Speaking to SMSF Adviser, CommSec general manager of adviser services Eric Blewitt said that by investing in physical residential property, the average SMSF worth around $1 million is defying the rules or theories of proper portfolio diversification and exposing the fund to unnecessary risk.
Mr Blewitt said limiting the exposure of an SMSF to a property to 10 to 15 per cent would ensure the fund has sensible diversification.
“If you’re looking at an average SMSF, which has just over $1 million, and you’re looking at a 10 or 20 per cent allocation, you’re only looking at $100,000 to $200,000 worth of property,” he said.
“It’s not until you get to that $4-5 million balance that you can go buy something at $500,000 or maybe up to a $1 million and still have an allocation at a reasonable proportion.”
The performance of residential property markets in different capital cities has also been very diverse, he warned.
“Looking over the past year, Sydney was around 14.5 per cent, whereas Brisbane was 2.5 per cent and Perth was pretty much flat, so for an SMSF purchasing a property as a single asset, it is pretty much pot luck depending on where you purchased it,” he said.
Darwin’s residential property market, for example, has actually declined by 2 per cent.
“Property as far as SMSFs are concerned, specifically residential, is pretty hit and miss depending on where you happen to have purchased and therein lies the problem with [investing] in an illiquid asset, so unless it’s only a small portion of a balanced portfolio, it’s pretty challenging,” Mr Blewitt said.
The yields from residential property are only expected to reach around 3.5 per cent while capital growth is only expected to be around 5 per cent, he added.
“Your risk premium over and above cash isn’t too much – okay, you might have some capital growth, but looking at the last year, looking at the diametrically-opposed growths and reductions in the country – it’s pretty hard to pick,” he said.
“It’s a challenge because you’ve not only got to pick the right area, you’ve got to pick the right apartment or the right house. We’re coming into spring carnival season – you might as well see what horse you’re going to back.”
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I agree, Elaine. I’ve also had clients with commercial property vacant in excess of 12 months.
Not only does it cause havoc with the cash flow, it makes the property almost unsaleable because nobody will buy a property that can’t attract tenants?
Never had those issues with residential property, but unfortunately RP is a political football at the moment.
Pollies are fretting about spiralling prices and a potential crash; are effectively blaming investors for the perceived problem; and are using media campaigns and blanket statements to talk it down and dissuade people from investing further.
I don’t understand the bias against residential property. As an administrator I’ve seen far more issues with commercial property particularly where the client’s business is run from it. One in particular comes to mind. When it came time to retire, they couldn’t sell their business so ended up closing it down and the property sat there empty for years because they couldn’t sell it and no-one wanted to rent it because the area it was in was slated for redevelopment. Other clients have sold their commercial properties at a loss. Many have issues with tenants not paying rent, not being able to get tenants at all or having to reduce rent significantly. Those with residential properties have had no issues with tenants and all but one have shown capital gains. Now I realise this is a small sample but appears to reflective of my experience with property both in and out of SMSFs. Can someone please explain why residential property is the bad egg?
Mr Blewitt may well be right but he’s ignored the fractional model, a modern form of syndication in a MIS legal structure that enables a SMSF Trustee to invest in real property of their choice up to an appropriate asset allocation for their portfolio, risk assessment and time
frame. From a $500,000 SMSF a $100,000 allocation could be invested across 10 properties in different geographic locations avoiding the single asset risk exposure he is so concerned with.
Keith, nobody is questioning the diversification strategy. It is pushing a certain asset class because of a vested interest that people are questioning. If this was a property business saying shares are ‘pot luck’ they would be crucified and labelled a spruiker
Interesting responses. Sounds like they have a barrow to push themselves. Is it a case of shooting the messenger? As an auditor, I would be concerned if a SMSF invested principally in property. Diversification is a real issue for Trustees to consider and address.
Sanity at last! Perhaps the APRA/ASIC should consider such restrictions on asset allocation as opposed to outright ban on LRBA’s. That will go some way to curtailing some of the poor practices that exist around property spruikers, excessive leverage and unaffordable property prices due to excessive players in the buying arena. Lets now hear those with vested interests whinge and complain.
Some sanity at last. Perhaps the Govt needs to consider such regulations regarding asset allocation as opposed to outright ban on LRBA’s.
So only 10 to 15% into property (a long term investment strategy)… what is the suggested split for the rest of the portfolio ?? How can any credibility be given to an adviser who takes a 12 month historical view of property ??
Whilst I agree that asset allocation is a key performance driver and diversification is a key risk mitigation tool, what the article assumes is that there is no use of gearing and uses a short term analysis to make a point.
Over time, as shown by the Russell Investments “2015 long-term investing report”, returns from shares & property are around the same so it’s not about which, but the quantum invested in the asset class.
Buying property via gearing increases the capital invested and, by extension, increases the total return over a longer term. Neither asset classes should be considered speculative or short term and care is required in the selection of all SMSF investments.
[The LRBA rules, virtually exclude meaningly direct share investment via gearing in SMSFs however, the strategy can be deployed outside of super and hence a “whole of balance sheet” assessment of asset allocation is required.]
Another problem of treating SMSFs as a financial product
So insightful, if I didnt know any better I would think they had a vested interest in a competitive product…. Saying Brisbane was flat so residential property is hit and miss is like saying the ASX loses over 50% a year because Fortescue Metals dropped 65% in FY-15. Logic at its finest.
Thanks for the independent advice. I’m just trying to reconcile this with the property manager saying we should invest more in property and would have avoided recent large drops in share prices.
As for suggesting property investment is like picking a race horse – it sounds like share investing must be very safe. Eric, can you tell us which shares will increase next year. Noting your view a 5% gain and 3.5% dividend aren’t much better than cash, we’re looking for sure bet shares that provide a combined return higher than this.
Where is the ethics?
So another vested interest group explains the anti SMSF position. Listen to him. Why would you take your money out of comm sec and jeopardize his salary. It’s all about comm sec keeping your portfolio under management not the performance.
By the way how has the stock market investments of comm sec performed this calender year….interestingly not a mention. Stop these self interest groups getting free media exposure….make them unbiased valuable items and we will all read them