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Saturday, October 10, 2009

Would you own 3 to 4 properties in your lifetime?

There was a recent Singapore news report about steps taken by the government to “cool” down the real estate market. There was concern that speculative fever might be heightened, especially when forecasts seem to indicate a more challenging and subdued economic environment.

How can the Singapore property market run up so significantly on the back of the worst global financial crisis in history?

Some attribute this to the liquidity available in the banking system, while others are quick to point to a low interest rate environment. It was also highlighted that many buyers were home upgraders who are cash-rich, and of course, some were speculators hoping to make a quick profit within a year or two. There are certainly many types of players in the real estate market, and it is not easy to fully comprehend the dynamics.

In a recent discussion that I had with some colleagues, an interesting trend surfaced – a person is likely to own about three to four properties in his or her life time! Mapping that to one’s life stages, it is easy to identify the four possible stages. Such life stages are similar to those used for investment planning as well.

The first stage is what I call the “carefree” period of one’s life. It describes a person who is fresh out of college and has probably worked for a few years. He or she would have little wealth, few assets or little liability, and generally a higher risk tolerance.

In the property dimension, this would be the first step towards independence, when one thinks of moving out of the family home or relocating for work. Many may start by renting a place, but in time, one might consider owning a small apartment, especially when the rental can somewhat offset part of the mortgage obligations. Typically, this person is in his or her 20s.

The second stage is what I call the “family” stage of life. In the 30s and perhaps no longer single, one would be looking forward to settling down. Not only is one more financially able now (assuming a few years of disciplined saving and investing and having paid the first mortgage), the family unit is also likely to benefit from double income. With that decision to get married and in time start a family, the considerations are now very different.

This would lead to property upgrades. The home that served them well in their singlehood will no longer be suitable. So one would typically plan for a bigger place like a landed property or a bigger apartment with more rooms. Just like investing, having built up some wealth and assets, this is the point where one can enlarge one’s investment portfolio while still taking high risks.

The third stage is what I call the “established” stage. Typically, it describes people in their 40s to early 50s who are established in their career. They may have a few school-going children.

Generally, this group would have built up a substantial wealth portfolio and a reasonably comprehensive insurance coverage. From an investing perspective, this group is likely to be more balanced. They are likely to be unwilling to take too many risks, but at the same time not too conservative as to keep everything in cash or low-risk products.

At this stage, a couple of scenarios are possible. One possibility is an upgrade from the matrimonial home to a bigger house in a better district, perhaps a semi-detached, a detached house, or an even larger apartment. Another possibility is that one becomes “sort of” a real estate investor.

Those with the means can end up buying residential properties or shoplots for investment, with the objective of renting out for additional income. Naturally, the sky is the limit, and people in this stage of life can own multiple properties or stay in one of them.

The fourth stage is what I call “Looking Forward to Retirement” and “Retirement” stage. As one approaches retirement or is retired, perspectives can change very significantly. His or her children may likely have completed their university education or have already started working. They may also have moved out of the home bought in one’s third stage of life. A significant retirement nest egg would have been established and liabilities are generally lower as mortgages are almost fully paid off, or the children do not need as much financial support.

One also tends to take a more conservative approach to investing and taking risks. Planning ahead can take on varied routes. One option is to stay on in the large house and enjoy the golden years; although its residents are probably only the old couple lamenting the quietness of the house, a maid and maybe a pet dog or cat.

The other is to move into a smaller home with more convenient amenities. I realise that some retired couples are choosing the latter option as living in a smaller condominium allows them to enjoy the facilities and relative safety and security. Invariably, they may hold on to investment properties where rental can be used for retirement cashflows or passed on as inheritance.

We all go through these four stages of life as reflected in the trend in property demand. While most of us do not build up sufficient wealth to be multiple properties owners concurrently, it is not difficult to appreciate and understand why we are likely to own between three to four properties during the course of our lives.

I believe that property ownership is an integral part of our lives and culture. And when it comes to personal finance, property ownership is a key element that I would like to focus on in the weeks to come. Perhaps some learned readers can also share their views with me, as I believe there are many qualified property experts out there.

Tay is senior vice-president and senior head of UOB’s personal financial services division.

By The Star (by Tay Han Chong)

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