Property: a poor investment in retirement

In discussing their retirement plans with me, prospective clients often raise the prospect of investing directly in property and with property prices steadily marching higher, that is understandable.

However, there are several specific reasons why property is a poor investment in retirement.

Firstly, it is not possible to directly own property with a cost-effective retail fund such as Netwealth. You can own units in a managed fund that in turn invests in property, but typically these funds invest in large commercial type property.

As a rule, they have done extremely badly since the pandemic, as growing numbers work from home and improved technology means many employers need fewer clerical staff, which means less demand for office space. These funds are typically very expensive given the management fees charged.

It is possible to invest directly in property via a self-managed super fund, but these are very expensive and challenging investment vehicles to own and run. It is also not possible for you or a family member, to live in a property you own via a self-managed super fund.

While property investments can be a significant way to generate strong capital gains over an extended period, I believe it’s an unsuitable asset class for retirement savings for several reasons.

Firstly, property investments tend to be large, lumpy investments. You can’t sell $20,000 of a property investment for example, in the way you can sell part of a share portfolio should you need extra funds in retirement.

Property tends to have large upfront charges as well as significant exit costs compared to buying and selling shares and property tends to be inflexible in as much you can’t always sell it on the day you want to sell it, in the way you can with shares.

While there are always exceptions, the after-tax returns after all fees, taxes and charges are included, tends to be very low compared with shares and there are no franking credits attached to the returns on property investments. This alone can add a third of the overall return on share investments.

More, direct property investments tend to be very time consuming and require someone, either yourself or a manager, to keep a close eye on what is happening with that house or apartment.

For these reasons I think there are better investments for people in retirement.