DBS Group (SGX: D05) has served up some sobering news on real estate ownership.
Singapore’s largest bank recently presented research that shows property may no longer be sufficient or cost-effective as a retirement asset for younger Singaporeans.
The implications are worrying, to say the least.
Property has long been a cherished asset class for Singaporeans.
The reliable price appreciation has kept pace with economic growth in the last few decades.
However, income growth now lags behind property price appreciation, making this asset class much less affordable.
In the last decade, average home sizes have also shrunk by 20% while the price per square foot has surged by 50%.
With the price-to-income ratio at a 20-year high of almost 15 times for a median household, the dream of owning a property for retirement may fast turn into a nightmare.
How should you react to this alarming news?
If a property is not sufficient, how else can you better prepare yourself financially for retirement?
A heavily-regulated asset class
It’s important to note that real estate is a heavily regulated asset class.
Many rounds of cooling measures imposed by the government have not only dampened the fervour over the years but have also jacked up the total overall cost of ownership.
First off, there’s the additional buyer’s stamp duty.
This is a tax of 12% or 15% if you are buying a second or third property for investment, respectively.
The rule was enacted to deter speculative activity in the property market.
In addition, a total debt servicing ratio (TDSR) of 60% of your gross monthly income was introduced in 2013 to curb excessive borrowing.
In contrast, the TDSR rule is designed to ensure home buyers do not take on too much debt.
Given what we know from the past, there is the likelihood of further cooling measures in future should the government deem property prices to be rising too quickly.
Hence, future price appreciation may be capped.
Rental yields have also barely kept up with the inflation rate, ranging between 2.5% to 3.1% depending on the location and age of the unit.
Spread out your income sources
Another big problem with property is concentration risk.
Private property typically has a high price tag and investors can usually afford to sink money into just one or two, at most.
It’s a heavy capital commitment and you are owning just a single property.
Contrast this to the ownership of a REIT that owns a diversified portfolio of properties across property sub-classes and regions.
Rental income derived from investment property is also taxable, while distributions made by REITs are tax-exempt in the hands of the unitholder.
REITs such as Mapletree Industrial Trust (SGX: ME8U), Parkway Life REIT (SGX: C2PU) and Suntec REIT (SGX: T82U) pay quarterly dividends, thereby providing the investor with regular cash inflows.
Owning a bunch of REITs helps to diversify your income sources so that you are not reliant on just a single property that may remain vacant for short periods.
Owning a diversified portfolio
It’s also instructive to learn that the total returns from owning a second private property pale in comparison to owning an index fund tied to the S&P 500 Index (INDEXSP: .INX) or a Singapore REIT index.
Using the first quarter of 2009 as a starting base, every S$100 invested in a second property will quadruple to S$399.
While this may sound like a lot, investing that same S$100 into the index fund or REIT index will yield S$635 and S$486, respectively.
The above shows the importance of owning a diversified portfolio of asset classes including equities and even bonds.
Growth companies such as Zoom Video (NASDAQ: ZM), Microsoft (NASDAQ: MSFT) and PayPal (NASDAQ: PYPL) can accelerate your wealth-building process.
Compounding your dividends means you can end up with a much larger portfolio that generates an increasing stream of passive income.
Not being tethered to purely just property also allows you to have a better night’s sleep, knowing that your money is not tied up in just a single asset.
Get Smart: A different mindset
It’s tough to shed the mindset that property prices can only head up.
Our parents and grandparents have probably touted this “wisdom” to us as though it were the gospel truth.
However, with Singapore becoming a mature economy and the demand and supply levers for property being drastically different from what they were years ago, it’s time for a rethink.
Younger investors should be armed with a diversified portfolio comprising different asset classes, and should not be overly reliant on just property for wealth-building.
It’s time for more young adults to step up to the plate and make equities a larger part of their portfolio.
The best time to start is now, so don’t hesitate and start investing as soon as you can.
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Disclaimer: Royston Yang owns shares of DBS Group, PayPal, Suntec REIT and Mapletree Industrial Trust.