In 2013, self-managed superannuation funds directly held approximately $70 billion of real property, with residential property accounting for $15.5 billion of the total. These numbers hardly exhaust the investment potential of SMSFs, which hold roughly $439 billion.
Property companies have recorded as much as a 90 per cent increase in sales in the 2014 financial year with demand from the SMSF sector playing a key role.
How then should real estate agents guide property buyers who are investing SMSF funds? And how should a seller’s agent position a property to appeal to the SMSF buyer?
The real estate professional must walk a fine line, being knowledgeable about the legal environment, but careful to offer neither legal nor investment advice. With that in mind, real estate agents should be alert and prepared to deal with three issues when dealing with SMSF property transactions.
Since their inception, SMSFs have invested in real property as part of a balanced portfolio, at least in part because of generous tax treatment. Rent from the property investment will be taxed at 15 per cent and capital gains from selling the property can be as low as 10% for individuals saving for retirement. For those simultaneously drawing a pension from an SMSF any rent and capital gains can be tax-free.
In 2007, the law was amended to permit SMSFs to borrow funds to purchase investments. This change, in particular, seems to have ignited interest in real estate. It is essential the property be held for investment in order to benefit from this change.
With respect to residences, that means that neither the beneficiary of the SMSF nor any relative may live in or vacation in the home. Nor may the residence be purchased from the beneficiary or relative. In contrast, a business owned by the SMSF owner may occupy commercial property.
During the global financial crisis, many investors fled to cash, but some years out now, the real property market is beginning to be attractive once again.
Will the market shift away from owner-occupied properties?
A flood of investment money might suggest a shift away from owner-occupied properties. Over the long run, a shift toward rental property is conceivable. It may be a long-term trend to watch because it could alter the real estate market in fundamental ways, but there is probably no need to plan for it in the short term.
For the immediate future, the real estate agent representing a buyer should ensure that the properties shown to the client are income-producing and that the discussion focuses on investment potential.
Could SMSF investments fund a real estate bubble?
The possibility of a real estate bubble emerging as a result of SMSF investment has been both discussed and dismissed by various commentators, but your client may be aware of the debate.
Even in times of feverish speculation, however, well-priced properties that produce a reliable, if not spectacular, income continue to do well. That should be both the buyer’s and seller’s focus.
Is the buyer well advised?
The extent to which a buyer is well advised can be a delicate issue because most real estate agents are not professionally permitted to offer legal, financial or accounting advice.
Nonetheless, you may work closely with buyers and develop a sense that some are not adequately supported in these areas. You may be able to provide great service and build a long-term relationship with a client through referrals to outside professionals. This is something seller’s agents need to be aware of, too, since a misunderstood transaction is more likely to fall apart.
It labours the obvious to note that SMSF property investment, driven by accountancy and financial advisory firms, will have a massive influence in the property market in the coming years.
Real estate professionals should be aware of the legal and technical aspects of SMSF investment and should be prepared to assist clients in the purchase or sale of appropriate properties.