Regulators Warn of SMSF Property Speculation

A surge in property speculation by leveraged self-managed super funds amid sliding house prices in the nation’s biggest cities has sparked concerns among the powerful Council of Financial Regulators that many may be in over their heads.

There has been a renewed rush by SMSFs to take out mortgages for property investment despite an increasing crackdown by the major banks to close off the problematic credit products.

The total value of property investment loans held by SMSFs has raced to $39 billion — more than 5 per cent of all assets in the $700bn self-managed super sector by the end of the June quarter.

CFMG Capital General Manager, Andrew Thomson suggests:

“Significantly leveraging your retirement funds to gain exposure to a single asset in a single asset class is what I would call a risky proposition - and despite my belief in property as a wealth building asset, not something I would ever partake in”.

Loans for property investment through SMSFs are considered “limited recourse” because if the loan defaults, the bank can claw back only the specific asset bought with the loan, not the rest of the assets in a fund. However, as loans can account for a large share of a particular SMSF’s assets, this can leave the borrower vulnerable to changes in property prices, risking pushing a retiree on to the age pension.

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The number of limited-­recourse borrowing arrangements has risen dramatically from just 0.1 per cent of SMSF assets a decade ago to more than 5 per cent, as more SMSF owners have been encouraged to pile into investment properties by financial advisers and “one-stop-shop” SMSF advisories, which collect lucrative fees for establishing the funds and tipping trustees into housing assets.

The concern about the use of the borrowings in SMSFs follows revelations at the financial services royal commission of systemic problems across financial advice outfits that spruik SMSF property investment and stand to win lucrative fees whether or not it is in the best interests of clients.

Almost one in 10 SMSF owners have accessed limited-­recourse borrowing arrangements, which are mostly used to fund property investments.

“As a developer of residential property, we see it all the time.  On the front line of sales in each of our projects, my sales team regularly encounters schemes aimed at selling off new property to recently established SMSF’s, often with large commissions involved.  At the end of the day, we are a land developer tasked with selling vacant land lots to owner occupiers, investors, builders and other willing buyers – so while we have no involvement in arrangements like these, we are well aware of their existence and it’s a concerning trend. “ Mr Thomson said.

“My view is that while purchasing investment property as a means of wealth building is a proven methodology, its not something I’d do within my super fund if it required significant leverage. There are other ways to gain exposure to property via your SMSF without the requirement to get into a non-recourse debt facility. As an example, the CFMG Land & Opportunity Fund allows SMSF investors direct exposure to the lucrative residential property market with just $25,000” he said.

The Australian Securities & Investments Commission has been targeting poor consumer outcomes in the sector — finding that 90 per cent of financial advice given to SMSF owners failed to be in their best interests — and the figures show the pace of borrowing has reignited in the most recent quarter.

By the end of June 2018, limited-­recourse borrowing arrangements (LRBAs) had grown to $39bn, an increase from the $32bn figure recorded at the end of March of the same year. This compares with a figure of just $418 million in June 2008.

The Council of Financial Regulators, a collection of representatives from Treasury, ASIC, the Australian Prudential Regulation Authority and the Reserve Bank of Australia, was tasked with a review of limited-recourse borrowing arrangements following David Murray’s Financial System Inquiry.

In September, 2018 - Commonwealth Bank became the last major lender to stop offering the products, following Westpac ending the sale of LRBAs in July.

APRA told the Murray inquiry it had “long had reservations about extending the ability of superannuation funds to borrow” as “additional direct leverage may amplify returns but exposes superannuation fund members to greater financial risks”.