SMSF lending: Call to ban "accident waiting to happen"

by Rebecca Pike16 Feb 2019

A property group is calling for legislation to ban borrowing for property against self-managed super funds (SMSF).

RiskWise Property Research has said all the major banks pulled out from offering the product last year as well as their subsidiaries and other banks like AMP.

According to CEO Doron Peleg, the ATO had also expressed concern about the risk to the retirement savings of individual SMSF trustees in the event of property decline and the Financial System Inquiry recommended a ban on direct borrowing by SMSFs to prevent an unnecessary build-up of risk in the superannuation system.

Peleg called lending to SMSFs an “accident waiting to happen as people gamble with their retirement funds”.

“Super is the only asset class you can leverage against but using it to buy property is definitely high risk if things go wrong,” he added.

Peleg said this risk had been acknowledged by the major banks and the Council of Financial Regulators should take notice and implement it across the entire industry.

However, while most banks have halted the practice, non-banks lenders are filling the void and continued to do so.

There are more than 600,000 SMSFs in Australia, managing nearly $750,000 in assets, according to APRA.

RiskWise said many SMSF borrowers were choosing off-the-plan properties, which Peleg said carry a large level of risk largely due to potential oversupply, leading to squashed property values, high vacancy rates and a cooler market.

Peleg said, “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’.”

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.

COMMENTS

  • by Michael 18/02/2019 8:52:27 AM

    This is ridiculous. You can't babysit SMSF investment decisions. At the end of the day, all SMSF & Super decision are a gamble, in the current environment.

    I've never understood why individuals are essentially forced (in standard super plans) to only invest in shares and managed funds. There's no discussion around shares dropping in value and protecting investors from that risk. In fact I've seen many people pulled out of retirement following their super crashing to Earth during the GFC.

    The lending space in SMSFs is so conservative that the lenders themselves carry very little risk of default.

    Property is another asset class. And if you're operating an SMSF, you've probably done more homework or have a higher interest in investing in a particular class of investment. Limiting that choice doesn't make sense.

  • by Bemused 18/02/2019 9:15:08 AM

    Which is the greater risk?

    Informed investors utilising an SMSF structure to build wealth for retirement, managing varying risks to generate an acceptable return.

    -or-

    Passive super holders, "invested" in Industry Super, dutifully paying their "fees" while waiting for the government to change the rules in order to raid their savings and wealth, condemning them to a life of government welfare dependence.

    Maybe government and their bureaucratic cudgels should focus on helping individuals (ie get out of the way) build their wealth and not implement punitive "rules" in aid of tax grabs and feathering the nests of their mates inside the Industry Super behemoth.

  • by John 18/02/2019 9:32:20 AM

    I agree entirely Michael.

    Something else for government bureaucrats to ban. The super trustee has a legal obligation to make sound investment decisions on behalf of the members so better off making sure that's happening rather than another brainless call to ban property.

    Property is a very sound investment when due diligence is carried out correctly. In fact, a good property purchase is a really good idea within super, provided that some basics are followed. Don't pay too much, always pay P&I and gear the borrowings so that the contributions and the rent pay down the debt in a reasonable time.

    A property purchase will always be better researched than shares and who would leave their funds in cash or deposits at the moment, earning nothing?