Does property investment align with your SMSF strategy?
Investing in property through your self-managed super fund (SMSF) can be a highly effective way to build your retirement savings. And with property prices forecast to grow this year at their fastest pace in decades, many SMSFs are currently researching how best to participate.
There are several options available including direct investments, such as buying a house or commercial property, and indirect property investments like property trusts and mortgage funds.
As with any SMSF investment, you should carefully consider your fund’s investment strategy before deciding whether the direct or indirect approach best meets your fund’s needs.
A sound SMSF investment strategy is a good idea, it’s your legal obligation as a trustee. Within it you should consider matters such as diversification and liquidity. These are especially relevant when it comes to making direct property investments through your SMSF.
Diversification means investing across a range of different assets and asset classes with different risk profiles. It is a simple and effective way of reducing risk within an investment portfolio. Too little diversification can lead to concentration risk, or ‘putting all your eggs in one basket’.
Liquidity is a measure of how easily an SMSF’s assets can be converted to cash. This is important because it affects the fund’s ability to pay benefits when its members retire, and to cover its expenses.
When an illiquid asset such as a rental property is an SMSF’s principal asset then making large payments at short notice can be problematic. And liquidity problems can be aggravated when a fund uses leverage such as a limited recourse borrowing arrangement to purchase property and a member has no other income producing investments at the time that, combined with member contributions could service the loan repayments.
Costs of direct property add up
There is something reassuring for investors about the tangible nature of bricks-and-mortar property, and the tax benefits of buying it through your SMSF can be significant. And adding to property’s allure is the current strength in property prices, which are already at record highs and now forecast to increase by double digits across the remainder of 2021.
However, as the Australian Securities and Investments Commission's (ASIC's) Moneysmart website warns, becoming a landlord can be costly and time-consuming.
Expenses include high entry and exit costs such as stamp duty, legal fees and real estate agent's fees; and ongoing bills including insurance, accounting & management fees, interest, council rates & strata fees, maintenance & renovations, and vacancies during which the property earns no income.
And there are some very specific restrictions that apply to owning and renting property in your SMSF.
Investing in property without buying one
Indirect property investment is a way to participate in Australia’s booming property market that can make it easier for SMSFs to avoid diversification and liquidity concerns and doesn’t come with the headaches of a landlord’s responsibilities. Some options include:
- A-REITs - Listed real estate trusts provide exposure to property assets such as office towers and shopping malls. And because they are listed on the Australian Securities Exchange (ASX), you can buy or sell some or all of your holdings at any time. Australian real estate investment trusts (A-REITs) can provide diversity and liquidity, but are their value is also impacted by the movement of the stock market.
- ETFs – Exchange-traded funds (ETFs) that focus on property can also be traded on the ASX. They are a low-cost way to invest across several listed property securities at once, including property companies and collections of A-REITs. They can also provide diversity and liquidity, but their value may be impacted by the movement of the stock market depending on the basket of assets they invest in.
- Unlisted property trusts – Professionally managed unlisted property trusts pool investors’ money to buy investment properties. Investors can buy and sell ‘units’ in the trust, which aims to provide a regular income to investors. Unlisted property trusts can provide diversity if they hold multiple assets. Depending on the type of trust, units in the trust may need to be held for several years, so they may or may not have the liquidity your SMSF requires.
- Mortgage trusts – Mortgage trusts (also known as mortgage funds) are another way to invest in the Australian property sector without directly purchasing a house, unit or land. Much as the big banks issue loans to home buyers, mortgage trusts provide a specialist lending service to borrowers such as property developers and generate an income for investors from the interest charged on these loans. They generally aim to provide investors with competitive regular income. Mortgage trusts can provide diversity depending on the number, location and type of loans in their portfolio, and are subject to withdrawal periods outlined in their offer documents.
Trilogy is a leading fund manager that specialises in managing mortgage trusts, property trusts and diversified income funds. If you are looking for a property-based investment option for your SMSF, chat to a member of Trilogy's Investor Relations team today.
As with all investments, there are risks as well as rewards associated with investing in property. A licensed financial adviser can help you better understand the pros and cons of different investment types. We always recommend investors obtain, read and understand the relevant offer document and seek advice from a licensed financial adviser before investing.
This article has been prepared by Trilogy Funds Management and does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy’s products are only available through the relevant PDS issued by Trilogy and available at www.trilogyfunds.com.au. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Investments with Trilogy are not bank deposits and are not government guaranteed.