Unlisted property funds the new black due to super cap changes

Changes to super rules, especially the new $1.6 million “balance cap” may reduce the attractiveness of holding physical property in a SMSF, particularly through a limited recourse borrowing arrangement.

If legislation regarding LRBAs is passed, the whole balance outstanding — including the amount borrowed — could be included in regard to the total super balance.

A potential solution to this is to invest in unlisted property funds, allowing a much smaller commitment than holding physical property. The value of the investment may remain more stable compared to listed property trusts and returns are relatively attractive, without the impost of a debt facility.

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“Smaller investment”

Unlisted property funds are an easy way to access a large-scale property investment without having to commit significant amounts, which should allow investors to hold the investment in their SMSF without breaching the retirement balance cap of $1.6m.

There is, of course, the option of investing in listed property trusts, A-REITs, but then the investment is subject to the whim of the market as the investment is valued at the prevailing market price.

The market traded-price could be considered a fairer reflection of the investment’s value, but the sharemarket is influenced by many factors, of which not all would directly impact the A-REIT and the value of its underlying property assets.

“Listed v unlisted”

According to the Property Council unlisted property annual total return across all sectors was 12 per cent to June 30 compared with 14 per cent for the previous year. Listed property or A-REITS saw returns close to minus 6 per cent for the financial year due to the sell- off in bond prices, which led to investors seeking higher returns elsewhere.

Many investors might not realise it, but the number of unlisted property trusts investing in property outweighs listed property trust by about 2 to 1 (80 v 40).

The CFMG Land & Opportunity Fund currently has two offers in market with fixed return of 12% per annum for different fixed investment timeframes.