18 November 2013

Why SMSFs are important

The RBA's September Financial Stability Review made the entirely uncontroversial (indeed, almost inarguable!) statement that the self managed superannuation fund (“SMSF”) sector, now that it is permitted to borrow for investment, is a new vehicle for potentially speculative demand for property. On the back of this statement, some commentators have claimed SMSFs would soon drive property prices into the stratosphere. ASIC has also weighed into the debate about SMSFs and their exposure to property which is creating a national perception that SMSFs are recklessly investing into property and this will cause a housing market supply and price crisis.

However, recently released figures from the SMSF regulator the ATO just don't bear out such fears. According to the ATO as at 30 June 2013, statistics indicate that of the $495 billion SMSF sector, only $75 billion (15%) was invested in property assets, of which just $17 billion or 3.5% was residential. Commercial property holdings are actually more common in SMSFs because many small business owners hold their business premises in their SMSF. Moreover total property holdings of the SMSF sector at 15.15% of total funds, almost precisely mirror the standard 15% allocation to property in the balanced option of a large superannuation fund!

Borrowing has been permitted by SMSFs for six years, yet geared assets in SMSFs are just 0.48% of total assets. This is hardly a tsunami of demand by anyone's standards and whilst there's no doubt that regulators may need to keep a close eye on the sector, to ensure SMSF members are not being talked into inappropriate investment by high powered salespeople charging large commissions as was the case in Storm and Westpoint both of whom collapsed, media claims that the sector is rife with property leverage and speculation are clearly inaccurate and do not hold water.

As the graph below shows, the growth of commercial and residential property holdings in SMSFs is not out of proportion to the growth in total assets. Indeed, far from affecting house prices, such growth as there is seems largely directed to the commercial property sector.

Graph 1
source: the Dunn Thing

Why SMSFs are important to the Australian economy?

The government first allowed SMSFs to borrow to buy property in September 2007 and then the global financial crisis hit. It has taken several years for product providers to build “limited recourse” products tailored to SMSFs. SMSFs now have circa $507 billion in assets but as indicated the amount invested in housing right now is tiny: only $17.5 billion, or 3.5 per cent. About $314 billion of SMSF money is spread evenly across cash and equities making SMSF portfolios look like larger superfunds and not reckless self interested tax evaders as they have often been portrayed.

The formation rate (new SMSF registrations at the ATO) has been exploding over the past number of years with over 500,000 SMSFs now registered and overwhelmingly being formed by older people (45 years and up) in preparation for their retirement. This appears to reflect a level of quite deep dissatisfaction with superannuation professionals and an understandable want to control their own money. SMSF individuals also do so in the knowledge that their “nest egg” is no longer under the Treasurer's discretion to step in and “in the national interest” replenish or make good investment losses. This means SMSFs are ‘truly independent of system’ and take on their investment risk seriously because it is their own money when they invest it.

SMSFs and the housing bubble debate

SMSFs could, therefore, possibly reshape the housing market in both positive and negative ways. Some surveys suggest SMSFs want to commit 30 per cent of their savings to housing, which implies $152 billion for investment.

The key question is whether SMSFs use their cash ballast as deposits for leveraged housing investments or invest in other assets.

Graph 2

Deducting current holdings indicates about $135 billion of unmet housing demand. That’s a huge number and represents 70 per cent of the total value of home sales over the last year. So what if SMSFs use the $135 billion in latent cash available for housing as the 30 per cent equity alongside a 70 per cent home loan? This means they would actually be buying $449 billion of total housing (or 2.4 times the past year’s worth of sales). Total current SMSF assets would jump 59 per cent from $507 billion to $804 billion. The portfolio weight to cash and equities would fall from 62 per cent to 40 per cent while real estate’s share would rise to about 56 per cent. The whole debate about whether SMSFs influence housing prices adversely revolves around where all this SMSF purchasing power ends up. If it flows into new housing supply, it could help solve how we are going to accommodate 15 million new residents over the next 35 years. If, on the other hand, it goes mostly into buying existing homes, it could fuel current deep supply imbalances. The potential (not actual yet) impact of SMSFs on Australia’s banking and housing markets is potentially bigger than most people realise.

Today, most credit providers offer SMSFs the ability to borrow up to 80 per cent of a property’s value at standard variable rates with 30-year terms. Several also allow borrowers to repay interest only – not any principal – on the loan for up to 15 years. Some SMSF savers will have no direct housing investments, but others will own a home. Surveys suggest that almost 30 per cent of families think the wisest place for savings is housing. As an asset class, housing has three advantages: familiarity; the availability of cheaper leverage for longer terms than any other investment; and the perception of very low risk.

A huge number

The above analysis gives us a broad feel for current SMSF housing demand, which could range from $150 billion to $450 billion. It is static and assumes no further growth in SMSF assets. Of course, the pool of SMSF money will expand as a function of super contributions and as SMSFs take more market share away from traditional funds. It is, for example, conceivable that the SMSF share of the total super market will rise to closer to half as more savers take control of their financial futures. If they decide to leverage up their cash to buy housing, the relative size of SMSFs would increase further.

Graph 3


It’s a really interesting debate and we include our pictorial infographic on the SMSF sector for your use.

La Trobe Financial is proud to have recently introduced an SMSF loan Product with a market rate of 5.60% pa ( comparison rate 5.71%) for brokers to consider this very large and growing market.

Click here for our flyer on why SMSFs are important to Australia



... That's Lending

Best regards,
Paul Wells, Chief Investment Officer
La Trobe Financial Asset Origination & Credit Division



La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 123 staff and has managed over AUD$10Billion covering over 100,000 investment grade assets since inception in 1952.

Copyright 2013 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

The following awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund and may be viewed on our website

Ratings And Awards
Click to share

> Loan Products
> Partner Portal
> Subscribe Free


Paul Wells
Snr Vice President
Chief Investment Officer

(03) 8610 2802

SALES TEAM
Senior Manager's Client Partnership (SCMP)
Daryl
Daryl Hill
0408 566 524
Vice President
Head of Major Clients
Craig
Craig Robertson
0447 599 664
Head of Sales
– Credit
Sally
Sally Humprhis
Exec. Head of Institutional Sales
0448 404 413
Suzanne
Suzanne Hemsworth
SMCP - NSW/ACT
0421 029 691

Sam Deeby
SMCP - NSW
0419 114 790

Janelle
Janelle Barnes
SMCP - QLD/NT
0409 435 559

Nicole
Nicole Waugh
SMCP - QLD/NT
0438 637 490

Nicole
Robyn Eacott
SMCP - QLD
0459 056 760

Megan
Megan Pfab
SMCP - VIC
0408 126 664


Michael Watson
SMCP - VIC
0409 419 039

Paul
Paul Biddle
SMCP - WA
0421 029 687

David
David Sturtevant
SMCP - VIC
0414 451 031



Michelle Bannister
SMCP - VIC
0408 566 518

 
Credit Approval
Cory
Cory Bannister
03 5177 1606
Head of Product
– Credit
Steve
Steve Lawrence
03 8610 2807
Head of Underwriting
– Credit
Ryan
Ryan Harkness
03 8610 2856
Head of Debt
Capital Markets

Justin Coates
03 8610 2882
Head of Operations
– Credit
Luke
Luke Jones
Credit Manager
03 8610 2816
Jimmy
Jimmy Mc Grath
Credit Analyst
03 8610 2846
Melissa
Louise Lindeman
Credit Analyst
03 8610 2827
Gerald
Gerald Edwards
Credit Analyst
03 8610 2879
Linda
Linda Gorski
Asset Retention Manager
03 8610 2817
Bianca
Bianca Williams
Credit Analyst
03 8610 2877
Daniel
Daniel Sudjaya
Credit Analyst
03 8610 2880
Garry
Garry Skelton
Credit Analyst
03 8610 2832
Kelly
Kelly Tierney
Asset Retention
03 8610 2822
Laura
Laura Henderson
Asset Retention
03 8610 2836
Loan Closer Team
Leanne
Leanne Seymour
Loan Closer Unit Manager
03 8610 2808
Marrisa
Marrisa Hoffman
Senior Loan Closer Unit
03 8610 2824
Sakshi
Sakshi Goyal
Loan Closer Unit
03 8610 2826
 
 
Newsletter Footer


Please Note: This publication is for accredited broker use only and is not for distribution to consumers.

All loan applications are fully assessed to ensure the loan is not unsuitable and that we meet our responsible lending obligations in accordance with our usual underwriting requirements. All features and interest rates are current as at the date of publication. Conditions, fees and charges apply. This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website. La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you. The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.

La Trobe Financial Services Pty Limited - Australian Credit Licence Number: 392385
La Trobe Financial Asset Management Limited - Australian Credit Licence Number: 222213

Terms, conditions, fees, charges and La Trobe Financial lending criteria apply.

1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit www.latrobefinancial.com.au The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit www.latrobefinancial.com.au This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
3. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at www.lipperweb.com. Thomson Reuters Copyright, All Rights Reserved.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.