Property as a retirement asset
Even within a portfolio of properties, one should diversify to include various property segments
23 Feb 2012 16:41
By Ku Swee Yong
CEO, International Property Advisor Pte Ltd
ALMOST one in 10 Singapore residents are aged 65 and above. There is no dispute that Singapore’s resident population (defined as Singapore Citizens and Permanent Residents) of 3,789,300 is ageing.
Recent media discussions about the proposed building of several eldercare centres threw the spotlight on the lack of space to provide our elders with better comfort. We would need to do more to provide for our elders, many of whom have survived the war and contributed to building this country.
The next largest category of our population is aged between 45 and 49 years. This group is 324,000 strong. No surprise that the population distribution bulges in the middle: low birth rates, alongside the need to maintain a strong workforce, meant that immigration policies of the past decade have favoured high net worth families and economically productive young foreigners.
Those who are approaching 50 and are sizing up their nest egg and looking forward to their next decade will increasingly demand retirement planning. Unfortunately, our bills do not retire. They continue to pour in monthly: credit cards, utilities, phones, cable access, etc. How many investment classes provide monthly incomes to help one maintain a reasonable standard of living post-retirement?
I am all for diversified investment portfolios. Depending on one’s risk appetite, one might have some shares, foreign currencies, fixed income, real estate and perhaps some passion investments such as art, wines and watches. As we reach retirement, the portfolio might take on a lower risk profile, for example with less stocks and private equity and with more fixed income and cash.
At this point, a monthly rental income from real estate ranks high on the list of preferred investments. Real estate is a long-term investment, with low price volatility, steady income stream and especially for freehold property, well suited for multi-generational wealth preservation and wealth transfer.
Considering the above, and with the Central Provident Fund (CPF) withdrawal age being pushed further out, more people are investing their accumulated CPF funds into residential properties and collecting rental income from this source. This is an indirect use of CPF funds which might otherwise be available only when one reaches 65 years. There is no denying that life spans are getting extended due to the good quality of our environment and high standards of medical care. Consequently, CPF withdrawal policies might change further down the road.
Even within a portfolio of properties, one should diversify to include various property segments. Each segment of real estate has its own supply-demand cycles and policy risks. Policy risks in the residential segment are the highest, as evidenced by the numerous cooling measures introduced in the past three years. Therefore, the various streams of rental income should include retail, commercial and perhaps overseas properties.
If we were to broaden our scope further, within the real estate space, alternative investments include debt, private equity in completed buildings or development projects, convertible bonds and even Real Estate Investment Trusts (Reits). Several good quality Reits pay quarterly dividends of between 4 and 7 per cent per annum. This is an opportunity for some clients: they took additional leverage on their largely paid-up property at the current home mortgage rates of about 1.2 per cent to invest in Reits. With interest rates expected to stay low for a few more years, some clients also leverage on their property investments to invest in fixed income instruments such as corporate bonds and private equity debt.
Include some debt
We generally recommend clients to take some debt but not so much that it would stretch their finances, especially for retirement planning. A loan-to-value (LTV) ratio of 60-70 per cent, depending on the property type and the client’s risk appetite, provides a good balance between cashflow and risks.
As most mortgages are available to borrowers until they are 70 years old, when investing in a property for retirement cashflow, borrowers need to note the loan repayment plans (which include principal plus interest) versus the potential rental income. For example, an investor aged 58 who has invested in a $1.5 million freehold residential property might take a $900,000 loan (60 per cent LTV) for 12 years. His monthly rental income could be $4,500 but his mortgage payment would be about $7,000 (principal plus interest).
Negative cashflow is not a good thing during retirement. Those who have access to private banking facilities might overcome the negative cashflow situation with revolving credit facilities. A private bank may view a client’s total risk based on the total financial assets and property investments pledged with the bank.
Here, the loan against the client’s property could be structured such that interest payments are serviced regularly but payments towards reducing the principal sum are deferred until, for example, when the client’s investment in a unit trust matures or when a fund is redeemed.
Taking on some debt is good for cashflow purposes but when we consider handing over our wealth to the next generation, having liabilities on the family balance sheet is less desirable. Most of us would not want our children to bear the burden of the property loans upon our demise. In our diversified retirement portfolio, we should always include a Universal Life (UL) insurance plan which has a payout that will cover all the outstanding principal sum of loans.
Those who have several property investments of very different values – say, a landed property, two conservation shophouses and four apartments – might find it challenging to distribute the assets equally to their beneficiaries. In such cases, they could invest in a larger UL that will ensure that the liabilities are paid down upon their demise and in addition, allow for a more even distribution of assets to their beneficiaries.
Involve trustworthy partners
There are a few other things we should consider around our property investments before we can enjoy the cashflow. For legacy planning, would we want to hold the properties under a trust or a foundation? How active do we want to be in managing the investment portfolio after we have retired? Are there tax implications especially where foreign properties may be involved?
Right from the beginning of planning for our retirement, before we even begin to select the assets for our retirement portfolio, we should look for a trustworthy real estate agent and a personal banker. A good banker will assist in managing the loans, the outward payments and reinvesting the incoming rentals. A responsible property agent will help manage the leases and the tenants. Most importantly, the well-qualified property agent must keep tabs on market fluctuations, policy changes and recommend suitable divestments and additions to the portfolio of properties.
Having these strong partners will ensure that our retirement will be a relatively carefree and peaceful one.
The writer is the author of ‘Real Estate Riches – Understanding Singapore’s Property Market in a Volatile Economy’
Reply With Quote
Originally Posted by Beebot
...when they up the lorry can take with them to next world...
