Spectacular investment trend for self-managed super funds
Residential property investment is becoming increasingly popular within the self-managed super fund sector. According to the Australian Taxation Office (ATO), the value of residential property assets held in self-managed super funds has increased by $9.81 billion (67.1%) between June 2011 and March 2016 to reach $24.4 billion in value. In comparison, dwelling values across Australia’s capital cities increased by 26.2%, demonstrating that most of the increase in SMSF’s investing in residential property has been fuelled more by uptake rather than appreciation of the asset value.
Despite the strong growth in SMSF’s investing in residential real estate over the past five years, investment housing still comprises a relatively small proportion of net SMSF assets at 4.3% compared with non-residential real estate at 13.1% of net assets, listed shares comprising 30.2%, and cash/term deposits comprising 27.3%.
The slant towards non-residential real estate within SMSFs is understandable. Small business owners can purchase a business premises within their super fund and rent it from the fund, thereby funnelling business rental payments into their savings as well as (hopefully) benefitting from capital gains in the value of the asset.
Residential real estate within a SMSF has different rules. A dwelling purchased within a SMSF can’t be lived in by a fund member or their related parties, and it can’t be rented by a fund member or their related parties. In simple terms, a residential real estate investment must remain completely at arm’s length from the fund member.
Super funds are generally unable to borrow capital to fund an investment, however, since September 2007, SMSFs have been the exception, with a provision for limited recourse borrowing arrangements (LRBAs) available for self-managed super funds. According to the ATO, a limited recourse loan means the lender’s rights are limited to the asset held in the separate trust; there is no recourse to the other assets held in the SMSF, which provides some protection to the overall value of the fund.
Growth in limited recourse borrowing within SMSF’s has been nothing short of spectacular, rising from just $1.4 billion in June 2011 to $19 billion in March 2016 (1,260% growth).
Those SMSF investors who got into the Sydney or Melbourne market early would have seen enormous growth in their residential assets, providing a boost to their overall retirement wealth. Since the beginning of 2009, Sydney dwelling values have increased by 86% and Melbourne dwelling values are up by 71% over the same time frame.
However, the growth cycle won’t last forever. In fact, over the past twelve months, we have already seen dwelling values in Perth and Darwin decline by slightly more than 4%. The trend rate of growth showed a strong bounce during April and May this year, however it’s likely that housing market conditions will continue to moderate due to a range of factors including affordability constraints, low rental yields and tighter finance arrangements from the banking sector.
With the residential housing cycle now likely through its peak rate of growth, it will be interesting to see if residential property investment by SMSF’s continues to grow at the same pace.