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SMSFs are shifting from shares to property – but is it a good idea?

By Chris Brycki
07 January 2021 — 3 minute read

With SMSFs moving more of their asset allocation away from shares and into property, it's important clients consider what timeframe they have from retirement and whether there is adequate diversification in their portfolio.

For several years, SMSFs allocation to direct shares has been in decline. This trend accelerated after COVID.

According to the 2020 Investment Trends research, in 2013 trustees allocated 45 per cent of their portfolios to shares. Today, that allocation is down to 31 per cent. This means more allocation to property, which is no surprise considering the Australian mentality that property is a secure investment that will yield good returns over time.

However, an SMSF investor should always consider their time frame from retirement because this will have an impact on the type of property they invest in. It’s also important that there’s enough diversification in any portfolio and the expense of property could mean a heavily weighted portfolio instead of even distribution across asset types and classes.

Actual returns are different to ABS figures

ABS figures in 2019 revealed an increase of 7 per cent per annum for dwellings in capital cities in Australia over the last 32 years. Figures like this sway all types of investors, but it’s important to note that the 7 per cent p.a. increase fails to account for the cost of renovations, improvements and maintenance.

For example, imagine a house being purchased for $245,000 in 1986. If no work was done on it, and then it was sold 32 years later for a land value of $1 million, the ABS would record a price increase of 4.6 per cent p.a. over 31 years. 

Since the house is run-down, the new owners knock it down and spend $1 million building a new house on the land. If the property then sells for $2 million, the ABS will record that as a 100 per cent price increase over 12 months, and will list a new 7 per cent p.a. increase for the property ($245,000 to $2 million).

However, the actual return – after taking into account the $1 million spent on rebuilding the house – would be just 4.5 per cent p.a. A property may not require major renovations, but over time, bathrooms and kitchens might need updating or replacing, while decks, pools and gardens also need ongoing maintenance.

There are ongoing costs like council rates, body corporate fees (if applicable), as well as water and insurance. Additionally, there are also the transaction costs of buying and selling a property.

The RBA estimates that the costs of buying a house (including stamp duty, conveyancing, etc) is around 4 per cent of the value of the property. The cost of selling a house includes real estate agent commissions and advertising which all add up to about 3 per cent. Thus, the total costs of buying and selling a house are in the vicinity of 7 per cent of the total value of the property. 

Investment properties and rental yields

The gross yield (rent) on houses in capital cities in Australia is 2.8 per cent and 3.8 per cent for units, according to SQM Research. However, there are substantial running costs which need to be taken into account to arrive at net yield.

Investment properties attract council rates, management fees, property maintenance and repairs. And if the property value is above the land tax threshold, there will also be land tax to pay each year.

Short-term rentals can yield more than a long-term tenant due to the higher fees to stay for a night. And it’s true – there’s been a boom in the short-term rental market thanks to platforms like Airbnb and Stayz, but competition is fierce and the tourism landscape has changed dramatically. 

Tax benefits of owning property may be disappearing

Hanging out for capital gains rather than rental yield? Bearing in mind that the property dwelling itself will depreciate over time by around 2.5-4 per cent per year, the capital gain will be based on the value of the land which has historically increased by between 4-5 per cent per year.  

Once the annual losses are offset against the likely capital gain on sale, the typical long-term return on an investment property in Australia has been marginal.

What about investing in other assets?

It’s worth considering all options to invest your hard-earned money, and whether an alternative to property may be better suited to your goals.

All of these factors don’t mean property doesn’t have a place in a properly diversified portfolio. But a problem arises if the cost of the property or properties weights a portfolio too heavily towards one asset. 

As any sensible financial adviser will tell you, holding a diversified portfolio that includes shares, bonds and commodities like gold will allow you to access smoother returns rather than simply putting all your eggs into the property basket. 

Chris Brycki is the chief executive of Stockspot.



SMSFs are shifting from shares to property – but is it a good idea?
chris brycki
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