Property vs pensions: Round 3

Suggest someone invests in property instead of a Retirement Annuity for their long-term savings goals - and you're likely to have cream pies thrown at you. I have received the cyber-equivalent of this in recent weeks for sharing a personal comparison: My R50 000 invested in life company Retirement Annuities about 10 years ago versus the returns from a friend's R50 000 carefully-selected flat in Cape Town.

My return: R40 000. My friend's return: R2m.

Now, you'd think with an example like that, the property naysayers would go crawl under a rock. Not a chance.

Many of them, of course the financial intermediaries who earn obscene commissions for selling us Retirement Annuities (or RAs as they are commonly called), have come out guns blazing. Many of their comments and calculations are inventive and intriguing, but I don't buy them. Let's take some of the more obvious points up for debate (which you can read by clicking on Don't fall for RA tax perk hype and Retirement Annuities vs property: Round 2):

1.       "Compare apples with apples". This is investment-speak for saying you can't compare two unrelated things as it is just not fair to the person who is trying to convince you that their apple is the best. Frankly, I couldn't care about which of the financial adviser's apples are likely to be better. I want to know how best I can put my R50 000 to use - and in this case it means looking beyond those apples available in the fruit cart being offered by the average intermediary. Few intermediaries will tell you to invest in property because there is no money for them if you go that route.

2.       "Property is sooooo expensive these days. Yields have dropped." Yes, that's true, but I will still get a yield if I invest in property. In the case of my RAs, after 10 years I'm still waiting for a "yield" to show in my return statements, thanks to the greedy mouths in the financial services chain gobbling up all the returns. For, regardless of the returns' projections, the RAs quite simply have failed and are likely to continue doing so.

3.       "Tenants are awful to manage." Yes, they can be. But I can evict my tenant and find a better-performing one. I might lose a month or two in rent, but my investment will soon be back on track. There's nothing I can do to improve the performance of my Sanlam RAs. My money is pretty much stuck there until I need a Zimmer frame. In the meantime, I'll have to pray that some powerful people at Sanlam (or Old Mutual or Liberty for that matter) will one day get together and say: "Ag shame, we really are deducting too many costs off the investments of all those people to whom we've flogged our RAs. Let's cut our bonuses, salaries and corporate perks so we can give them a better deal."

4.       "You need a fairly significant capital amount to enter the property market."  Intermediary Noel Williams notes that R50 000 "would definitely no longer do the job, unless you wanted to buy a very small cottage in rural Kwazulu-Natal". I'd argue that there are indeed properties to be found that would transform R50 000 into R2m in another 10 years - and not just in KZN (click here to search a sample of what's on offer in the South African property market right now). However, there is nothing wrong with saving a little longer for a bigger cash deposit for a property. As my friend's case shows, borrowing money from a bank to fund the difference between a deposit and the property's purchase price exaggerates your long-term return. You get a tenant to pay off your capital.

5.        "The RA tax break means you automatically get a positive return," is another argument put forward by RA fans. I have seen a number of fascinating calculations in recent weeks attempting to show me that even though my RA investments have lost money I am still getting a positive return thanks to the tax break I have enjoyed by investing in an RA. I don't have any equally mindboggling calculations to throw back, but what I do know is this: When I look at my statements my life company RA investments are still worth less in nominal terms than what I put into them 10 years ago - regardless of all the nice marketing talk in the accompanying documents. And besides, RAs aren't tax avoidance schemes. I will pay tax when the money - whatever is left of it - comes out the other side.  

6.       "Get a real adviser, doll." Williams, and others, reckon I need to consult an "experienced, qualified investment adviser to establish why (my RA) performance has been so disappointing". So I did, and he told me that the persistent poor performance of my life company RAs is exactly the reason he, and his colleagues at a top-notch firm and at other financial planning companies, refrain from recommending such offerings. He said the only reason to recommend a life company RA is the big commissions the intermediary doing the recommending gets. There's very little in these RAs - if anything - for the clients.

7.       "Don't knock unit trust-based RAs." No, I won't. I also have some money in an Allan Gray RA and this holding has performed respectably over the years - thanks in no small part to the fact I was able to avoid paying intermediaries any commission by going to Allan Gray directly with my money. Allan Gray is an unusual company in the South African market in that it has always welcomed do-it-yourself investors and has never courted intermediaries at the expense of the clients whose money they are managing. However, if I choose to invest any money in an Allan Gray RA or any other similar-type offering through an adviser, I will not enjoy the same returns. I can expect to pay a percentage of assets under management, which may sound small at 1% or 2% a year, but over the years that adds up, eroding the gains made by the smart asset managers who run the portfolios. 

Has my Allan Gray RA holding performed better than my friend's astute Atlantic Seaboard property purchase? Sadly, not. It's hard to beat transforming R50 000 into R2m over 10 years. When you see returns like that being made, it's hard not to get hooked on direct property investments.  Want to contribute a blog or guest column in the great "RA vs property debate"? Send it to news@realestateweb.co.za. Or share your views by commenting below.

Click here to subscribe to the Realestateweb newsletter now! And click here to find out more about Realestateweb's property valuation reports. And here to search for properties.

Services Subscribe to newsletters News feeds Share this article Facebook Google Laaik.it Yahoo! Digg del.icio.us

Comments

 

responses to this article

Leverage I would like an intermediary to tell me how to use leverage in my RA?...nope you cant can you? fail! by aj on March 12 2010, 10:24 Find this comment inappropriate? Report it

your friend should do some profit taking now and invest the spoils elsewhere. If she keeps the property the gains made in the last 10 years will slowly be eroded away. By the time she retires all she will have is a C***** little flat with enough rental income to by a . .more couple of bottles of white wine each month. . .less by bbflames on March 12 2010, 10:33 Find this comment inappropriate? Report it

Property beater A neighbour of mine bought a carefully selected lottery ticket 5 years ago. Two days later, he had 6 million. In his case, this worked out to a 219000000% return. Therefore by the logic used in this article, the lottery beats everything. by darth bobo on March 12 2010, 10:34 Find this comment inappropriate? Report it

testing doesnt seem to post by test on March 12 2010, 10:34 Find this comment inappropriate? Report it

RA's vs Property Jackie, the key to intelligent investing is to diversify. As has been mentioned over and over in the responses to your article, all investment instruments have their place, their good points and their bad points so yes, property (for the lucky individuals . .more with the wherewithall to be able to buy & manage it) can be a great investment, as can RA's for their part. Dissing a long term investment because 'intermediaries earn obscene amounts of commission' is not only misinformed and incorrect but also unwarrented coming from someone who is supposed to be in the know. Compared to the obscene amount of COMMISSION earned on property investments, the intermediaries commission pales into insignificance. Not only that but these commissions are REGULATED by the government, unlike estate agents commission, and is actually extremely low in comparison to commissions earned in other industries, let alone salaries earned by company staff (like yourself, Alan Gray employees, bankers etc.) So, get off your biased, ill informed hobby horse and accept that not only are different investments beneficial in different environments, but also having all your eggs in one basket so to speak, is as risky as playing russian roulette with an automatic. And get it into your head that everyone gets remunerated for the work they do, commission or otherwise . .less by Robbie the Grape on March 12 2010, 10:48 Find this comment inappropriate? Report it

Property vs Pensions Well, I can see that from your experience and knowledge you have no idea of what you are talking about. An RA/Pension is not an investment in the first place, it is purely a tax wrapper for long term accumulation of pension savings. I do agree . .more that Life Company's sell high cost low performing life funds but you cant compare that with a direct property purchase. What you/friend have experienced, is the biggest housing price bubble in 100yrs and your friends got lucky. That is not skilled investment. An funny enough property does go down in value to, believe it or not. You are free to select the investments within your pension platform, if you choose the right one. Allan Gray is no different to any investment/fund manager such as Coronation, etc etc. they just follow a value investment strategy. If you think equity (because that is what is inside a fund) is worse than property, then take a look at Buffet, he only owns one residential house, no other property and is worth $50billion. NO PROPERTY Grow up and stop trying to give investment advice if you are not qualified or experienced enough to provide balanced reasoning. . .less by Haydn Ellwood on March 12 2010, 10:52 Find this comment inappropriate? Report it

Property has its risks Going the property route is not for everyone. Especially if you have a monthly extra cash need to repay a bond etc after rental received. I tried this route, got retrenched and could not cough the required extra cash... fortunately no . .more loss as the property prices increased enough to cover the costs. Had I invested my cash in somthing like Satrix, and added monthly the additional cash I burnt on the property, I could have re-arranged my monthly payments easily when the need arose. Ok - not yet an RA with the tax advantages. But, one could go for an RA provided you can adjust the monthly cash requirements in case of need. And ensure that the costs are as low as possible. At the moment I'm in EFT's - simply because of the low costs. . .less by Nico on March 12 2010, 11:06 Find this comment inappropriate? Report it

Property is the winner. I worked on a cruse ship operating out of the UK that focus on retired couples. 90% of them were LANDLORDS. (They also seemed to have lots of fun, May be they were not to worried about the onboard prices of the drinks) by Bruce on March 12 2010, 11:21 Find this comment inappropriate? Report it

Misinformation! I am pro property - I own a commercial property! However, this is a tasteless article riddled with misinformation. You examples are extreme and manipulative! by Eish! on March 12 2010, 11:34 Find this comment inappropriate? Report it

Property R50.000 to R2m.... not without high leverage. This reminds me of a colleague who bought a house in Parkhurst (Jhb) 3 yrs ago for R2.6m and sold mid-2010 for R1.8m (pre-costs). Net effect. He owns zero except a loan note with ABSA for approx . .more R800.000. Point is leverage is incredible when it works but it would be a very naive investor that does not appreciate the risk involved (esp after 20% of the US found themselves in negative equity). . .less by Charlie Chaplin on March 12 2010, 11:46 Find this comment inappropriate? Report it

property vs RA It depends when you buy property. 10 yearys ago it was a great investment but if you bought in 2007- thats a different story. Even so anything beats a life co RA. Try to find out why it underpeforms projections. At least with Alan Grey there is . .more transparency. The shares are there to see daily. . .less by bright spark on March 12 2010, 11:49 Find this comment inappropriate? Report it

Once-off luck Have been running a property company with 23 properties for the past 9 years. Experience is an annual yield of around 16% over the full period taking into account all property related costs,rentals,capital growth etc. Your friend's return of 44% pa (CAGR) . .more was a once-off luck and in my humble opinion should not be used to make a case for property investments or to compare with any other asset class ( A friend of mine also had a once-off luck by growing R100k to R640k - growth of 540% - by investing in Exxaro 8 years ago. Good for him but flash in the pan) . .less by Giles on March 12 2010, 12:01 Find this comment inappropriate? Report it

Paws off my returns Point here is that property capital yield will fluctuate up and down and the example in the article is extreme and few would be lucky enough to get that return. HOWEVER, you will, over a long time always generally get a capital return on your property in . .more a good area and this, at the very least, preserves your capital amount while you draw an income from it. Build your portfolio big enough and you can live comfortably off the returns in old age. . .less by Goitman on March 12 2010, 12:31 Find this comment inappropriate? Report it

The REAL REASON not to invest in an RA Is that you are more likely to notice if someone steals yours property. Trustees of retirement funds are supposed to look after YOUR interests. Most of them are employed by the institutions that administer your retirement funds. Corporate lackeys. Few of . .more them are able to manage this obvious conflict of interest. . .less by Carl Wille on March 12 2010, 12:32 Find this comment inappropriate? Report it

Acknowledge that the IFA is legis lated out of giving you thebest advise. Yes I know FAIS places the obligation on an IFA to give a client the best advice but this is promptly negated by the FSB itself which only allows registered products. In short, it misses very much more than it allows. The regulator defeats its own . .more legislation! . .less by Free the Rest on March 12 2010, 13:27 Find this comment inappropriate? Report it

Dumb This is a ridiculously stupid debate, the best performing asset class in almost every country in the world has been property and the volatility has also been calculated at a lower figure, which suggest arbitrage. Clearly property is the best investment, . .more nobody has ever got rich investing in an RA. Come one moneyweb stop this C***, surely you have better things to report about. . .less by Dhiren on March 12 2010, 13:27 Find this comment inappropriate? Report it

I will wait for round 4 Surely the RA industry can mount a defense on why their yields are so abysmal? Perhaps haul out millions of satisfied RA holders? The RA industry needs to explain their performance. There are not a lot of happy RA holders out there. The past attempts by . .more some Financial Advisers to explain whilst a good effort on their part was just theory. RA in SA is in need of a complete overhaul to make it a useful retirement tool for individuals and not RA salespeople. . .less by Tuscanite on March 12 2010, 13:56 Find this comment inappropriate? Report it

Debate Seems a bit thick to keep comparing investment choices over the last 10 or 20 years... A modern RA holds no more inherent costs than an after-tax share portfolio. Borrow R1,000,000 from the bank (Against your current property) and diversify it . .more across the Top 40, borrow another R1,000,000 and buy a property. 20 years from now, see where you are... Property will come second . .less by Anton on March 12 2010, 14:03 Find this comment inappropriate? Report it

FAIS,FSB is the biggest rip off of all time When has the FSB EVER prevented a big financial fiasco? Please advise. The biggest rip offs of all time have gone on under the noses of the FSB crew. by Anon on March 12 2010, 14:17 Find this comment inappropriate? Report it

RAs can be great, just choose them wisely You can't use a single example of property investment success to promote an entire investment class. In long term investments and on average equity has been the best historically. Also, with RAs, apart from the fact that payments are deducted . .more before income tax which you might argue is cancelled out by paying tax when they pay out, you also don't pay capital gains tax which is not true for expensive properties. With RAs you also get up to a 3rd paid out in lump sum tax free at retirement. Having said that I believe people should stay clear of so-called "financial advisers". A financial adviser in my opinion would be someone who educates you and gives advice for a consultancy fee. The "financial advisers" of today to me are nothing but door-to-door salesmen. My advice is to invest in an RA that: 1) Was not obtained through a "financial adviser" 2) Has admin/management fees that are largely performance based 3) Makes it easy to monitor performance on the fly 4) Has little or no penalty for moving your money away to a different RA if you're unhappy with the performance - the SA tax system allows you to do this Also, diversify and don't JUST invest in RAs. . .less by Eon on March 12 2010, 14:20 Find this comment inappropriate? Report it

@ Robbie the Grape I agree but unfortunately one has to look at overall net return on investment so all costs need to be included to calculate returns. THE TAX BREAK MUST BE IGNORED BECAUSE IT BELONGS TO THE TAXPAYER AND IS RECOUPED IN THE FUTURE! Why is it that managers of . .more these products will happily provide details of overal fund performance but unless you're an adept user of the XIRR function and with some effort are you able to calculate your returns. When will the FSB make this a requirement. NO wonder life companies are struggling it only the uninformed and lazy that continue to acquire these products. . .less by Albie on March 12 2010, 14:25 Find this comment inappropriate? Report it

RAs The real retirement debate is one that compares the merits of self investment with no tax breaks, and saving for retirement through an RA. When thats sorted then discuss the merits of the various asset classes. by Roger the Lodger UK on March 12 2010, 14:29 Find this comment inappropriate? Report it

RAs Sorry guys. The real debate should concentrate on the the merits of the RA and the self invested retirement portfolio at the point of retirement. For example Personal experience says that at the point of retirement, a self invested fund of value . .more 1,000,000 (and regardless of asset class) will serve me better than an RA whose value is 1,300,000. No question. . .less by Roger the Lodger UK on March 12 2010, 14:42 Find this comment inappropriate? Report it

@Roger the Lodger UK Not everyone is going to be great at a self managed invested retirement; there are some people who really need RAs to protect them from themselves and need the advice of financial advisers. Having said that, if the RA was such a great product there would . .more be millions of South Africans praising the wonderful retirement income it has provided. Sadly the only praise for RAs seems to be from intermediaries for whom it is a source of income and not RA holders. My concern on financial advise is that seldom is non-listed residential property recommended as an investment even though on a risk adjusted basis it is repeatedly one of the better investments. I wonder if it is not recommended because no commission can be earned by those doing the advising? . .less by Tuscanite on March 12 2010, 15:19 Find this comment inappropriate? Report it

Watch the interest rates for property cycles As long as you don't buy at the top of the market like the parkhurts fellow, property will do fine. Buy when interest rates are high and sellers are under pressure. Do not buy when rate are low like they are now. Sellers are can wait for there price. For . .more me personally stock are better, less commisions and easier to get in and out as long as you do you homework and not gamble. Buy a share like you would if you where actually buying the company outright . .less by Brendan on March 13 2010, 07:45 Find this comment inappropriate? Report it

Tuscanite has a point ! Lets hear it from all those happy RA holders out there? No... not you brokers... happy RA holders only need apply. Lets here how well your RA has done for you?? ....anyone......? by Brennan on March 13 2010, 08:58 Find this comment inappropriate? Report it

Why so few people may be happy with RAs People save almost nothing for retirement, instead buying fancy cars, and refinancing every two years. They carry expensive credit card debt, and live far beyond their means. They cash out their pensions when they change jobs and splurge. Then, . .more when they hit 60, they expect their R250 a month contribution to their RAs to carry them for the next 20 years. Obviously they will be less than pleased. . .less by cc on March 13 2010, 09:26 Find this comment inappropriate? Report it

I bought 3 flats in Hillbrow in 1982, what a great investment! I bought 3 flats in Hillbrow, my friend bought a house in Yeoville. We are living like kings well into our sixties!!! [NB the above was sarcastic] by Ef on March 13 2010, 09:47 Find this comment inappropriate? Report it

Balance your investments Why discuss it as it makes sense to divesify your investments into property, equities and retirement instrument (provident,pension etc). You do not need to be an investment expert just read books such as Bruce Cameron's Retire Right and spend a bit of . .more time studying the JSE via an organisation such as PSG. You will find that a finacial advisor can do no more for you than you can do yourself. Alan Gray does not insist that you consult and invest with them via a "Finacial Advisor" and that means more cash in your own pocket. Morgs . .less by MORGS on March 13 2010, 11:38 Find this comment inappropriate? Report it

ra's @cc you are so correct. SA citizens squander their money and live way beyond their means. Buying the newer RA's online from AG and Coronation costs 0.5% and by removing the excessive commission you will see excellent retuns. Yes, those that start at 60yrs . .more made their own beds. The most powerful force in financials is compound interst (and , add to that, self-discipline.) Their is no easy way to build wealth and that is what is wrong with the easy ride in BEE. . .less by Pie in the Sky on March 13 2010, 13:18 Find this comment inappropriate? Report it

3 flats in Hillbrow and other comments There is a time to buy and a time to sell and with property you can do that, especially when you are really really good at market timing like the property bears. Ironically even buying properties in not so good locations seems to have outperformed RAs . .more where your funds are held captive to squeeze every last cent of commission, admin fees and surrender penalties. There are indeed some people who failed to make adequate provision for their pension and in my view a minority were irresponsible by living above their means and then there is the majority who followed all the so called responsible independent financial advice and saved in investment products recommended by their brokers, advisers, etc and yet still have inadequate investment returns given the period they were invested to provide a suitable pension. The settlement with the investment industry has provided little relief for these policy holders.The deafening silence from happy and contented RA pensioners singing the praises of their industry supplied financial projections being met and exceeded by the industry is noteworthy as to who the RA really benefits. . .less by Tuscanite on March 13 2010, 16:02 Find this comment inappropriate? Report it

Where is CJ Greetings Brenan and Tusc.... CJ ???? where are you ?? by Gem on March 13 2010, 19:31 Find this comment inappropriate? Report it

More deserving of tabloid Tuesday I used to work in the financial advice sector and even while there would recommend my clients that, if they could, they should look at buying property, or otherwise leverage their capital, in the run-up to retirement. Why? Because any financial . .more management 101 course will teach you that leveraging can increase your return on equity, but there are risks involved. To be honest, in a conservative planning scenario (that is don't plan on returns in the 45% pa range) almost nobody makes it with enough capital at retirement to maintain their projected retirement salary. This necessitates the use of leverage somewhere along the line. Personally, to properly use your RA, in whatever form, you should reinvest the money Jan-Taks gives back, otherwise what's the point? If you don't, you might as well take one of those life-wrapper RA's and pretend that you've scored because you've managed to make your life assurance premium tax deductible - the investment becomes superfluous. I haven't done the sums, but re-investing your tax returns should makes a significant difference to your return on equity (which would be your basic premium) Property, if you can afford it, is likely to be more consistent in value and give you a better return on equity. Continued... . .less by Keith on March 14 2010, 22:49 Find this comment inappropriate? Report it

More deserving of tabloid Tuesday (part 2) Part one is my opinion on this debate, which could be legitimate, but by virtue of the quality of reporting has really descended into the mire. "Obscene commissions" (3% for financiial advisers) - how would you then describe estate agents' comm @ . .more 7%, super-obscene, maybe uber-obscene? This is emotive and not substantive reporting, hence my subject line. Boxing gloves as the photo byline, rounds - I guess Jackie was spoiling for a fight. This is a tale that we like to tell around dinner table and sometimes even get hot under the collar about. It's a bit like reporting on Malema, we all get excited about it, but really, it should never have made it to the press. Maybe property-web can move away from their tabloid style of reporting and give us articles which are thought provoking and show a modicum of proper research. I have a genuine interest in the property sector, but find this site to be generally sensationalised and lacking in substance. . .less by Keith on March 14 2010, 23:01 Find this comment inappropriate? Report it

And the real world oscar for a reasonable old age goes to............... Rental Property. My father split his investments between residential rental property and Old Mutual "products" from about the age of 40 Now pushing 90 he lives on (select one) !1) His rental income 2) His magnificent returns from his . .more OM policies As any intelligent person knows the answer is 1, he would of course have done better to invest soley in property but then hindsight (unlike foresight) is always 20/20 Why is there no investment policy where the returns are tied to the renumeration of say OM's CEO? That one is bound to be generous but the RA industry is structured for the benefit if the SELLER of the RA NOT the PURCHASER as the products are always designed by the seller and not the purchaser. If you still have many years before retirement and can tolerate risk consider investing in a SATRIX type investment, if you need security rent is the answer. . .less by andrewa on March 14 2010, 23:03 Find this comment inappropriate? Report it

Bruce Cameron Invests in property. by Anon on March 15 2010, 03:58 Find this comment inappropriate? Report it

property if I find and old mutual,sanlam, or any other agent selling their k*k on my doorstep I will chase the thieves away....yes they steal from people which normally are poorer and less informed in this world and they don't blink an eye. I made 6 property . .more deals in last decade and made an average of 500% profit. The only 1 I am pretty even on was a Woodstock(cape town) apartment I bought for R450k 3 years ago. . .less by william on March 15 2010, 10:00 Find this comment inappropriate? Report it

Point in case You are preaching to the choir - both sides, I think... The people that get caught up in bad deals are your average joe and jane that has limited information and follows the trend...A friend or newspaper tells them everyone is making huge profits with . .more property and so he goes off to buy a bad deal. Another friend tells jane that she should get a RA for the tax benefits and her old age and refers her to joe commission, which is driven by greed and not his "client's" interests. Joe seeks out a company which pays him maximum commission, with abysmal yields which jane will sadly only realize at retirement :( These are the sad facts as I understand them and read about, Jackie being an example of a jane (sorry no offence Jackie :-), which fortunately caught this in time - others are not so lucky, my average dad, was not... BTW: I have no problem with intermediaries earning a commission, fair wage for work done...but should these commissions not be product performance based? Surely when you see your income tip downwards, then you will be motivated to move your clients to a better performing portfolio? Fair play for both parties? . And to the ones giving bad advice, I hope the wheel turns! . .less by GvG on March 17 2010, 09:48 Find this comment inappropriate? Report it

Income first Property income has many factors of which some can be controlled. RA's can not be controlled by an individual! I'd rather control all the factors that I can thank you! With property shortfalls there is a tax advantage for a few years . .more so there is no argument that the tax benefit of RA's is better. Tax benefits have been structured by government & SARS to get people to save and thus lower the burden on government in the long run. Why help government, SARS, Od Mutual, Sanlam, etc? Help yourself rather and buy small properties, students love them, young proffesionals love them, people who can not get bonds love them, etc You will pay an RA until you retire, you will pay shortfalls for a few years and then you buy the next property or sooner...... . .less by Property Investor on March 18 2010, 20:42 Find this comment inappropriate? Report it

Name
Subject
Comment