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Published 02 October 2013 00:01, Updated 02 October 2013 08:54
For many years, Australia’s self-managed super fund sector has been portrayed as a rising force of the economy, putting choice back into the hands of investors and allowing retirees to control their own destiny. But in recent weeks, the sector has been forced to play a very different role – that of the villain.
The $500 billion SMSF sector is on the rise and not everyone is happy about it. Large funds and government ministers are among those to question whether SMSFs are getting an unfair advantage in property purchases and hurting housing affordability in the process.
But SMSF experts are hitting back, questioning whether claims about an SMSF-fuelled housing bubble are true and whether Australia’s big super funds have their own agenda.
The alleged advantages that do-it-yourself super funds have when buying a property are a product of legislative changes in 2007 that make it easier to put property in a SMSF by allowing investment with borrowed money and making property investment tax-free for people aged over 60.
Property spruikers have been quick to encourage self-funded retirees to take advantage of the new laws and some people are worried that investment from SMSFs in property is adding further heat to an already hot market.
On September 25, the Reserve Bank of Australia questioned the impact of the 2007 legislative changes in its Financial Stability Review.
“Since then, property holdings by SMSFs have increased and this type of investment strategy is being heavily promoted,” said the RBA’s review.
“The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.
“One risk of the increase in property investment by SMSFs is that at least some of it is a new source of demand that could potentially exacerbate property price cycles.”
There is little doubt that the amount of property held in SMSFs is on the rise. It sits at about $80 billion, up from $20 billion in 2006.
Assistant treasurer in Tony Abbott’s new coalition government, Arthur Sinodinos , is concerned by the fast growth.
In a recent interview with The Australian Financial Review , Sinodinos warned that the rise could overheat the housing market.
“What I noticed [is] that since the global financial crisis there has been an upsurge in interest through investing in SMSFs,” Sinodinos told The Australian Financial Review.
“On one level that is quite understandable, but on another we have to make sure that no matter what the vehicle is, it’s done in such a way that the ultimate objective is to preserve and maximise the savings for retirement.”
SPAA’s Graeme Colley says the persuasive power of property spruikers is exaggerated.Photo: Louise Kennerley
Sinodinos’s comments have been leapt on by several advocates of SMSFs, who say the sector has been unfairly criticised for its role in pushing up house prices. “Last time I looked, the legislation . . . applied to all funds, not just SMSFs,” says the managing director of Hewison Private Wealth, John Hewison.
Hewison says it’s important for the government to avoid knee-jerk solutions made in response to pressure from big superannuation funds.
“The institutional lobby group wants the government to change the rules to suit their structurally flawed model which results from the commoditisation of superannuation into a marketable product.”
Rajarshi Ray is the chief executive of Class Super, a provider of low-cost software to SMSF administrators.
Class Super has been growing strongly and its software helps manage about 8.5 per cent of the market. The cloud-based nature of Class Super’s software means Ray has insight into where his clients are investing and says there is little evidence of a big shift into property.
“Over the last 12 to 18 months, property has bounced around from 14.5 to 15.1 per cent of the assets. That is not spectacular growth,” Ray says.
“The long-term trends in SMSF asset allocation have been broadly the same apart from the height of the global financial crisis, when cash was favoured.”
Ray believes property has a legitimate place in SMSF strategies. “It’s not a case of SMSF plus property equals bad,” he says.
“It’s the property spruikers and arrangers who should be scrutinised and we as an industry should welcome that scrutiny.”
According to the RBA’s Financial Stability Review, direct property investment makes up about 15 per cent of SMSF assets. But most of that – 77 per cent – is held in commercial property. This suggests that residential property constitutes just $18 billion of the $500 billion in SMSF assets.
“It was only six or 12 months ago that the suggestion was that SMSFs are holding so much money in cash that they are clearly not asset allocating properly and therefore aren’t properly building for their retirement,” Ray says.
“The most common reasons most people go into SMSFs are control and investment choice. Over the past 10 years SMSF managers have proved to be better managers on a return basis on average than industry or retail funds. So there is part of me that wonders whether there is some self-interest in some of this commentary.”
Class Super CEO Rajarshi Ray says property has a place in SMSFs.Photo: Greg Totman
The director of technical and professional standards at the SMSF Professionals’ Association of Australia (SPAA), Graeme Colley, believes that SMSFs are getting an unfair rap.
“According to Australian Tax Office statistics, geared property in SMSFs makes up less than one half of one per cent (0.4848 per cent) of their total investments,” Colley says.
“It would take a huge shift in investments to influence the real estate market compared with individual investors who use negative gearing to purchase property.”
The persuasive power of the spruikers is also exaggerated, Colley says, because ASIC has claimed that all investments made by an SMSF, including property, require advice from a licensed financial adviser.
“This requires an examination of whether the investment is appropriate to the circumstances of the fund and its members,” he says, leaving aside the vexed issue of advisers who work as part of a “one-stop shop” with property marketers.
“Individuals do not require advice from a professional adviser to consider their particular personal circumstances before they invest in geared property. This means a higher risk is associated with the investment and the lenders experience a higher rate of default than the strict lending policies that are imposed on an SMSF.”
A new report by investment bank UBS raises concern about Australian banks’ exposure to a property price bubble and suggests that rates of lending by big banks may be a much bigger problem than other stimulatory factors, like additional investment from SMSFs. “In stressed scenarios, Australia’s large exposure to leveraged landlords could lead to a significantly more volatile economic cycle than current stress tests imply. We do not believe that these implications have been fully considered by the banks, regulators or market participants.”
“We do not believe that there is another country in which the landlord population is as highly leveraged or in the middle-income bracket as Australia,” the UBS report says.