SMSF investors tipped to transition to commercial property
While limited recourse borrowing arrangements are safe for now following the Coalition election win, some SMSFs may still be looking to move away from residential property following tighter credit conditions, says an investment manager.
While the federal election result has alleviated concerns about a ban on limited recourse borrowing arrangements, there are still a number of obstacles facing SMSF investors who want to invest in residential property following tighter borrowing conditions and some proposed changes to related-party loans.
All of the major banks have now withdrawn their SMSF loans products for residential properties, which means there are now fewer lenders operating in the space. There has also been a substantial tightening in lending policies among those lenders that do remain in the space.
In addition, there is also a proposal by the government to include the outstanding balance of certain LRBAs in the calculation of a member’s total superannuation balance.
The proposed measure is intended to apply to members who have satisfied a condition of release with a nil cashing restriction or those with a related-party loan.
AMP Capital head of real estate research Luke Dixon said that with SMSF investors increasingly encountering challenges with LRBA strategies and residential property investment, he expects this will result in some SMSFs looking to invest in commercial property instead.
For SMSF clients looking to make the switch from residential to commercial real estate investment, there are some key areas expected to outperform, he said.
“From a commercial perspective, finding income returns means looking through the assets, into the markets where they sit and how conditions there can deliver strong rental growth,” he said.
“Regions with strong economies, low unemployment, positive business conditions and a diverse variety of tenants typically perform well. Forecasts from our own research indicate that for income hunters, the best results will come from prime offices in most major cities and urban fringes, inner urban logistics facilities and convenience-based retail like standalone supermarkets and neighbourhood centres.”
Residential investors looking to make the switch to commercial real estate, he said, will also benefit from diversification of a wider variety of asset types as the commercial market further deepens.
“Non-bank lending, student accommodation, build-to-rent and self-storage could all create more opportunity for investors to diversify and achieve better income returns.”