Given the uncertainty and volatility that has characterised investment markets in recent years, many people are looking for ways of supplementing the retirement savings.
According to Samukelo Zwane, Head of Product Development at FNB Wealth and investments, the question on the lips of many of these individuals is whether physical property makes for a good retirement planning investment.
“Unfortunately, there’s no easy answer to this question,” Zwane responds, “because the decision whether or not to invest in physical property for retirement depends on the unique circumstances of each individual, as well as their income needs once they retire.”
Zwane says that diversification across different asset classes is always a prudent approach to retirement planning, and physical property is undoubtedly a viable asset class for many people to include in their retirement strategy.
However, he emphasises that caution is required; as well as a clear understanding of what retirement means for your income.
“For the vast majority of people, retirement coincides with a significant drop, or complete loss, of a steady income stream, such as a salary,” Zwane explains, “and it’s important to clearly understand that how each investment you make will meet your unique income needs after you stop working.”
He explains that while it sounds logical enough, many people don’t fully understand the implications of not earning an income anymore, and having an essentially ‘finite’ amount of financial resources from which to draw an income for the rest of their life.
“Understanding this retirement reality for yourself is the first step in deciding whether a property investment should form part of your retirement plan,” he explains, “and if so, what type of property investment is best suited to the income needs of future you.”
He explains that property investment is certainly not without its own share of risks, and that these differ depending on the type of property investment you make.
“Buying a physical property – like a residence or a commercial building – can be a good investment if market prices continue to rise,” he says, “and if that’s 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.”
However, he points out that there’s always a chance that property markets don’t rise like you had hoped they would, 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” Zwane says, “like the possibility that your tenant may default, or that you are unable to rent it out for a prolonged period, which would mean you don’t earn any income from it for that time period.
“Or, if it’s a commercial property, even a decline in the industry in which your tenant operates could have a negative knock-on effect for your rent payments. All of which could spell disaster if that rent is a large part of your retirement income.”
Despite these risks, however, Zwane is positive about the potential for physical property to add value in a retirement investment, provided it isn’t the only income generator, but forms part of a wider selection of retirement assets, including a pension or retirement annuity.
He also advises those who don’t want to have to deal with the time and financial costs of being a landlord to consider other forms of property investment, like listed properties or fractional investments.
“These forms of investment allow you to benefit from the investment profile of a portfolio of properties, without ever having to physically own any of them,” he explains, “and because many pay regular dividends, a large enough investment could generate an income over time – however, that may fluctuate depending on the performance of the properties and the markets sentiment.”
“In the end, retirement investment is just like any other investment, in that the best approach is to diversify your assets,” Zwane concludes, “and including property as one of those asset classes can be a very savvy approach to take, provided you know the risks, plan for your unique income requirements once you stop working, and never put all your retirement eggs into one property basket.”