Planners embracing SMSF property gearing

The number of self-managed super funds (SMSFs) borrowing to invest has more than doubled in the past two years, with property by far the most popular geared investment for trustees.

Two thirds of planners surveyed intended to place at least one SMSF client into a loan product in the next 12 months, according to the study of almost 3000 trustees, planners and accountants.

Although only 7 per cent of SMSFs currently borrowed, planners believed that close to a quarter of all SMSFs were suitable for geared investments.

The main uses for geared investments within SMSFs are commercial property and direct residential property, with each cited by more than half of planners surveyed.

“The advice planners are giving their clients reflects this emphasis on property,” said Investment Trends analyst Recep Peker.

“Among planners who advise SMSFs, 41 per cent say that they intend to recommend a loan into property when they next advise an SMSF client on a geared investment strategy. In contrast, only 13 per cent intend to recommend a loan into shares.”

Of Australia’s 428,000 SMSFs, 29,000 were invested in geared products in April 2010, up from 13,500 in July 2008, the study found.

About 75,000 trustees were intending to use geared products in the next 12 months, and half of those planned to gear into property, with the other half split between products such as shares, warrants and managed funds. More than half of trustees said they were unlikely to use geared products.

“Gearing within SMSFs is a rapidly growing niche,” Peker said.

“Importantly, the two most significant groups of professional advisers for SMSFs, financial planners and accountants, are both increasingly likely to recommend geared products to their SMSF clients,” he said.

Gearing also had support from just over half the accountants surveyed, although they also cited problems with loan providers such as non-compliance, problems with trust deeds, providers not understanding legal requirements and complicated paperwork as a hindrance to the use of gearing.

“Forty-two per cent of accountants have responded to the problems by recommending the use of lending less than they otherwise would have, while 25 per cent are telling clients to organise loans themselves,” Peker said.

“That suggests that loan providers could significantly lift the uptake rate for their products among advised SMSF clients by working with the accounting profession to overcome these kinds of difficulties.”