The love affair of the Maltese with the property market is intense. I know of very few people who openly predict that this affair will end anytime soon in an acrimonious divorce. The advice passed on from one generation to another is that putting your money in real estate is invariably a safe bet for anyone looking to store value for the future.

In 2005 over 75 per cent of occupied dwellings were owned by those living in them. This is one of the highest rates in Europe. Banks’ lending for house purchase has increased dramatically over the last 20 years. One can safely say that for most households the bulk of their wealth is invested in property.

Property is most often bought for social reasons – the need to provide decent shelter for one’s family – rather than for speculative purposes.

But as the pensions’ crisis intensifies many are looking at their property as a means to provide them with additional income when they retire. But what are the drawbacks of relying on property investment for retirement income?

Since there are various ways in which one can invest in property, the answer to this question depends on how one intends to invest in property. Most of us now know what the consequences are for those who willingly or otherwise invest in property funds.

These funds are simply dynamite for those who have a low risk tolerance. If you cannot afford to see even just 10 per cent of your retirement’s nest-egg blown in the sky, then avoid putting your money in such funds.

Some prefer to buy a second home that they hope to sell as they approach retirement and buy an annuity with the proceeds. An added bonus of this type of investment is that one can rent out the property until it is sold. I believe that this is one of the most cost effective ways of investing in property with a long-term view of boosting retirement income.

Another common way of providing cash flow on retirement is to downsize from a large property to a smaller one and hopefully release some of the extra equity that one would have in a large family house. If one follows this root in an orderly way, this could be a very pragmatic way of avoiding income anxiety on retirement.

The main drawbacks of this investment strategy are those that characterise the property market in general. The property market is far less liquid than any of the financial markets. It is also one of the least flexible markets. If you are pressed to sell your property in a relatively short time you may end up incurring significant erosion in the value of your asset if your timing coincides with a slump in the market. Moreover, you cannot dispose of just a part of your property when you need some liquidity or income. All these factors can be managed with an investment strategy that takes into consideration the effects of these limitations of the property market.

Of course, not everyone owns a second property even if over 75 per cent of households live in property they own. For such persons one possible option could be an equity release product sold by the financial services industry. Equity Release Plans are defined in the HM Treasury Consultation Document “Regulating Home Reversion Plans” as “financial products, or sale and lease arrangements that allow home owners to release the value of their property above any amount owned on a mortgage. These schemes involve a provider giving the home owner a lump sum or income on the basis of the value of the home.”

Equity release products have never really taken off, even in countries like the UK where they have been in existence for many years. One of the big disadvantages of this way of generating cash flow is that financial services providers often charge exorbitant fees for these plans that are considered quite risky.

There are other reasons behind the lack of interest in this option. The UK Pensions Policy Institute for Age Concern identifies an important reason that keeps people away from equity release plans. Owning property is an intensely emotional issue for most people. Handing down the family home to one’s children is an aspiration of many aging parents and few will consider abandoning this tradition.

So, property investment can have a role in one’s retirement strategy, as long as one understands the limitations of the property market.

jcassarwhite@yahoo.com