SMSF exposure to residential property over-stated
The role that self-managed super funds (SMSFs) are playing in the current surge in residential property prices needs to be kept in perspective, according to Graeme Colley, the director of technical and professional standards at the SMSF Professionals' Association of Australia (SPAA).
Colley said that despite the market talk of SMSFs flooding into residential property, the actual numbers reveal it's still a small percentage of the sector's $500 billion in assets under management.
"At June 30, property in SMSFs consisted mainly of non-residential property such as commercial property ($58 billion) compared with residential property ($17 billion) out of a total of $495 billion," he said.
"At $17 billion, that's 3.4 per cent of all SMSF assets."
For Colley, gearing is also not the issue its critics allege.
"According to ATO (Australian Taxation Office) statistics, geared property in SMSFs makes up less than one half of 1 per cent (0.4848 per cent) of their total investments," he said.
"It would take a huge shift in investments to influence the real estate market compared with individual investors who use negative gearing to purchase property."
Regardless, Colley said that SPAA welcomed the current debate because it served to highlight what SPAA has consistently said - that SMSF trustees need to get professional advice before using gearing to invest in property.
"Property is not an inappropriate investment per se, but it must be appropriate to the fund and consider the member's circumstances, just like all investments, whether they are via an SMSF or personal investment decisions outside superannuation," he said.
"In a low interest environment, people are looking for better opportunities for investing, a natural reaction to move out of a low earnings investment.
"Property is an alternative to interest rates on cash, fixed interest type investments and term deposits, and there are still fears about just how robust the sharemarket is."
Colley added that ASIC (the Australian Securities and Investments Commission) had said that all investments made by an SMSF, including property, required advice from a licensed financial adviser.
"This requires an examination of whether the investment is appropriate to the circumstances of the fund and its members," he said.
"However, individuals do not require advice from a professional adviser to consider their particular personal circumstances before they invest in geared property.
"This means a higher risk is associated with the investment and the lenders experience a higher rate of default than the strict lending policies that are imposed on an SMSF."
Originally published on SMSF Essentials.
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