Whether a piece of real estate is an appropriate investment for an SMSF much depends on the circumstances of the fund and its members, whether the property is a worthwhile investment and, critically, a fund’s mandatory investment strategy. 
Further, SMSF trustees should only accept investment advice from the holder of an Australian financial services licence – not from a property spruiker.
As Smart Investing discussed early last month in Your SMSF’s navigator and anchor, SMSF trustees are required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund.
These circumstances include a fund’s objectives and investment policy to achieve those objectives, investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits.
Although fund trustees must consider diversification when preparing an investment strategy, they are not legally required to diversify their portfolios.
SMSF trustees who are thinking about acquiring a direct property investment for their fund should consider taking advice from a licensed adviser such as an SMSF specialist about its suitability as an investment. Appropriate advice can deal with such concerns as whether a single high-cost direct property investment will dominate a fund’s portfolio, perhaps making diversification for risk and return difficult.
And SMSF trustees do not want to be compelled to sell a direct property investment at a time not of their own choosing in order to pay member retirement or death benefits. Again, much comes down to the circumstances of an SMSF and of its members – including the members’ investments held inside and outside super.
One of the factors that appeals to property spruikers is that SMSFs can borrow to invest using limited recourse loans. However, in practice, the average level of gearing in SMSFs is relatively small.
The tax office’s recently-published Self-managed super fund statistical report –December 2015 indicates that investments subject to limited recourse loans accounted for 3.1 per cent of the total value of SMSF assets by the end of December. This was up from 1.85 per cent two years earlier. (The vast majority of SMSF geared assets are direct property.)
And the same tax office statistics show that SMSFs held 16.5 per cent of their assets or $97.8 billion in ungeared direct property in December last year – compared to $18.7 billion in geared assets (the vast majority of geared assets being property).
Such statistics help put the SMSF borrowing issue into perspective.
Please contact us on 0415 306 000 if you would like o discuss.
Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard Australia.
Reproduced with permission of Vanguard Investments Australia Ltd
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