Why SMSFs are increasingly investing directly in property

Read almost any financial magazine, website or flick through the financial pages of a newspaper and you’ll soon come across articles and advertisements focused on self-managed superannuation funds (SMSF). What used to be more typically referred to as DIY super funds are in a period of rapid growth.

A decade ago DIY funds accounted for about 10% of superannuation balances, now DIY has matured into SMSF accounting for 30% of the nation’s $1.4 trillion of super savings or an estimated $439 billion. And this is a trend that is expected to accelerate.

According to APRA (Australian Prudential Regulation Authority) at June 2012 funds in SMSF now exceed the funds held in retail funds 26.6% $372.1 billion, industry funds 19% $266.1 billion, public sector funds 15.9% $222.2 billion and corporate funds 4% $55.86 billion.

SMSFs have truly consolidated their position as one of the most popular forms of superannuation savings. In previous posts I have looked at the popularity of direct property investment and I see some overlap of motivation with the rise of SMSF.

Let’s highlight some of the reasons SMSFs are attracting such a level of popular support and such rapid growth and the overlaps are evident.

Is there a link between SMSF and the appeal of direct property ownership?

Heading this list is the common appeal of control if you want control then an SMSF is the best solution because as the trustee of the fund within the bounds of the law, you can make trustee decisions that take into consideration individual circumstances.

Increased choice and flexibility is another and unlocking the ability to consider different strategies, including the choice of investment options and that choice can include property. However, like every option care is required and the same selection criteria need to be applied to property.

Better tax management is another SMSF plus because with most other funds, but not all, an account is taxed on realised and unrealised earnings. But with an SMSF, only realised earnings are taxed.

Improved cashflow management is another benefit with transition to retirement pension strategies; you can contribute to and withdraw from super simultaneously. An SMSF also allows you to manage this within one pooled account.

Investment risk management is also an influence because with other funds as money is received a previously nominated investment strategy is automatically employed. An SMSF gives more flexibility of investment options and risk profiles.

Direct property investment a selective option

As already outlined legislation allows SMSF the ability to borrow and leverage funds into both residential and commercial property and there are clear trends this is happening. A recent survey conducted by Smart Property Investment revealed that, 72% of respondents plan to switch to an SMSF in the near future and 92% of those said they would borrow to invest in direct property inside of their SMSF.

Now given the popularity of a self-managed fund, my team at Colliers International have partnered with national leaders to assist SMSF set-ups seamlessly. If you haven’t already, I encourage you to attend one of our seminars to hear more or visit www.colliers.com.au/smsf

There are many reasons that Australians have traditionally been drawn to direct real estate investment. I feel one lasting legacy of the GFC will be the desire for people to take even more direct control of their finances and this logically extends to superannuation.

Curtis Field, an associate of mine at Colliers International who is very much involved with this area, says.

“Almost every day we come across more and more clients from all walks of life who are looking to take control, diversify and stop managed funds/market fluctuations affecting their families financial future, it’s always a key point of any discussion when it comes to property investment options.”

“This includes the ability to harness their super balance as a deposit for investment property and be able to purchase a property right now without one cent of their own personal funds and no cashflow drain. This includes looking at off-the-plan projects where there are many options and varied timelines to consider.”

Generally I accept that for some direct property investors, negative gearing plays a central role, however in a SMSF there are also many tax benefits that are attractive. It’s an area where a clear understanding is required, and our team has lots of help available.

Curtis also highlights the ability to take on good debt in a tax structure that can service debt using 100 cents in the dollar along with the fact that loans are Limited Recourse, meaning other super assets are not subject to bank security.

Curtis sums up with three further key facts:

“SMSF still secure full use of depreciation and capital building tax deductions that are not added back to create extra tax on sale of property, which happens with normal negative gearing.

“There is also the ability to pool funds with up to four members to allow increased exposure to property assets, this can be a great idea for a couple or business partners.”

And one final point Curtis makes is the ability to better manage the intergenerational transfer of wealth in a safe asset protected environment.

Do the homework and be sure to have a plan

The Superannuation Industry (Supervision) Act clearly sets strict rules for all SMSF and up-front the fund must have an investment strategy that covers direct property investment and importantly one that benefits the fund members.

While some restrictions do apply the fund can invest in commercial property and residential property but it would be wrong to see a fund as a simple way to rush into property. However this can be a very attractive option for a fund to buy into a new project and so needs to be a valid part of any project marketing strategy.

For an SMSF securing the most suitable asset class is key. It is also true that individuals understand and are comfortable with the choices they make. The popularity of real estate has always been in big part driven by the fact it is tangible, you can see and touch it and in a risk sensitive world the growth of SMSF investing in property looks appealing, easy to achieve and manage.

But please take note

My comments are not intended in any way to promote SMSF. I am not seeking to give any financial advice here, my intention is to open the conversation of the relationship between the appeal of SMSF and how that overlaps with the appeal of direct property investment, and how the SMSF sector can be an important target for a project marketing strategy.

Peter Chittenden is managing director for residential of Colliers International.