SMSF Association

Australia’s peak industry body and foremost authority on self-managed superannuation.

Perfect storm in a teacup: warnings of SMSF property moneytrap not backed by figures

By Andrea Slattery, CEO, SPAA 1 Oct 2013 1

IT is called a perfect storm. ASIC, APRA and now the Reserve Bank have bought into the argument that self-managed super funds could be a key factor in fuelling a property bubble as residential prices -- especially in Sydney -- increase sharply.

This year, housing prices have jumped 6.4 per cent nationally, with Sydney leading the pack at 9.4 per cent.

But it was the Reserve's Financial Stability Review released on Wednesday, warning of the growing property holdings held by SMSFs, that really sparked a media firestorm; Australia's love affair with bricks and mortar, when coupled with the central bank's warning, always meant it would command the headlines.

So it's worth noting what the bank actually said in its overview. ``Changes to legislation in recent years have permitted superannuation funds, including SMSFs, to borrow for investment, including property. Since then, property holdings have increased and this type of investment strategy is being heavily promoted. The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.''

That was essentially it: SMSFs are potentially a vehicle for speculative demand. And the SMSF Professionals Association of Australia agrees.

We have constantly warned that SMSFs must approach property, like all investments, armed with the best professional advice. Property is not an inappropriate investment per se; but it must be appropriate to the fund and consider the member's circumstances, just like all investments.

Where we do strongly disagree is the inference by the regulators, and other critics of the sector, that many SMSF trustees are listening to the siren call of the property spruikers and gearing up to rush headlong into unsuitable residential property investments.

The figures don't bear this out. At June 30, property assets in SMSFs stood at $75 billion, of which $58bn was mostly commercial; $17bn was residential. With total assets at $495bn, it means residential property comprises 3.4 per cent of all SMSF assets.

When it comes to limited recourse borrowing arrangements (debt), the numbers should be even more soothing for our regulators. According to tax office statistics, geared assets in SMSFs make up less than half of 1 per cent (0.48 per cent) of their total investments. Hardly an avalanche, especially when gearing has been an option for six years.

But what's the long-term trend? Is property as an asset class in SMSFs growing exponentially?

Again, the evidence simply doesn't support this. When the one-off $1 million contribution cap and gearing was allowed in 2007, there was a spike in property investment, with a 53 per cent jump in investment in 2006-07. But the figures for 2012-13, showing 14.7 per cent growth, were below that for 2007-08 (24.5 per cent) and 2008-09 (18.3 per cent).

Growth was also higher in the two years before the advent of gearing and the $1m contribution cap. Add the fact that interest rates for a part of 2012-13 were at record lows and it's perhaps a mystery why there hasn't been more investment in property.

There are another two aspects to this issue. Unquestionably, the housing market is hotting up, and much of it is driven by investment demand, $2 in every $5 in NSW going into investment properties.

What we don't know is how much is being driven by demand from SMSFs compared with other investors. What SPAA research does show is lowering the concessional contributions caps in recent years has prompted people to look for alternatives including opting for negative gearing outside super as a retirement-incomes strategy. Yet we seem to hear little from regulators about this and the damage negative gearing does to government revenue.

It seems to us at SPAA that any train wreck will most likely occur there, and for one simple reason. SMSF trustees, if they seek advice on any investment, require advice from a licensed financial adviser to assess whether the investment is appropriate to the circumstances of the fund and its members.

Individuals don't require professional advice to consider their particular circumstances before they invest in geared property, suggesting these investments pose a higher risk compared with SMSFs, where far stricter protocols are in place.

SPAA agrees with regulators. To misquote Winston Churchill, the price of financial security is eternal vigilance. The obsession with SMSFs and property investment is out of all proportion to the evidence; not so much a perfect storm, more a storm in a teacup.



SPAA_Logo _RGB_above 15mm

About SPAA

The SMSF Professionals' Association of Australia (SPAA) is the authoritative voice for the self-managed superannuation fund (SMSF) sector. SPAA, which represents professionals providing a range of services across various disciplines in the complex area of SMSFs, is an advocate for the highest professional standards and competence to ensure SMSF trustees always receive the best possible advice.




  • Graeme Ward | 01:03:14

    I have a farm property in SMSF and see there could be a long term problem with it because of the minimum withdrawals increasing as we get older. Does this mean a forced sale of the property in order to comply with this rule? Another issue I have with SMSF is that the banks consider cash in the fund as business money and pay a lower rate of interest on it. How can this problem be solved?

Leave a comment

Make sure you enter the * required information where indicated. Please also rate the article as it will help us decide future content and posts. Comments are moderated – and rel="nofollow" is in use. Please no link dropping, no keywords or domains as names; do not spam, and do not advertise!