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CommSec has labelled physical residential property as a “hit and miss” investment and has discouraged SMSFs with less than $4 million from investing in the asset class.
Eric Blewitt, CommSec's general manager of adviser services, said that by investing in physical residential property, the average SMSF worth around $1 million is defying the rules or theories of proper portfolio diversification and exposing the fund to unnecessary risk.
Mr Blewitt said limiting the exposure of an SMSF to a property to between 10 per cent and 15 per cent would ensure the fund has sensible diversification.
“If you’re looking at an average SMSF, which has just over $1 million, and you’re looking at a 10 or 20 per cent allocation, you’re only looking at $100,000 to $200,000 worth of property,” he said.
“It’s not until you get to that $4 million to $5 million balance that you can go buy something at $500,000, or maybe up to a $1 million, and still have an allocation at a reasonable proportion.”
The performance of residential property markets in different capital cities has also been very diverse, Mr Blewitt warned.
“Looking over the past year, Sydney was around 14.5 per cent, whereas Brisbane was 2.5 per cent and Perth was pretty much flat; so for an SMSF purchasing a property as a single asset, it is pretty much pot luck depending on where you purchased it,” he said.
“Property as far as SMSFs are concerned, specifically residential, is pretty hit and miss depending on where you happen to have purchased, and therein lies the problem with [investing] in an illiquid asset; so unless it’s only a small portion of a balanced portfolio, it’s pretty challenging."
The yields from residential property are only expected to reach around 3.5 per cent while capital growth is only expected to be around 5 per cent, he added.
“Your risk premium over and above cash isn't too much – OK, you might have some capital growth but, looking at the last year, looking at the diametrically opposed growths and reductions in the country – it’s pretty hard to pick,” he said.
“It’s a challenge because you've not only got to pick the right area, you've got to pick the right apartment or the right house. We’re coming into spring carnival season – you might as well see what horse you’re going to back.”
[Related: Government urged to use super to address housing affordability]
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