Bruce Brammall, 18 July, 2018, Eureka Report
SUMMARY: Property and gearing are on the nose, but it doesn’t mean good property isn’t the right solution for savvy investors.
When it comes to superannuation, we’re all aware now that when the tide turns, it can happen quickly.
Government decisions to reduce contribution limits are an example. We’ve witnessed this occur on three separate occasions in the last decade.
Westpac’s decision last month to withdraw from lending to self-managed super funds this week is, of its own, barely noteworthy.
But it probably signals another tide turning. A tide that, for super funds, seems to ebb more often than it flows.
Banks are under pressure, most notably from the Royal Commission. The suggestion is that Westpac (and presumably competitors that might follow) are exiting because the return-on-equity for the banks from this line of product isn’t high enough.
More likely, however, is the pressure of questionable lending standards that are now creating concerns about the standards of the loan portfolio.
And it might have something to do with the findings of ASIC’s report into the advice provided around SMSFs and property gearing, announced in recent weeks.
The survey was conducted of 250 funds that set up their SMSFs in August 2016 and received advice.
The headlines that danced out of ASIC’s report were damning. It found that more than 90% of all advice provided to trustees around the setting up of SMSFs to purchase property was not legally compliant.
Importantly, that doesn’t mean that all of these clients were offered bad advice and would be worse off as a result. It means that it didn’t meet regulatory standards.
ASIC found around 10% of those SMSF members were likely to be dramatically worse off at retirement as a result of the advice. A further 19% of SMSFs were at an increased risk of suffering financial detriment. There were more that they weren’t sure enough to make a call on.
Those likely to have been worse off were those with small super balances to start with. Also, those where property was the only asset class invested in.
Another overriding factor was age – those with smaller balances and older clients are, obviously, going to find it more difficult to make a geared property work, unless there is an underlying booming property market.
As I’ve said for years, the single biggest threat to a newby SMSF is a property developer, and the hangers-on that come with them.
The concern is the “one-stop shop” nature of what happens at these seminars, or introductions. Desperate wannabe property investors are often persuaded that the only way they can purchase their dream of owning an investment property is by husband and wife combining their super into a SMSF for the deposit on a property. From there, related parties (usually) will help set up the complicated structures required for SMSF geared property investments, the loan and the introduction to the vendor – the property developer.
(And even worse, as ASIC points out, the sales team has often already sold them a property in their personal names and then goes for the double-dip by selling them a second property inside a new SMSF they help set up.)
The whole charade is almost always simply a front for the developer (or property sales force) to sell the property, with the added bonus that related parties get to clip the ticket on the advice and the mortgage. The real money is made, however, by the sale of the property.
ASIC’s report backs up my concerns – and promises action.
“We are particularly concerned about the operation of one-stop shops because of conflicts of interest and, together with the ATO, we will have an increased focus on property one-stop shops in the future. This will include building and sharing data and intelligence, and ASIC taking enforcement action when we see unscrupulous behaviour.”
While ASIC has acted on these outfits in the past – most notably the Park Trent group in 2014 – I’d argue that not enough was done. Hopefully, ASIC’s actions to monitor these groups become more laser focussed and more action is taken, sooner rather than later.
Property investment is a time-tested method for creating wealth in Australia. Not in every investment cycle, but over time, it has largely proven a winner.
But there is such a thing as dud property. And, I argue strongly, that most of it is pretty easy to avoid. Medium and high density property, properties located near the “next big thing” in resources-based towns, anything in regional and rural areas. Virtually anything without the valuable commodity known as the “scarcity of land”. And, of course, anything sold by a developer.
SMSFs can, potentially, be a great vehicle for creating wealth via property.
But potential SMSF suitors have always had to battle unscrupulous advice/agent/developer outfits.
Westpac’s decision to pull out of the industry may well be temporary – unless David Murray’s Financial Systems Inquiry recommendation to scrap limited recourse borrowing arrangements is adopted. I still believe that would be a mistake.
Banks know what makes a good property investment and what doesn’t. The lead, by several LRBA lenders, to restrict lending to what they saw as risky investments, is probably a better option than pulling out of the market completely.
And plenty of lenders refused to lend to new properties, properties under a certain size, or properties in extensive postcodes that they saw to be a risk.
Without legislative banning, however, LRBA lending is unlikely to die. Even if the major lenders withdraw, there will still be smaller, more nimble lenders who will provide finance in this space.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.