Pitfalls of property investment through SMSFs and why banks are avoiding the risks
Jul 19, 2018
Buying property with your superannuation is an accident waiting to happen, according to RiskWise Property Research CEO Doron Peleg.
His comments come as Westpac announces it will no longer offer self-managed super fund (SMSF) loans for new consumer or business lending.
While the big four bank says it wants to streamline processes, Mr Peleg believes the real reason is that offering SMSF loans doing so is beyond Westpac’s risk appetite, especially if retirees lose significant amounts of their pension due to failed property investment.
The move means Westpac subsidiaries the Bank of Melbourne, St. George Bank and BankSA will also no longer offer the product.
Over the past few years, Self-Managed Superannuation Funds (SMSFs) have gained such popularity there are now more than 600,000 in Australia, managing around $700 billion in assets. This is according to figures from the Australian Prudential Regulation Authority (APRA), and the Australian Taxation Office (ATO). In addition, the statistics show us the average balance of an SMSF is more than $1.1 million.
In fact, according to the ATO, in the five years to 2017, SMSF assets grew by $274.3 billion, or a staggering 65 per cent.
However, the RiskWiseCEO says it’s “a dangerous road” as pensioners gamble with their retirement funds.
“It really is a high-risk endeavour, and, in fact, Labor will move to ban borrowing against SMSF if they are returned to power in the next Federal election,” he said.
Borrowing on your super to feed into property is governed by strict conditions known as 'Limited Recourse Borrowing Arrangements'. And according to Industry Super Australia, there has been a 200 per cent rise in the past few years.
RiskWise research shows off-the-plan (OTP) properties are very popular with SMSFs, however, many carry a high level of risk largely due to potential oversupply - leading to squashed property values, high vacancy rates and a cooler market. Inner-city Brisbane is a case in point where weakness in the market has led to a high level of risk for investors and therefore lower valuations and rising defaults on settlements.
“What this means is that many individuals fall into debt they can’t climb out of as their SMSF hits the ‘rock bottom’ known as a ‘property bust’,” he said.
“The three major types of risks associated with over-supplied OTP high-risk suburbs are Equity Risk, Cashflow Risk and Settlement Risk and they all add up to potential disaster for the anyone staring retirement in the face. Especially as set-up costs for these types of borrowings often have higher fees.”
Mr Peleg said when considering buying property through a superannuation fund it was important to identify loss of income if there was an oversupply in the area and there was a problem finding tenants to rent the property, especially as these dwellings appealed to a limited market and not families with children seeking bigger homes and a decent-sized block.
“Super is the only asset class you can leverage against but using it to buy property is definitely high risk if things go wrong and, frankly, an accident waiting to happen,” he said.