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SMSF Investments In Residential Properties – A Mixed Blessing

Data furnished by the Reserve Bank of Australia in September reveals that nearly $18 billion in Self Managed Super Funds (SMSFs) is invested in the residential real estate. This, as a ballpark projection, represents nearly 3.6% of the total SMSF kitty (evaluated at roughly $500 billion).

At the moment, these are not big numbers but trade analysts and experts believe that soon this moderate percentage may spike to as much as 30%.

This news may have bipolar implications. To elaborate, if the SMSF money goes into off the plan or preconstruction phase properties then it could solve the housing puzzle for Australia. On the contrary, if the money is poured into buying existing homes then it could change the demand and supply dynamics drastically, causing a big spike in property prices.

This could be really bad news for First Home buyers who anyway feel themselves marginalised to the shores because of their financial constraints. Also, the change in rules pertaining to government grants is not helping them at all. The introduction of SMSF players (with their low-tax slabs) into the market of “existing homes” could mean that the First Home Buyers are all but blown away.

It’s also a little surprising that the SMSF investors, when they look beyond shares and collectables, only think of residential real estate. After all, there is the commercial and the industrial real estate too. Even odder is this trend because in times of low inflation and low cash rate, commercial real estate offers higher rental yields- it is a well known fact.

The real problem also may creep in when property spruikers in big number start eating into the SMSF investment pie. It is worth noting that SMSF is a financial instrument and nobody without an Australian Financial Services License can recommend or advise on this product.

This fact notwithstanding, many real estate agents are advising SMSF holders to invest in one property or the other without necessary knowledge to back up their recommendations.

Also, sometimes, they are paying commissions to financial advisors (the black apple types) to approve a given property which they are lobbying for in front of an SMSF client.

In a smart step to curb malpractice, the Mortgage and Finance Association of Australia (MFAA) has warned property agents to go through a training programme and earn their accreditation before advising on SMSF investment.

Do you think that the first home buyers will be a certain casualty of SMSF investments in residential real estate?