(03) 9020 2905PORTFOLIO POINT: The great super fund property opportunity has yet to materialise. But falling property prices and maturing infrastructure could get super funds and gearing dancing soon.
When the twin “super tsunamis” were unleashed in 2007, it was accepted that it would be some time before their full impact would be seen.
Simpler Super made a fairly grand entrance, care of the attention grabbing $1 million contribution limit and the tax-free super for the over-60s.
The second tsunami was the completely unexpected instalment gearing in super changes that came just months later in September 2007. Those changes have had little to no real impact so far. Yes, some super funds have been able to borrow to gear into property (and any other legal investments). But the much anticipated great rush hasn’t occurred yet.
If anything, gearing in super has most likely dwindled since the laws were changed. In the second half of last year, the traditional self-funding instalment warrants – which have been available since early the previous decade – were axed. A new breed of SFI warrants is being launched (see my February 25 article).
With the benefit of hindsight, we can now see that the timing of the gearing provisions coincided roughly with the top of both property and equity markets. What no-one really appreciated in late September 2007 was how overpriced growth asset markets were. Shares and property, but particularly the former, have endured pain that has made the decision to sit on the sidelines that much easier. (Property is further from being over than shares, I believe.)
But at some stage, potentially fairly soon, trustees will stop sitting on the sidelines. They will want to make some long-term investment decisions, with the use of the new laws, to get to where they want to be.
Since I did a wrap-up of property lending in super a little over a year ago (Jamie: Link to Feb 25, 2008, piece, please), the earth has moved. In fact, there have been a couple of earthquakes. And each of them will – increasingly – make the geared property option in super more appealing.
Some of these changes are general changes that apply to all property investment. Some are limited to super.
- Interest rates have slumped
In late February last year, interest rates were near cyclical highs. The Reserve Bank rate had just been lifted by 0.25% to 7%. They were to lift it to 7.25% the following month. More importantly, the banks were acting on their own. The banks were to lift in excess of the RBA increase in March and they went again on their own in the middle of the year also.
Since, we’ve had a net 375 basis points cut from the RBA’s cash rate, which is now sitting at 3.25%. Most of those cuts have been pass on by the banks, but not all.
- Lender margins on SMSF loans
Because the September 2007 changes were so unexpected, there were less than a handful of product providers in the market early last year. As a result of the lack of competition, the margins being charged on the loans were astronomical. They were literally able to charge interest rates 3-4 percentage points above home loan rates.
One of the most “nimble” back then, niche provider Calliva, was forced out of the market when their European bankers pulled the financing (which was already a long way from being what Calliva had sought). Bigger names, including Macquarie Bank and Babcock & Brown, came to the party a few months later. But most of the financing offers available a year ago were backed by developers to buy their developed properties. Being able to pick a property, organise the financing and purchase, wasn’t really an option.
Interest rate margins being charged by the lenders have fallen considerably. In many cases, the loan rates now are only marginally above standard variable home loan rates.
- Strength of SMSF loan providers
Being able to deal with reputable lenders has always been important. But those who watched the likes of Opes Prime and Lift Capital would have been understandably nervous dealing with some of the small, recently started, lenders.
No need for such concerns today. While the industry is still in its infancy, you can at least compare products now from most of the majors. Commonwealth Bank will lend up to 80%, but has conditions and higher rates attached to that. National Australia Bank will do a 70% loan, with a cheaper interest rate. ANZ has yet to come to the party, while Westpac/St George have an offer out there as well.
That’s not to say that there is anything wrong with the smaller providers. But there is significantly more comfort dealing with banks that have S&P ratings and reputations that requires ongoing maintenance (witness ANZ’s settlement over Opes Prime for an example).
- Property prices
Property prices have started falling around the country. In some suburbs in many capital cities, it is entirely possible that you could pick up the same property that you would have bought a year ago for a discount of between 5% and 20%. Depending on who you listen to, this is either bargain basement territory, or it’s perhaps half-way through a property correction.
Plenty of Eureka Report’s experts have made their own predictions. For what it’s worth, here’s mine. Split the property market into top third, middle third and bottom third. From the top of the market (late 2007 or early 2008):
- The top third of properties will fall by around 25-35%. This is property priced at roughly $750,000 and above. This is where margin calls and lines of credit have done the most damage. It is the third and fourth home buyer market. It is where too many people have watched their super funds fall from $1 million to $700,000 (and that might be being generous), which is causing considerable retirement angst. Plenty of forced property sales here, with no compelling reason to buy. Classic deflation.
- The middle third will fall about 15-25%. Approximately $380,000 to $750,000. This is the second and third home buyer market. Yes, they’ve suffered some margin calls, but it’s not nearly as bad as the upper echelon. They are younger, so access to depressed super is not so big an issue. No great buying support, but not as much pressure to cash up.
- The bottom third, or below $380,000, will fall around 10-15%. This is the first home buyer market. If they’ve lost money on the share market, it is largely going to be the AMP and CBA shares they bought that have fallen in value from $20,000 to $12,000. They were always going to sit in the bottom drawer anyway. There are huge government incentives for first home buyers to buy (and the Government WILL extend that one beyond June 30, of that I’m as confident as I could possibly be).
How long property takes to bottom out from here is the tough question. Not in this half. Possibly in the second half of this year. But it’s quite possible the correction will extend beyond this year.
For trustees with an interest in the area, there’s still time to watch and learn. Or bargain hunt. Either way, continuing to keep abreast of both the property market and the lending rules is important.
Bruce Brammall is the principal financial adviser with Castellan Financial Consulting and author of Debt Man Walking. He is also an author of The Power of Property (2006) and Investing in Real Estate For Dummies (2008).