Should SMSFs Have the Right To Invest In Property?

The number of self-managed super funds (SMSFs) investing in property is on the rise. Not surprising considering property investments have outperformed most other assets over the past 25 years in real terms. Only shares performed better once costs and taxes are taken into account.

This trend isn’t surprising.

After all, SMSF investors are no different to any other. Retail funds are equally active in the housing market. Unlike members of retail funds however, SMSF investors have more control over their money. And all the data suggests is that real estate is becoming the go-to investment for SMSFs.

But the rising influence of SMSF investors on the real estate market is raising concerns too.

There are now calls for an outright ban on SMSF investing in real estate. Others, still, want the practice of negative gearing banned among super funds.

But all this reeks of selective bias. SMSF investors are not alone in the rapid growth in house prices in some cities. They’re investors, like any other, and are entitled to the same opportunities as everyone else.

Nor is this a niche group of people either. Self-managed super funds are expanding their reach right across Australia. The number of people using SMSFs rose to over one million last year.

This million-strong market is merely capitalising on the opportunities present in the housing market. And, by any measure, their appetite for real estate is insatiable.

In the past year alone, property investment among SMSFs grew by 11%. That pushed the total value of the market up to $21.78 billion. This was up sharply from March 2014, when the market value was $19.49 billion.

This growth is more impressive still when we consider that property investments rose by 60% since 2011. SMSF investors are like all others in that respect; property is king when it comes to Aussie investors.

But this isn’t a recent phenomenon among SMSFs. This trend has remained constant since a law change in 2003 allowed funds to invest in property.

At the same time, these figures should be viewed in a broader context. SMSF residential property assets still only make up 4% of the total super investments in Australia and overseas. But the direction its heading in is positive.

It continues to grow year on year, highlighting the importance that investors are increasingly placing on the property market.

Whether it will overtake the share market is another question altogether. Taxes and costs associated with the housing market will make that harder to achieve. But it’s not out of the realm of possibility. The local share market is stagnating, and global crises could take their toll on stock investors.

In contrast, property prices continue to rise, at least in select cities. Forecasts over the next few years paint a positive picture for particular markets. House prices in Sydney and Melbourne should remain robust for the rest of the decade.

A call to ban SMSFs from investing in residential property

Not everyone is convinced that SMSFs should be allowed to invest in real estate. There are growing concerns that capital heavy SMSFs are having an adverse effect on the market. Specifically, the concern is that they’re pushing up prices and lowering affordability.

The recent Financial System Inquiry (FSI) recommended banning SMSFs from investing in property or shares. The Reserve Bank also gave their backing to the idea.

But they would, wouldn’t they? Suppressing house prices is one of the RBA’s main objectives. They want to divert the effects of rate cuts from the property market to the broader economy.

For my money, any argument favouring bans is lacking in reason. There’s no purpose in punishing SMSF investors in isolation from all other investors.

What’s more, if such a measure was implemented, it’d need to apply to all superannuation funds. Anything less would raise questions of favouritism.

The government knows that, politically, it’d be a tough sell one way or another. They aren’t going to punish one million SMSF investors for the sake of housing affordability alone. It’s for that very reason that the government has kept quiet on the issue.

And another thing: how is this any different from investors who borrow money straight from a bank? There are already enough absurd restrictions placed on superannuation funds.

There’s even a case to be made that SMSF capital is less risky as a whole. It’s certainly no more of a hazard than regular home loans issued to borrowers.

Negative gearing rising among over 60s

The other concern the FSI points to is the increase in negative gearing among people 60 and over. In 2000, over 60s made up 12% of all geared property investments in the market. That figure had spiked to 20% as of 2012.

Is this really a problem though? Are over 60s inherently riskier than other investors? I wouldn’t say so.

But if the FSI, or the RBA, is really interested in housing affordability, banning negative gearing is the wrong way to address it. It’s not only counterproductive, but it could actually make housing less affordable for others. The reason for this is relatively straightforward.

Banning negative gearing would result in a slowdown of new housing constructions. After all, without investors to invest, supply goes down. If supply goes down in the short to medium term, prices will go up.

What’s more, it would force investors to hike rents once tax concessions get scaled back.

Remember, negative gearing allows for a net loss on rents in the hope that house prices will grow. That’s why investors need incentives, like capital gains, in order to invest in the first place.

Banning gearing would leave us with not only rising house prices, but dearer rental prices too. Discouraging investors from investing is a sure fire way to make housing less affordable for everyone.

What do the government make of this? Again, they’re staying tight-lipped. It’s certainly ill-advised for the government to enact any changes to negative gearing prior to an election. From a political perspective, regulators would be wiser to maintain their pressure on bank and their lending practices.

Mat Spasic,

Contributor, Markets and Money


PS: It’s become obvious to many that the superannuation industry is rife with abuse. Unlike SMSFs, retail funds catch many people out with hidden fees and costs.

But according to Markets and Money’s Bernd Struben, it doesn’t have to be that way. There’s no reason you should be putting up with underhanded tactics of self-serving fund managers.

Bernd is the Managing Editor of Port Phillip Publishing. He has more than 20 years of professional finance and management experience. He’s written a free report to help you devise a plan to protect your money.

Bernd will show you how to take control of your destiny, making your super work for you. In the report, you’ll learn why you should never leave your savings in the hands of fund managers who get paid regardless of their performance.

In addition, Bernd will also talk you through the four core principles of a successful investment philosophy. That way you can use your super to the build the wealth you’ve always dreamed of.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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