What kind of impact do you think an outright ban of limited recourse borrowing arrangements (LRBAs) will have on SMSF investment in property?
It will have a huge impact. There’s a whole group of people who are empowered to take charge of their own financial wellbeing and financial outcomes and they’re choosing to set up an SMSF, they’re choosing to borrow money and they’re choosing to invest in property.
It would have a massive impact if they were to put a blanket ban across the marketplace. Property is traditionally low risk, well, low to moderate risk. If you look at historical volatility in the share market versus the residential property market you see a clear delineation between the two – property has historically [had] very low volatility and from that point of view people are seeing it as an alternative option to potentially risky shares.
What other things could we put in place other than a complete ban on LRBAs?
The proposal to ban LRBAS within SMSFs in the final report of the Financial System Inquiry (FSI) is based on the chance of something happening in the future that may place super funds at risk. We think that chance, in terms of the scale of any mass problems, is quite remote, so let’s start with the basics, let’s start with educating super trustees first.
Let’s make sure they understand the risks associated with putting borrowing inside their investment strategies. Secondly let’s put some better regulation around the investments that they are looking to borrow money. A perfect case in question is if people are looking to borrow money to invest in direct property and direct residential property then let’s regulate the advice on property investment.
Further to that, we’ve got other mechanisms around the lending side that we can change, such as at the moment when you are borrowing money as part of a super fund structure, some lenders are asking for personal guarantees to be put in place. I would be encouraging lenders to remove that personal guarantee obligation, which then removes risks for the super fund, in terms of removing any further obligation of the trustees or the individuals who are providing those guarantees.
Now the banks obviously may need to address their pricing in terms of the interest that they charge clients by removing that risk, but that would be another solution outside of just putting a ban on lending inside a super fund. I’d also like to add that I’d like to see the property market regulated.
At the end of the day, if a change occurred by which it was okay to borrow money to invest in shares or licenced investment products but not okay to invest in property or residential property for that matter, we’d have a real issue with that. It’s giving consumers less opportunity to be able to invest to provide in a self-funded retirement, and that’s the goal of super. The goal of super isn’t necessarily just a savings vehicle, it’s an investment vehicle to allow people to provide for self-funded retirement to take the pressure off government to provide for people in their retirement.
Did you have anything you wanted to add?
I think that covers it, it’s important that government is listening to both sides of the conversation. I don’t like the fact that industry super funds and retail super funds are advocating for this change when ultimately it’s because LRBAs are part of the reason people are leaving their channel of investment and choosing to invest directly via an SMSF.
I think there’s evidence that’s being put out there that those with SMSFs are performing well, their returns have been in many cases superior to industry and retail funds, so I think there’s another agenda taking place here that needs to be addressed here as well. It should be a balanced conversation and it’s not just one being driven by these powerful groups who are trying to restrict people exiting from their funds.
I have no doubt of this if you read the submissions coming from the industry and retail super funds that there’s certainly an agenda there. Now they may be flagging a concern about future risk, but in reality they know the competitive advantage of some people setting up SMSFs is the ability to control the outcome and the investment strategy, and if borrowing and leverage are part of that investment strategy then naturally it’s going to attract people away from the traditional retail and industry super funds.
If they’re going to ban LRBA’s in Self Managed Super funds, how about they ban ALL borrowing in ALL Super. Let’s see how quickly and how hard the Industry funds and Banks lobby against that!
(note: I’m not actually advocating banning borrowing)
I personally think restricting LVR’s to say 50% or equity in property to exceed a certain percentage of overall fund value to be a better alternative.
Great to see an article to balance the debate. Let’s explore why Government introduced this option in the first place, so that money going into super can be diversified across more asset types to limit too much of the Super Funds Pool going into equities and creating a significant bubble in equities that when goes bust has a more significant impact on peoples retirement money.
The Banks are already charging a premium for SMSF business compared to what they offer a similarly secured loan to a personal home buyer or investor. With most loans being done at an LVR of 70% or less, there is little potential downside for the banks. With such a safety buffer the banks shouldn’t need to increase rates, if anything they should come down a fraction
The strategy is a relevant strategy for wealth creation, however the level of borrowing, the number of working members and ages of members needs to be looked at in conjunction to the personal situation and reasons for the strategy.
What alternate strategies were looked at and why discarded are of importance.