply to a property you buy to rent out. It is possible that your tenant can default or that you are unable to rent your property out for a prolonged period, which would mean you do not earn any income from it for that time period.”

Or, he warns, if it is a commercial property, even a decline in the industry where your tenant operates could have a negative knock-on effect on your rent payments. All of this could spell disaster if that rent is a large part of your retirement income.

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Property can add value to retirement investments

Despite these risks, Zwane is positive about the potential for property to add value to a retirement investment, provided it is not the only income generator but forms part of a wider selection of retirement assets, including a pension or retirement annuity.

“If you do not want to have to deal with the time and financial costs of being a landlord, consider other forms of property investment, such as listed properties or fractional investments. These forms of investment allow you to benefit from the capital growth of a portfolio of properties without ever having to physically own any of them.”

Zwane says because many of them pay regular dividends, a large enough investment could generate an income over time although that may fluctuate depending on the performance of the properties and the markets.

“Diversifying assets is key to successful retirement investing and including property as part of your investment portfolio can be a shrewd approach. However, the net position is always more important than being sentimental about property.

“Therefore, investors must compare the eventual total returns from various investment types, including property, before deciding on whether or not a property portfolio makes sense for them and their long-term needs.”