As banks turn off the tap, SMSF trustee focus shifts to other property options

Promoted by Charter Hall Direct.News that some leading banks

consisting of Westpac and St. George, have actually suspended providing to SMSFs for home purchases has actually thrust alternative methods to access quality home investments into the spotlight.

This begins the top of 2 other essential advancements in this space.

First, substantially tighter bank credit.

In current months finance for any kind of residential financial investment property has actually become especially more difficult as the banks minimize interest-only lending at the wish of the regulator APRA, lenders adopt lower LVRs (loan to appraisal ratios) and more economic development in financial investment property financing, typically, kicks in. Not just has it become harder to secure finance, however when it is gotten the cost is usually more significant for the borrower.

Second is adverse residential cost movements.

Unsurprisingly the long-mooted trend in home costs has shown up in the key markets of Sydney and Melbourne with cost reductions being recorded in a lot of important locations with consensus projections for new modest falls. Leading home research company CoreLogic kept in mind in their August 2018 report:

” Last month (July 2018) we saw our national index move through the tenth straight month of falling home values. Considering that peak in September last year, the Australian real estate market has actually taped a cumulative 1.9% fall in value; a relatively moderate recession to date, particularly when you consider that worths remain 31% higher than they were five years ago.”

CoreLogic reports fall in Melbourne domestic costs were the best, at 1.8% for the last three months to the end of July, while Sydney’s were down 1.3% for the same period.

Property is an essential aspect of lots of SMSF/ retirement portfolios.

The significant institutional financiers such

as the large extremely funds and insurer typically allocate in between 8% to 15% of their portfolios to the modern home.

It’s typically agreed the two most typical types of property investments made by trustees and members of SMSFs are business facilities relating to a trustee or member’s company, or previous business, and property investment systems.

Few SMSFs ever buy such financial investments with 100% cash. There is nearly always a smaller or bigger element of tailoring, that is, loaning.

The drying up of bank finance will trigger many trustees to look in other places to satisfy their allotment to property in their fund.

Among the most logical and accessible avenues for SMSF property investing in this brand-new landscape is investment residential or commercial property funds. These can either be direct (i.e., unlisted) residential or commercial property funds or ASX listed funds, generally described as AREITs (Australian Real Estate Investment Trusts).

Both have a substantial number of benefits. A critical one in this loaning environment is that both financial investments permit trustees the benefits of borrowing ‘built-in,’ as both direct property funds and AREITs usually have tailoring ratios of between 25% to 45%.

As a policy, the funds managed by my firm, Charter Hall, also believe this to be a prudent level of borrowing for a fund with local equity.

The higher the borrowing the potentially higher the returns, however also the more significant the threat.

In-home declines highly leveraged funds can have their equity, financiers’ money that is, dramatically reduced.

A 2nd destination is that the focus of both direct home funds and AREITs is not house however investment grade commercial property, which is the investment property sector of the option of big institutional financiers and federal government pension funds such as the Future Fund. The net returns from residential property financial investment, regardless of the headings of many daily papers, are too based on capital growth and too unpredictable. Once transaction costs and holding costs are taken into account (stamp duty, legal, repairs, and maintenance, land tax, rates, and sales commission, etc) the average annual income yield of residential investment can be in the low single digits and often negative, with the whole investment being a capital gains play. This is all well and good in a rising residential property market but a less than attractive proposition in a stagnant or falling market.

Investment-grade direct property

funds that I oversee at Charter Hall have a current target of around a 9% pa total return – income and capital growth – and have a current prospective running income yield from 5.8% pa: the award-winning Charter Hall Direct Office Fund, which focuses on prime CBD office buildings; through to 6.2% pa: the Charter Hall Direct Industrial Fund No. 4 which invests in industrial and logistic related commercial property tenanted by major Australian businesses; to 6.7% pa: the Charter Hall Direct Diversified Consumer Staples Fund which invests in commercial properties tenanted by producers and distributors of consumer staples goods; and 6.9% pa: the Charter Hall Direct PFA Fund which invests in predominantly government tenanted office buildings in Australian capital cities.

Charter Hall also has a range of AREITs, which are easily accessed via the ASX, with attractive returns. Unlike our direct property funds, whose values reflect the underlying net tangible assets (NTA) of the fund, AREITs may trade at above or below NTA depending on fluctuations in the level of the stock market and specific investor sentiment. AREITs have the advantage of being entirely liquid – one call to your broker or click on your mouse, and your investment can be realized, while direct property funds usually have an investment term of around 5 years and are designed for investing from ones ‘non-cash bucket’. Either way, the drying-up of bank lending to SMSFs can be viewed as an opportunity to look beyond residential property to secure attractive returns from investment grade commercial property, rather than a cause for hand-wringing.

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