The issue of SMSFs investing into residential property continued to grab the media headlines throughout 2013, with particular interest from ASIC when it released the findings of its SMSF Taskforce Report 337 in April.
The findings focused on the quality of advice provided to SMSF investors. One of the key findings of that report was ASIC's conclusion that there were concerning pockets of poor advice, much of it centred on investors setting up an SMSF with the intention of gearing into residential property.
Looking at the issue of SMSF gearing into residential property more closely, lending continues to grow, albeit off a very low base, driven by the fact that the governing legislative framework now enables SMSF funds to borrow for the purpose of property investment, as well as the tax advantages of holding such assets within superannuation vehicles.
As at 30 June 2013, $17.5 billion was invested in residential property through SMSF vehicles, an increase of just over 10 per cent over the previous 12 months. Whilst this rate of growth is quite strong, it should be noted that:
- the overall rate of growth in total SMSF assets over the 12 month period to 30 June was 15 per cent, outpacing the rate of growth in residential property asset growth during the period
- the overall borrowings of SMSF funds, most of which was presumably used to acquire property, is $6.8 billion, which is small when compared to overall SMSF assets of $505 billion as at 30 June 2013 and total residential and non-residential property of approximately $76 billion
- commercial or non-residential property continues to dominate residential property investment at a ratio of just under 4 to 1
Looking ahead, the challenge for industry in 2014 will be to ensure that SMSF lending for property investment retains the confidence of ASIC and other key industry stakeholders so as to mitigate the risk of unwanted regulatory intervention that may curtail future activity in 2014.
In particular, professional advisers in the industry will need to ensure that they become familiar with, and implement processes to ensure compliance with new disclosure requirements on AFS Licensees and their authorised representatives who give personal advice to clients on establishing or switching to an SMSF, as outlined by ASIC in September 2013 in Consultation Paper 216.
So far as SMSFs and property investments are concerned, one of the key new disclosure obligations will be the need to make relevant disclosure to the investor and develop an appropriate investment strategy for an SMSF.
This new obligation appears to be derived from ASIC’s concerns that some SMSF advisers were making recommendations to clients that too heavily weighted residential property as an asset class, placing the consumer at greater risk of financial loss were the residential property market to encounter a materially downwards movement in home values, when compared to an investor with a more balanced portfolio in terms of asset allocation.
The best way the industry can achieve this is through the continued education of consumers in the risks and benefits of establishing SMSFs and leveraging into property. This also extends to consumers being given appropriate advice when looking for diversification across their investment portfolios.
Market professionals who are marketing and selling SMSF investment schemes need to be appropriately qualified and incentivised to ensure sales practices in this segment of the market continue to meet minimum regulatory standards and ensure broader confidence is maintained.
More broadly, 2014 looks set to be another reasonably strong year in terms of growth in home values across the main capital cities, which will only drive continued strong investor activity in the market. Lending institutions appear to have embraced SMSF lending up to loan to value ratios of 80 per cent and to be comfortable with the risks involved.
Evidence of actual market SMSF lending volumes is difficult to obtain and therefore gauge. Notwithstanding, market commentary to suggest SMSF leveraged property investment is a key contributor to a housing bubble appears to be an unwarranted and unfounded assertion.
Craig Mackenzie is the head of legal counsel/consumer affairs at RP Data.