Small investors are wielding their self-managed super funds in the residential property market.
According to the Australian Taxation Office, self-managed super funds are now the largest and fastest-growing segment of the super industry.
Data from the ATO shows that residential property assets held by such funds are increasing by about $1 billion a year. In June 2008, the total value of residential property assets held by them was $10.825 billion, rising to $14.868 billion last March.
This largely reflects a lower interest rate environment and a lack of confidence in the share market as well as the easing of government regulations regarding borrowing against self-managed funds to buy residential property.
This figure also includes people transferring properties that they already own into their fund for tax purposes.
It seems with the high Australian dollar people are also buying overseas. In June 2008, the value of overseas assets held by Australian self-managed funds was $94 million. In March, the total value stood at $138 million.
The director of project marketing residential at Colliers, Curtis Field, said more people were investing via such super funds.
”A minimum of 10 per cent of people buying with their SMSF is certainly a consistent trend that we are seeing across most of our projects,” he said.
”A few years ago it would have been unheard of.”
There are many benefits to buying property with a self-managed super fund. Property bought via such a fund is bought with pre-tax dollars so purchasing power is increased.
Another benefit is that, as a general principle, if owners sell in the pension phase it is capital gains tax free.
The type of loan also has an in-built safety mechanism. It’s a limited recourse mortgage that is usually 70 per cent of the value of the asset.
This means the only asset that the bank can sell to recover its money is that property itself – it can’t attack any other assets in the super fund.
However, the president of the Association of Financial Advisers, Brad Fox, pointed to the downside of this type of loan.
”Because of the type of mortgage, there are more costs involved in both the higher interest rate demanded by the banks and the greater legal costs to establish this sort of a loan,” he said. ”That will sometimes catch out an unknowing buyer.”
Mr Fox also warned of the risks of buying off-the-plan, which were higher than for buying an existing property.
”You don’t know exactly what you’re getting,” he said.
”All the drawings and all the artists’ impressions are fine, but you don’t know what the market is going to be at the time of the completion of the building.”
Mr Fox advised people considering this path to do their homework and familiarise themselves with the ATO regulations to avoiding breaching SMSF rules.
”Once a breach has been committed they can be horrendously expensive to correct,” he said.
Despite these risks, Mr Field was confident this trend would continue to the extent that most investors would move from being personal investors to people who would buy through their self-managed fund.
”The amount of SMSFs will grow and the 10 per cent will become 15 per cent and then 20 per cent, but it will never be 50 per cent of buyers,” he said. ”It’s going to replace purchasers who are already investors.”
By Toby Johnstone