As Australians approach retirement, many will seek to rely on property investments to support their lifestyle when they stop working. While property has long been considered a safe, tangible asset, relying too heavily on real estate in retirement can present challenges that may not be immediately obvious.
Here’s why retirees need to consider the limitations and potential risks associated with property investments.
1. Liquidity Issues
Unlike shares or bonds, real estate is not a liquid asset. If a retiree needs to access funds quickly, selling property can take months, especially in a slow market. In times of personal or economic emergencies, a seller may be forced to accept a significant discount to achieve a sale. Even if a sale occurs, there can be substantial transaction costs, including real estate agent fees, legal costs, and taxes, further eroding returns.
2. Market Volatility and Economic Cycles
The Australian property market, while resilient over the long term, has experienced periods of stagnation and decline. Retirees who are heavily invested in real estate may find themselves exposed to downturns, as seen in the early 1990s recession or the more recent pandemic-related slowdowns. Property values can fluctuate based on various factors, including interest rates, government policies, and local economic conditions, which may not align with a retiree’s need for stable income.
Historically, residential property in Australia has provided solid capital growth, with the average annual growth rate for property prices in capital cities hovering around 6-7% over the past three decades. However, the rental yield typically ranges between 2-4%, meaning that investors are heavily reliant on capital growth for their returns (see above re liquidity and transaction costs).
If those numbers seem low, remember it is leverage (or debt) that typically improves returns from property. Debt may not be available or, if it is, add unwanted risk and stress in retirement.
By contrast, investing in the ASX200 (the top 200 companies on the Australian Stock Exchange) has delivered average long-term returns of 8-10%, including yields of 4-6% (more including the benefit of franking credits).
3. Maintenance and Upkeep
Unlike other asset classes, real estate requires ongoing maintenance. As properties age, maintenance costs rise, and unexpected repairs can quickly become a financial burden. A retiree who has allocated a large portion of their wealth to property may not have enough liquid resources to cover these expenses, which can eat into retirement savings.
4. Rental Income Uncertainty
For those relying on rental income from investment properties, there are several potential challenges. Vacancies can occur unexpectedly, and finding tenants in some markets can be difficult. Moreover, rental yields in some parts of Australia have remained low relative to property prices, especially in major cities. High property values combined with modest rental returns could leave retirees struggling to generate sufficient cash flow.
5. Regulatory and Policy Risks
Real estate investments are subject to government policies that can significantly impact profitability. Changes to negative gearing laws, tax reforms, or property zoning regulations can all affect the value and return on investment properties. For example, discussions around capping negative gearing benefits could reduce the tax advantages that many Australian property investors rely on, potentially impacting long-term returns.
6. Overreliance and Lack of Diversification
A well-rounded retirement portfolio should be diversified to reduce risk. Real estate is just one asset class, and overconcentration in property can leave retirees exposed to specific market risks. By contrast, a balanced portfolio with a mix of equities, fixed income, and real estate offers greater flexibility, better liquidity, and the potential for more consistent returns across different market conditions.
Striking the Right Balance
While real estate can be a valuable part of a retirement portfolio, it shouldn’t be the sole pillar. Retirees should be cautious about overcommitting to property investments due to liquidity constraints, market volatility, and the costs of maintenance. Incorporating a diverse range of assets, such as stocks, bonds, and cash, will provide a more balanced approach to retirement planning, offering both growth potential and the flexibility to adapt to unexpected changes. In most cases, utilising the substantial tax concessions of superannuation when doing so will further enhance such a strategy.
Retirees should seek advice tailored to their specific circumstances to ensure their investment strategy aligns with their long-term financial goals and provides the stability and income needed for a comfortable retirement.
If you’re planning your retirement or considering your investment options, contact one of our expert advisers for personalised advice.
Campbell Korff