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Baby boom meets property boom



 

Baby boom meets property boom

 

By Suzanne McGee

Financial Times; August 26, 2003

 

 

Randy Hecht's favourite hunting ground for fresh investment ideas may be Silicon Valley, but one of his biggest new themes has more to do with bricks and mortar than gigabytes and pixels.

 

Mr Hecht, chairman and chief executive of RS Investments, a San Francisco money management firm, is betting that, as more baby boomers approach retirement age, their purchases of retirement homes will send property prices sharply higher in communities from Florida and New Mexico to Baja California and New Zealand.

 

Mr Hecht and Jim Foster, president of RS Real Estate Group, a division of RS Investments, bought land in New Mexico and resold it to developers who are now building 5,000 single-family homes aimed at retiring baby boomers. The result: "a biggish profit", says Mr Hecht. He believes this is just the tip of the iceberg and is scanning the land for other opportunities.

 

"Over the next 21 years, 51m baby boomers and 'echo boomers' will hit 65," Mr Hecht says. "There's a scarcity of land in the kind of locations in which they will settle. The boomers are picky. They want recreational facilities, because they'll remain very active for decades. And they want views - a river, a lake, an ocean, a mountain."

 

The older members of the boomer generation have already staked out the prime spots. Waterfront acreage in Hawaii has risen tenfold in price in the last five years, says Mr Foster. Parts of Arizona are "built out", he adds, and the combined demands of retirement facilities and golf courses are literally draining the available water sources. "Montana is overrun by older baby boomers buying next to rivers."

 

Demographic expert Richard Hokenson says: "The boomer phenomenon is one of the most obvious demographic trends of the century, but people continually underestimate its impact on a variety of markets. He cautions retirees: "If you wait until everyone else is [buying retirement properties], you run the risk of being priced out of the market."

 

New Jersey-based Mr Hokenson owns a condominium on Mexico's "Mayan Riviera", south of Cancun, where he may retire. But he says it doesn't matter whether or not people know where they want to spend their retirement years. "You just want to get into the market somehow . As long as you pick an area people will likely want to retire to, you'll be in the market. If your plans change, you can sell that property and use the proceeds to buy another one."

 

Mr Hecht says traditional retirement regions, particularly California, are already over-priced, and that New Mexico will be a prime new destination, along with parts of Mexico.

 

Clark Thompson, founder and chief executive of EscapeHomes.com, a San Francisco-based website covering vacations and retirement homes, believes states with low income taxes and lots of outdoor amenities, such as Wyoming, Nevada and New Mexico, will lead the next wave. "People want to live somewhere where the kids and their kids have something to do when they come to visit," says Mr. Thompson, who spent his own childhood holidays with cousins on his grandfather's ranch in Wyoming.

 

Martha Johnson, senior vice-president of residential mortgage lending at Borel Private Bank, based at San Mateo, California, is structuring jumbo loans based on the combined value of the first homes and the vacation/retirement properties being purchased by a growing number of her well-heeled clientele.

 

"Buying now minimises the risk on a couple of fronts,"she says. Buyers can test-drive their potential retirement home, using it first as a vacation retreat. The purchases also give them at least a toehold in markets where growth restrictions may curb future development and fuel real estate price increases. "Everyone in the San Francisco area knows first-hand what happens to real estate prices when a big population shift takes place," she adds.

 

Financial advisers are divided on the wisdom of investing in retirement homes more than three to five years before people plan to retire. Gilbert Davis, a Pittsburgh-based adviser for high net worth boomers, recently talked a client out of buying a multi-million dollar property. "He didn't want to rent it out, so it wouldn't generate any income, and he only planned to use it a few weeks a year for now. Unless you know a particular community is the only place you'd consider retiring, and that special factors like growth restrictions mean property will only become more scarce, you are probably better off investing elsewhere until you are at least five years away from retirement."

 

There are other risks in acting prematurely, advisers warn. A community that looks ideal today may be less attractive in a decade, if it becomes overbuilt or hurricanes erode its beachfront. Moreover, says Jeff Erdman, a private wealth adviser for Merrill Lynch in Greenwich, Connecticut, buying a second home perhaps for retirement is a highly personal decision. That makes it tricky for other investors to forecast accurately and profit from trends in retirement home pricing.

 

"My clients don't look at their purchases as investments," he says.

 

Mr Hecht is undaunted. "The only big question we need to answer is, where is the next 'nicest place to retire to' going to be? Somewhere that hasn't already been overrun," he says. "If we can figure that out, the rest falls into place."

 

 

Published Tuesday, December 5, 2006 5:08 PM by Kanoa Biondolillo

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