Knowing your position in an unregulated asset class

Direct property investment is proving to be very alluring to SMSF trustees.

While direct property holdings account for a relatively small share of all SMSF assets (at around 15 per cent, and only 0.5 per cent of those are residential property), there are indications that direct property investing via an SMSF can be an attractive reason for establishing a self-managed fund.

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As much as some planners and their dealership networks might be loath to admit it, many Australians have a real soft spot for property and an alternative route to cracking the property market is certainly attracting the interests of many.

A surge in the number of SMSF loan products available and the large volume of discussion SMSF property investment has generated are two key indicators that this market is growing.

The rising number of property marketeers promoting properties ‘perfect’ for SMSF investment is another clear signal. Demand is clearly there.

In spite of property’s budding position within the SMSF sphere, it remains quite a grey area for many SMSF practitioners.

Unlike other asset classes, property as an investment remains unregulated – an issue that came firmly under the spotlight in 2013.

In the absence of regulation, what services can professional SMSF practitioners offer clients with regards to direct property investment within an SMSF?

It depends on your existing qualifications, licensing, and in many cases, what your dealer group and professional indemnity policy dictates.

According to the Corporations Act, property is not classified as a ‘financial product’. However, SMSFs are, and thus only those licensed to provide advice on ‘financial products’ are permitted to advise on the suitability of establishing an SMSF.

In other words, only financial planners and accountants can offer advice pertaining to the suitability of an SMSF.

If you’re a qualified and licensed mortgage broker, you still have an important role to play in terms of the provision of finance for an SMSF transaction if the trustee is considering borrowings associated with the property acquisition. However, you must avoid any assessment or recommendations as to the suitability of an SMSF for any clients.

So if planners and accountants can advise on SMSF suitability and brokers on lending options, just who is advising SMSF trustees as to which property might be an appropriate investment selection?

It is PIPA’s concern that potentially planners, accountants, mortgage brokers, real estate agents and property marketeers are all providing a degree of property investment advice, even though they don’t tend to have any qualifications or adequate understanding of property investment to do so.

In fact, many practitioners within this sphere lack the genuine expertise to provide such advice to SMSF trustees. Moreover, the lack of regulation surrounding property investment casts a very grey shadow over this part of the SMSF property investment process.

So, professional SMSF practitioners have several options to ensure their trustees make a smart SMSF property investment.

One, you can stick to your existing field of expertise and specialise in it. Certainly, it can be difficult to keep up with market developments and compliance requirements within just the one field.

Moreover, you’ll need to be careful of stepping outside of your professional indemnity insurance space if you pursue other fields. Opting to provide a professional introduction to an independent property adviser or advisory firm might be the most suitable option in this case.

Your second option is to upskill and gain a formal accreditation. This is obviously a great way to boost your individual service offering, if you think you have the time and resources to do it.

Thirdly, you can diversify your business to encompass property investment advice and hire a qualified property investment adviser and buyer’s agent to facilitate this expansion.

A fourth option would be to consider a referral partnership with a property investment company – essentially delivering an expanded service to your client, without completely diversifying your or your business’ offering.

Whichever way you choose to handle SMSF trustees’ aspirations to invest in direct property, consider your client first. If they don’t see value or get results in what you are offering, they will vote with their feet and move on.

Ben Kingsley, chair of Property Investment Professionals of Australia (PIPA)