Getting access to property via Self Managed Super (SMSF)

With the recent clamour by lawmakers to curb access to geared direct property, SMSF investors are now seeking alternative ways to gain access to residential property (Australia’s #1 asset class) via their SMSF.

Land syndications, crowd funding and opportunity style funds are now attracting significant investors from the DIY super space, with many SMSF investors still looking for significant exposure to the residential property market.

In a recent article in The Australian – the Wealth Editor had this to say: 

“Investors have many reasons for increasing their superannuation exposure to property, but perhaps the outstanding reason is the sense that the window of opportunity may not be open forever.

In the recent financial inquiry led by David Murray, it was suggested the DIY funds (self-managed super funds) should no longer be allowed to have geared property — in other words funds should not be allowed to borrow for property investment.

DIY funds had always been allowed to hold residential property if it was owned outright, but not if it was mortgaged. The rules allowing a DIY to borrow to buy property were only introduced initially in 2007.

Though the current regime in Canberra chose to ignore Murray’s advice, future governments may have a change of heart.

Nor do the present rules make it easy for property investors with a firm ruling that Limited Recourse Borrowing Arrangements must be made for each individual property.

Still, DIY fund investors who made the move into property — especially in the cities of Sydney and Melbourne — may well have enjoyed a better asset price appreciation than if the same funds were invested in the S&P/ASX 200, which has been drifting for almost three years in a relatively narrow range.”

So with the threat of access to leveraged property being removed a very real proposition, these investors are now looking for other ways to gain exposure to the residential property market via their SMSF. In a market previously occupied by high net worth investors, retail super funds and traditional family offices – SMSF’s are now staking their claim in the crowd funding and syndicated project space. One such operator of syndicated land funds has recently reported projects being 30-40% oversubscribed, largely driven by a growth from SMSF investments and by word of mouth.

Making this asset class more attractive is that these funds give investors access and exposure to the residential property asset class with as little as a $25,000 investment and no leverage requirements.

In another article appearing in the Australian, the Wealth Editor goes on to say: 

"In the whirlwind of confusion following the government’s latest changes to superannuation, investors who have or plan to have property in their super funds have been sidelined.

Yet a proper understanding of the new rules and how they relate to property is going to be crucial. It’s not an exaggeration to say this has been one of the hottest areas of investing in recent years: borrowing by DIY super funds for property has ballooned from just $1.4 billion five years ago to more than $22bn today.

Part of the problem may be that these funds see themselves as property investors as opposed to active DIY super operators.

But here’s the catch: the successful use of super funds will now be as much about understanding the new terms of super as it is about the mechanics of any underlying investment.

With the latest changes this is more true than ever before. The system is now wildly over-engineered and falling foul of new rules will change your numbers." 

As directly held property is such a notoriously risky asset – being slow to buy, and often even slower to sell – and usually required the existence of some sort of debt/leverage – falling foul of new or existing super rules can be problematic for DIY investors. Further, once you have established you are operating outside the rules, its usually not a simple fix to just sell the property at a moments notice.  

As a result of these concerns, there is certainly an argument to instead seek exposure to residential property via a land fund or syndication, than via direct purchase with leverage through your SMSF.