SMSF Could Make it Difficult for First Home Buyers
By Peter Sarmas on 7 Nov 2013
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SMSF is a growing area of investment
The Reserve Bank of Australia revealed in mid-September that about $18 billion of the $500 billion in Self-Managed Super Funds (SMSFs) is invested in residential property.
Currently, this equates to only about 3.6 per cent of the SMSF kitty, but it is a growing area of investment, with some surveys suggesting that this number could rise as high as 30 per cent in the near future.
It’s a scenario that Christopher Joye, Director of YBR Funds Management, says could drastically affect the housing market.
“If SMSF capital flows into new supply, it could help solve the problem of how we are going to house 15 million new residents over the next 35 years,” he says. “If, on the other hand, it flows mostly into buying existing homes, it could fuel very deep imbalances.”
These imbalances could include skyrocketing property prices.
“Some surveys suggest [SMSF] numbers could rise as high as 30 per cent in the near future.”
“The thing is nobody wants SMSF investors crowding into existing property and simply driving prices up,” said financial journalist, Alan Kohler. “The best result would be if investors used their low-tax, mandated super fund money to expand the stock of housing in Australia.”
John McIlroy, executive director of Crystal Wealth Partners Ltd, says SMSFs need to consider options other than existing residential property when looking to invest.
“Most SMSF trustees generally focus on residential property and not on other forms of property. Why not office, retail or industrial?”
According to McIlroy, commercial investments normally return significantly higher rental yields than residential investments, making commercial property an attractive proposition during times of low growth, low inflation and low rates.
“One of the benefits of using a non-residential property in an SMSF is that you can use your business entity to become the tenant – something you can’t do with residential.”
That said, other challenges have also raised their heads within the SMSF sector; principally the sector’s problems with regulation as well as being a magnet for property spruikers chasing a piece of the growing $18 billion SMSF pie.
And this is where the regulators need to step in.
“With the right guidance, thorough research and a detailed investment strategy, SMSFs can work effectively for many investors.”
As part of ASIC’s report about the SMSF sector last month, the government regulator said it wanted to make financial advisers warn clients that they did not have access to compensation in the event of fraud or theft of a SMSF property.
“Our recent surveillance of the sector found that advice was not up to a standard we would like,” said ASIC deputy chairman, Peter Kell. “We want to help ensure that the SMSF sector is healthy and that investors make informed decisions about SMSFs.”
Heeding such warnings, the Mortgage & Finance Association of Australia (MFAA) has taken its own steps to curb the growing trend of property spruikers by enrolling more than 130 mortgage and credit advisers into a training program designed to help them obtain accreditation in the SMSF sector.
“More than 3,000 SMSFs are being established each month in Australia and, with the proper training, mortgage brokers have the opportunity to deepen their relationships with clients through managing the process of gaining a loan for their clients’ SMSFs,” said Phil Naylor, chief executive of the MFAA.
With the right guidance, thorough research and a detailed investment strategy, SMSFs can work effectively for many investors.
However, if SMSFs continue to infringe on existing residential housing, there is a real possibility that property prices could reach unattainable entry levels for Australia’s newest generation of first home buyers.
The information or opinions contained in the commentary are general in nature and should not be construed as investment advice or financial product advice. Any research or analysis contained within the commentary is specific to the execution of a purchase brief provided by a licensed adviser. Peter Sarmas is not licensed to provide advice on regulated financial products and the information should not be relied upon to in determining the appropriateness of SMSF property purchases.
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