SMSFs and property: An insight on growth
Columnist: Craig Mackenzie
In spite of market hype surrounding limited recourse borrowing products, research suggests property may be underrepresented in investor portfolios.
The release of the Australian Taxation Office (ATO) quarterly SMSF statistics in May drew attention from the mainstream press which highlighted the fact that for the March 2013 quarter, the number of SMSFs established exceeded the 500,000 barrier, with the total number of SMSF members now approaching the one million mark at 958,095.
These numbers demonstrate the strong growth that this sector has experienced over the past decade as Australians seek to play a more active role in managing their retirement savings.
Statistics from the ATO also indicate that while the absolute value of SMSF monies allocated to property has continued to grow over the past three years, in line with the overall growth in the sector, the overall percentage allocation to property within the sector has remained flat since March 2010.
It is surprising to see that residential property has not grown in asset allocation percentage terms over recent years, particularly since amendments to superannuation laws were passed in July 2010, which were designed to provide greater transparency with respect to limited recourse borrowing arrangements by super funds.
Anecdotal market feedback suggests limited recourse borrowing products are an area of growth and opportunity for, and are being actively marketed and promoted by, a broad range of market participants. Yet the official ATO figures do not evidence this and suggest that property continues to be underrepresented in terms of a typical balanced portfolio.
This could be for a number of reasons:
• The ‘market hype’ associated with limited recourse borrowing arrangements is currently not matched by the number of transactions being completed, either because financial institutions are taking a cautious approach to this new lending opportunity and/or SMSF members are still working their way through the conditions associated with such arrangements;
• The ATO statistics are not accurately recording the growth in this asset class or across the sector more broadly, with quarterly statistics based on June 30 financial returns and adjusted based on the number and type of funds established in that quarter;
• Updated property values are not being undertaken and reported in an SMSF financial report, which is likely to be the case in the context of the significant amount of commercial property held within SMSF structures for several years. Recent valuation guidelines issued by the ATO concerning SMSFs are likely to see more frequent valuations undertaken of all SMSF assets, particularly property; and/or
• Australians remain cautious of having too much exposure to commercial and residential property in their SMSF vehicles.
Whatever the reasons, it will be interesting to observe the speed at which Australia’s most popular and valuable assets class gains an increased asset allocation percentage of Australia’s rapidly growing SMSF sector.