Property very high on the radars of high net worth investors, and increasingly through SMSFs

One in four wealthy investors have a self-managed super fund though there lingers a strong preference for owning an investment property outside of super, a new survey has revealed.

Around one in two (54%) wealthy investors – those with at least $500,000 to invest – own an investment property, with a quarter (24%) maintaining a self-managed super fund, according to a Hall & Partners Open Mind survey of 202 wealthy investors carried out for The Australian newspaper.

All those surveyed had $500,000 invested in various asset classes (excluding their own home) with almost half (45%) having more than $1 million to invest.

Interestingly, a much higher proportion - a third of the “higher-net-worth” investors (those with $1 million or more to invest) - had an SMSF compared with 18% of those that had only $500,000 to invest.

Two-thirds of these wealthy investors have no plans to set up a SMSF in the future with the difficulty and hassle in setting up a DIY fund and the belief that they could not do a better job managing their super than a professional fund manager the key reasons for this decision.

The other main reasons for not having an SMSF include a lack of interest and not understanding the benefits.

The benefits of having a self-managed super fund include, since 2007, being able to purchase property in super with debt using limited recourse borrowing rules, giving investors the twin benefits of leverage and concessional tax rates.

Another benefit of buying in super, says Ken Raiss, a  certified accountant and director of accounting firm Chan & Naylor, is that at age 60 no tax is payable on either rental income or capital gains.

Raiss also highlights that last year the ATO clarified that a self-managed super fund (SMSF) can borrow money to fund a cosmetic renovation, e.g. kitchen, bathroom, flooring etc.

"[However], if the renovation is structural, e.g. if it moves internal walls, then the funds must come from internal SMSF cash, not borrowings," he explains.

Factors that may discourage wealthy investors from setting up an SMSF include the somewhat complex structures that must be in place for borrowing to be considered legal by the ATO.

As Margaret Lomas explains: "It is not a straight loan to the superannuation fund – there must be a trustee who buys the property on behalf of the fund, who becomes the legal owner, while the superannuation fund becomes the beneficial owner that is, the entity which benefits from the asset.

Furthermore, she points out because a loan to a SMSF is a non-recourse loan (meaning the capacity of the lender to recover the outstanding money is limited to what they can recover by selling the property) loan to valuation ratios are usually quite low, around 60%, to allow a suitable margin to pay costs and to account for any falls in the market value.

"This means that the super fund will need to have the remainder of the purchase price, plus costs available," says Lomas.

Benefits of investing through a SMSF, says Lomas, include that as it is a trust structure, assets within this fund can pass more easily to beneficiaries.

Furthermore, if you own your own business you can borrow to buy your business’ real property (but not operating assets) using the super fund.

According to the same Hall & Partners survey, property remains high on wealthy investors’ investment radars.

Asked how they would invest $100 over the next 12 months, wealthy investors said they were prepared to spend $23.49 out of every $100 of investment capital in property – below shares ($33.03) – but higher than their allocation to a high interest earnings savings or fixed deposit account ($19.55),  Asian shares ($5.96) or government bonds ($3.09).

The less wealthy investors in the group also planned to invest more money in both equities and property.

The survey reveals that 70% of wealthy investors have a savings account and 59% hold shares directly (not part of a managed fund or super).

Investment property is third most popular asset (54%) followed closely by a savings account or fixed term deposit account (53%) and superannuation.

While less than a quarter (24%) of wealth investors have an SMSF, it does rank higher than a cash management trust (19%), annuities (8%), hybrids (6%) and corporate, retail and government bonds.

The Australian interpreted the results of the survey as not necessarily a vote against SMSF, but as a reminder that there are many different investment strategies.