by Olivia Long

There’s never any shortage of people predicting gloom and doom for the SMSF sector. In their eyes it’s a financial implosion just waiting to happen. No matter the lack of evidence to support their doomsday scenarios; they more than compensate with hyperbole. Nowhere is this more apparent than the issue of SMSFs investing in residential property.

On this front there has been no shortage of concerns about residential property as an asset class. But two stand out. They are:

  • Being potentially responsible for a property boom (a Reserve Bank quarterly report last year added fuel to this fire), with the side effect of making market entry for first home buyers all that more difficult;
  • The spruiking of self-managed super funds to unwary investors as a vehicle to enter the property market.

The first issue is simply not supported by the facts. The latest ATO figures have property investment at $80 billion or about 15% of all SMSF assets. However, it’s important to note that commercial property comprises about 75% of these property assets, leaving residential assets at slightly less than $20 billion.

It sounds a big number. Until, that is, it’s measured against the total value of the Australian housing market which, on the latest Reserve Bank numbers, is worth $4.75 trillion. That’s right, $4.75 trillion. $20 billion of $4.75 trillion is less than 0.5% of the market, making suggestions that SMSFs could be the cause of a property bubble simply risible. No, the cause of any property bubble is far more likely to be linked to negative gearing or a lack of supply, whether it be for established housing or land for new housing.

Of more concern to me is the second issue of spruiking. I have no doubt there are the unscrupulous preying on the unwary. Aside from the timely warnings from the regulators, you only have to see the number of “property seminars” still being promoted to realise SMSF trustees (or, perhaps more accurately, potential SMSF trustees) are being targeted.

To what extent and to what effect is difficult to ascertain. What we do know is that according to the latest Australian Taxation Office (ATO) figures to December 2013, SMSFs have $2.62 billion invested via the use of limited recourse borrowing arrangements (LRBAs). [Remember, too, LBRAs can be used to acquire any asset – not just property.]

That number makes LRBAs less than 1% of all SMSF assets, so, again, it seems to me hard to mount the argument that trustees are piling into unsustainable debt.

But it’s not just the numbers that give me comfort. Have a look at the investment returns for SMSFs over the past decade and there is clear trend; when markets are strong, SMSFs lag their APRA-regulated counterparts; but when markets are struggling, they outperform, suggesting that trustees are conservative investors.

That’s hardly surprising. It’s their own retirement savings they are managing – not an abstract member as is the case with APRA funds. It is little wonder government-guaranteed cash holdings in SMSFs are still around the 30% mark, nearly six years post the Global Financial Crisis.

At times I suspect SMSF trustees are too cautious, especially in the accumulation phase. The lack of international shares and bonds in their portfolios are issues that need to be addressed.

That said, the conservative approach to investment reassures me that few trustees are going to tempted by the siren call of the property spruikers.