Over the years when discussing international retirement planning and what to include in the basket of assets held inside a bespoke portfolio, the subject of whether or not to add property outside of one’s main residence often comes up, and thus needs to be properly and carefully considered.
The golden rule of course is always making sure that there is enough diversification amongst the assets classes, i.e. equities, bonds, commodities and cash, with each of the portfolios constituent parts having little correlation to the others, and held in the correct percentages to mitigate overall risk if one of them falls in value.
So what about adding a physical property to the mix?
The answer of course is that it is almost always a good idea, at least in principle, to add property to your retirement portfolio. I think it is fair to say that the majority of ‘high net worth’ people I encounter around the region have some exposure to the property sector in different countries, and most of them have done very well indeed over the years.
‘Having a ‘passive income stream’ generated from rents, in addition to seeing your property value increase over time can be a most rewarding and worthwhile exercise which many individuals find a lot more interesting and satisfying than watching (and worrying about) dividend yields, stock market ups and downs and alternative investment funds falling into liquidation!’
This all sounds rather jolly, but how to go about it whilst at the same time side stepping the many pitfalls that often lay in wait for the unwary buyer?
Things are not always what they seem in parts of the SE Asia property arena despite its many opportunities, and one has to tread with great care as amongst all the success stories there have been numerous failures and personal fortunes lost. Even today, some five years after the last global financial crisis (and indeed for many years prior to it!), you can still see the concrete skeletons of unfinished buildings where developers ran out of money prior to completion.
More than a few buyers who had paid deposits to sellors on the strength of a jazzy onsite show unit, creative photoshopped brochures, and perhaps the odd celebrity or golf professional thrown in to lend credibility, have been left stranded with little recourse or likelihood of ever getting their money back, let alone a title deed and a set of keys to a finished building.
There are many nuances and caveats involved in acquiring the right kind of property for ones ‘retirement portfolio’ – far too many to include in this article – and there is no substitute to having experienced local professional’s on hand who are willing to work with you to find properties that match your criteria.
It is worth remembering that most entities selling property are paid to do so by the property owner or developer. That said, if you make your requirements known from the outset, then a good agent or property investment advisory company will certainly be able to add value to the process for both buyer and seller.
From an investment perspective, resort property is very different to that of city property and houses different to condominiums. Future supply and demand imbalances have to be assessed for their effect on rental income and valuation growth. In addition, the availability of local mortgage finance, restrictions on foreign ownership, as well as any applicable property taxes for both the buyer and seller’s account are all things that need to be carefully considered.
In summary, the days of generating a steady 12% annual yield from rental income on residential property in Asia have largely gone so income expectations have to be more realistic nowadays. That said, an annual yield of 4 to 6 % net of running costs, coupled with long-term capital value growth should certainly be achievable if you buy carefully. There is also the added benefit of knowing that when there is another world financial crisis that spills over to the property sector, individual investors will still have the apartment or house to live in or rent out whilst waiting for it to pass.
In the final analysis, if you can accumulate some quality property that generates income plus capital gains over time, and a separate portfolio of other traditional asset classes that will provide a tax efficient income flow from the accumulated lump sum in later life, then you have a properly diversified and flexible retirement portfolio that should serve you well in the years ahead.
By Jerry Dingley
Jerry Dingley has been advising expatriates & international investors in the Asia Pacific region for 25 years. Specialist areas include expatriate retirement schemes, family trusts, inheritance planning, wealth protection vehicles, private client portfolios & QROPS UK Pension transfers.