Financial advisers not telling the full story on superannuation property risks

Updated

Financial advisers came out fighting recently after the Reserve Bank of Australia issued a warning about unhealthy property investment.

The focus of the bank's concern was increased borrowing by self-managed superannuation funds to invest in property.

The lobby group representing advisers to those funds has disputed that there is anything to worry about.

SMSF Professionals' Association of Australia chief executive Andrea Slattery says there is no evidence self-managed super funds are making reckless residential property purchases.

"We have constantly warned that SMSFs must approach property, like all investments, armed with the best professional advice," Ms Slattery said in a blog on the association's website.

"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 [borrowing] to rush headlong into unsuitable residential property investments."

The claim: Andrea Slattery says there is no evidence self-managed super funds are making reckless residential property purchases.

Andrea Slattery says there is no evidence self-managed super funds are making reckless residential property purchases. The verdict: Ms Slattery's claim is not the full story. Ms Slattery is right that residential property represents a small 3 per cent of all SMSF assets. However, when commercial property is added, the figure is 15 per cent and growing.

Ms Slattery cites statistics from the Australian Taxation Office to prove her point.

"At June 30, property assets in SMSFs stood at $75 billion, of which $58 billion was mostly commercial; $17 billion was residential," she said. "With total assets at $495 billion, it means residential property comprises 3.4 per cent of all SMSF assets."

The Reserve Bank warning

In its latest Financial Stability Review, the Reserve Bank says the number of people managing their own superannuation is increasing and almost a third of all money invested in superannuation is held in SMSFs.

It says in the past six years investment by SMSFs in property has increased, partly driven by changes to the superannuation laws allowing them to borrow to invest in property.

The increase has been in both residential and commercial property.

The bank says while there appear to be no financial risks at present, a number of aspects of the SMSF sector "warrant careful observation in the period ahead".

"Changes to legislation in recent years have permitted superannuation funds, including SMSFs, to borrow for investment, for example to purchase property," it says.

"Since then, property holdings by SMSFs 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."

What is a self-managed super fund? A self-managed super fund is do-it-yourself superannuation

It allows people to manage their own superannuation, including making investment decisions

Other superannuation funds manage money on behalf of members and the members pay management fees

In June 2013, SMSFs held around $500 billion in assets, almost one third of the $1.6 trillion in total superannuation assets, up from 9 per cent in 1995

76 per cent of people in SMSFs are aged 50 and over, compared with 26 per cent in other funds

SMSFs have an average account balance of $486,000 compared to $29,000 in other funds

The bank's warning focuses on both areas of property, not just residential.

The message is simple: the Reserve Bank is concerned an increase in property investment by SMSFs could potentially drive property prices to an unhealthy level. "It is important that those purchasing property do so with realistic expectations of future dwelling price growth," it said.

ASIC report on SMSF investment advice

The bank's concerns are backed by evidence of poor investment advice provided to SMSFs, as detailed in a report from the Australian Securities and Investments Commission, Australia's corporate regulator.

The report, titled 'SMSFs: Improving the quality of advice given to investors', was released in April 2013. It says there are "pockets of poor advice particularly related to geared residential property investment".

The report reviewed over 100 investor files relating to SMSFs with a fund balance of $150,000 or less. Poor advice - that investors set up an SMSF to borrow to buy residential property - was found in one third of the files.

"Gatekeepers such as advice providers have a critical role to play in ensuring that only those investors for whom an SMSF is suitable go into the sector," it said.

Tax statistics

The figures cited by Ms Slattery - that residential property comprises less than 4 per cent of all SMSF assets - do not reflect the current trends that are concerning the Reserve Bank.

Here's why:

Her figures came from the latest Australian Taxation Office self-managed super funds statistical quarterly report. This was released in June 2013, but the figures are ATO estimates extrapolated from 2011–12 actual data and may not reflect what has actually happened since.

Ms Slattery's figures represent a snapshot of the industry's position at one point in time - June 2013 - whereas it is more appropriate to look at property investment trends over time. The same ATO data from 2008 to 2013 shows commercial property investment by SMSFs has grown, while residential property investment has been stable at around 3.5 per cent.

The Reserve Bank says the increase in commercial property is likely to be due to incentives for small businesses to hold property through an SMSF.

"...the fund can lease the property to the business owner at a commercial rate and the rent paid by the business owner can be claimed as a business expense, reducing the taxable profit of

the business," it says.

Since 2008, interest rates for property lending have fallen from around 9.45 per cent to today's rate of 5.95 per cent.

Other superannuation funds

Residential and commercial property investments account for 8 per cent of the assets of super funds that are not self-managed.

The latest Superannuation Bulletin released in January 2013 by the Australian Prudential Regulation Authority, Australia's regulator of the financial services industry, says this amounts to $30.5 billion.

The data is not broken down into residential and commercial property.

In contrast, 15 per cent of SMSF assets are in property. This equates to $76.1 billion.

The verdict

Ms Slattery is right that residential property represents a small 3 per cent of all SMSF assets. However, when commercial property is added, the figure is 15 per cent and growing.

SMSFs allocate twice as much money to property as other super funds. In addition, the corporate regulator has identified a problem of financial advisers giving SMSFs poor advice on borrowing to invest in residential property.

Ms Slattery uses a credible source for her statistics, the Australian Taxation Office. However, the numbers are based on data that is more than a year old and do not reflect the trend of the past five years.

There is more to the story.

Sources

Topics: superannuation, housing, tax, housing-industry, australia

First posted