Is super property investment an ‘accident waiting to happen’?
Over the past few years, there has been a phenomenal growth of Self-Managed Super Funds (SMSFs), and with it a dramatic rise of borrowings for property by these funds.
But it’s a dangerous road, said RiskWise Property Research CEO Doron Peleg, who believes many are gambling with their retirement funds.
“It really is a high-risk endeavour, and, in fact, Labor will move to ban borrowing against SMSF if they are returned to power in the next Federal election,” he says.
Borrowing on your super to feed into property is governed by strict conditions known as 'Limited Recourse Borrowing Arrangements'. And according to Industry Super Australia, there has been a 200 per cent rise in the last few years.
“What this means,” says Mr Peleg, “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’.
“In addition, RiskWise research has shown off-the-plan (OTP) properties are very popular with SMSFs. This could possibly be because the rules state you can’t buy a residential property to live in, or for any family member to live in, so these OTP dwellings are generally more suited to tenants.
“But many OTPs carry a high level of risk largely due to potential oversupply - leading to squashed property values, high vacancy rates and a cooler market.
“The three major types of risks associated with over-supplied OTP high-risk suburbs are Equity Risk, Cashflow Risk and Settlement Risk and they all add up to potential disaster for the anyone staring retirement in the face. Especially as set-up costs for these types of borrowings can often have higher fees.”
Mr Peleg says when considering buying property through a superannuation fund it is important to consider the loss of income if there is an oversupply in the area and you are unable to find tenants to rent the property.
“Super is the only asset class you can leverage against but using it to buy property is definitely high risk if things go wrong and, frankly, an accident waiting to happen,” he said.
8 April 2018.