Clients at risk in property sector

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Expectations of rising property prices and 54-year low interest rates are among incentives for SMSFs to invest in properties, including commercial – which could come with a higher risk. Gunilla Haglundh reports:

Recent figures from the ATO indicate that SMSF direct investment in property has risen by 62% to $66.6 billion over a four-year period.

This has prompted ASIC to express warnings that it does not want SMSFs to “become the vehicle of choice for property spruikers”.

“I’ve noticed that over the last 12 months I’ve received more inquiries from real estate agents asking if we have clients who are ready to invest in a block of units,” said Christian Beltrame, financial planner at BKM Financial Services.

It’s not unheard of for investors to buy an apartment at an auction on a Saturday, and then contact their accountant on Monday, saying they want to set up an SMSF.

“I’m not really concerned about the type of property, rather, more concerned about diversification and borrowing beyond their means. Diversity, liquidity and investment risk has to be discussed by the trustees,” said Beltrame.

Brent McCartney, partner at DFK Benjamin King Money, says this sort of behaviour is “far from ideal”.

“It’s crucial to talk to an accountant about tax and structuring and a financial planner about cash flow, investment risks, diversification and estate planning.”

It is generally considered that residential properties are easier to rent out than commercial properties, therefore those investments could come with a higher risk.

Often the fund buys the commercial property where the trustee has their business, so the business pays market rent to their SMSF. The fund then pays concessional superannuation tax on the rent, but is able to claim that back through its normal tax deduction. This is also a good estate planning tool.

However, if an SMSF is not able to rent out a property for some reason and depends on the rent to pay the mortgage, it can come under financial stress.

“It’s important as well to know that the SMSF can only initially borrow money to purchase the property and not to substantially improve it,” said McCartney.

Above all when considering borrowing to acquire property, consideration of all of the clients circumstances should be undertaken as it may be more tax effective strategy outside superannuation, in their own personal name.

If the interest rate came down further in August, it’s reasonable to assume that ASIC will reiterate their warning and demand that the SMSF sector of Australia follow its compulsory investment strategies. There is however, no superannuation law that can forbid a fund to invest in a high-cost or a high-risk property.

More stories:

QE Tapering: What it means for you

SMSF property spruikers at it again

Advisers vs Trustees: Who's got it right?

  • Wayne Slager, Real Property Advice on 23/07/2013 12:37:41 PM

    Thanks Innocent Observer. I'm sure we share the same hope for honesty and integrity but diverge on the mechanism for delivery. Again, the proposal is regulation. Good luck with that. I return to my original call of Caveat Emptor.

    I also accept there's currently too few property professionals with the necessary client focus, capacity and aligned business model to deliver the service and outcomes you so rightly champion. I'm encouraged you've actively looked and I'm pleased to say that there's an embryonic property advice industry offering exactly those qualities and service. I'm sure we both hope more will follow.

  • Innocent Observer on 23/07/2013 12:09:47 PM

    Wayne, thanks for your post.

    I could directly reply to each point you make, but at the heart of it the most important issue is that we want (and should expect) honesty.

    Imposing a requirement that all claims are verifiable and valid, and imposing personal liability on all advisers would go a long way to fixing this problem. It's disheartening to hear real estate salesmen, property "investment advisers" and mortgage brokers still singing from the out-dated, mythical "rules of thumb" that have for so long misrepresented this asset class. There are still some still selling the "prices double every 7 - 10 years" mantra. It's ridiculous.

    Anyone "advising" on property, or claiming to be a professional in that arena, should be expected to know their facts. Ignorance is not an excuse. Yet I can count on one hand the number of these professionals I have met who have the knowledge, have done the research, and possess the integrity to advise in a manner that is professional and in the best interest of the client.

    This isn't about beating up on property or those advising on property. It's about putting front-and-centre the welfare of those who we are employed to help: our clients.

  • Wayne Slager, Real Property Advice on 23/07/2013 10:29:54 AM

    As a regular observer, and sometimes contributor, to many of these post article threads I note that while there are but a few uplifting, forward thinking and professional comments made (I thank Christian for his below) it saddens me that many degenerate into 2 main camps - a general attack on property being wholly bad and/ or a lament that "if only property were regulated like us advisers" there would be more protection for consumers and/ or it would be more 'fair' for us. Evidence also below. I'm not sure such victim driven comments are helpful apart from letting us vent our spleen. Sure, it feels good for a moment but then what?

    Now before your start frantically typing to throw in another grenade let me quickly add that I more than empathise with some of these concerns. I am also vehemently opposed to much of the activity in the property flogging space and the dubious operators within it and have publicly expressed those on many occasions.

    So, let's take a moment to assess the proposed 'fixes'. The main one is regulation. Now if there's one topic than planners get more upset about than property spruiking it's regulation of their industry - mostly because of its costs, imposts and overall lack of effectiveness in stopping poor advice or ethics. I read almost daily of clients losing their savings and advisers (licensed or not) fined, banned, jailed or slapped with an EU. Clearly regulation will never remove fear and greed or change the dark side of human behaviour and yet the cry to regulate property in the same way is touted as the panacea. Really? I'm not so sure but am reminded of the school yard cry, "But Miss, he was worse than me!" in some lame attempt to dilute and redirect the blame. Surely friends, as professionals we can do better than simple finger pointing - even if what we say is based on fact!

    Isn't our individual and collective duty to the consumer and, therefore, to be genuine and equally energetic in not just identifying the problems but finding AND implementing effective solutions? Allow me to tender one.

    That is for the wider advice space (principally accountants and planners but also lenders, mortgage brokers and even business coaches) to actively and thoroughly assist their clients with their inherent property issues rather than either ignore them or deal with them in only a cursory way. Christian rightly highlighted that clients have real property needs (and risks) so isn't it part of the adviser's obligations AND opportunity to provide/ direct the necessary support? I've spoken with scores of advisers and the number who do anything close to this is excruciatingly small. In the main they leave most property issues with the client to manage quite external to their otherwise detailed advice process.

    Is it any wonder then that clients either self medicate and get it wrong (or at best, do it poorly) or find themselves in the hands of the less desirable? I'm reminded of the wisdom of whenever we point the finger there are 3 more pointing back at us. Can we work together on this ... or is the below the best we can do?

  • Christian Beltrame on 23/07/2013 9:14:29 AM

    Dear Innocent Observer

    I can confirm I have not had any queries regarding acquiring NZ property in recent times inside or outside superannuation.

  • Innocent Observer on 23/07/2013 6:59:43 AM

    Aha, Steve, therein lies the problem....

    Property isn't a regulated financial product.

    Conduct that would see us (AFSL holders) lose our license and reputation is regarded as part and parcel of the business of RE spruik.

    I say to any real estate "investment adviser" (goes for anyone associated with the spruik of "investment clubs"): go out an get an AFSL. Back your advice. Make yourself liable, like we are for ensuring that our advice is in the best interest of our clients.

    These property clubs are the worst. They disgust me. It's bad advice wrapped up in incorrect statements of "fact", wrapped into a tight package that causes (in many cases) irreparable damage.

    Speaking of the RE lobby check out this little pearler from our (more socially advanced) neighbours, NZ:

    http://www.stuff.co.nz/business/industries/7159907/Agents-fear-home-truths

  • Steve on 23/07/2013 12:30:33 AM

    Dear Realestate Lobby,
    Keep chasing those rainbows your going to need the pot of gold at the end to pay for the litigation coming your way.....and it will come once Slater & Gordon run out of ideas for future dividend growth.

  • Christian Beltrame on 22/07/2013 5:43:21 PM

    Hi Steve

    We are experiencing rightly or wrongly a number of clients asking about property inside and outside super. obviously some are not in the right financial position to be considering such a strategy.

    there can be bubbles in all sorts of investments, not just property - was/is gold a bubble?

  • Christian Beltrame on 22/07/2013 5:34:36 PM

    Dear Wayne

    Agree wholeheartedly with your comments.

    I guess part of the role of the adviser is to educate the client about the advantages and disadvantages of an investment approach no matter what the asset is.

    But some individuals whether they seek an adviser or not will chase the greater return ignoring the risks!

    We try to encourage clients to seek expert advice before proceeding with purchases to ensure at the very least they are assessing the most appropriate tax vehicle is used.

  • Innocent Observer on 22/07/2013 10:05:39 AM

    Dear Steve,

    "Dreams" trump facts, history and logic.

    Yours sincerely,

    The Real Estate Lobby

  • Steve on 21/07/2013 11:08:26 AM

    No one with real wealth is buying property (without inbuilt growth like subdividing etc or simply to live in) Investors in property are being "sold" a dream that for most will result in a nightmare of decades with no real growth & negative income. Disaster looming.

  • Wayne Slager, Real Property Advice on 17/07/2013 9:51:44 AM

    Unfortunately, it's the nature of the human condition where some will gravitate to any sector considered to offer fast, easy money.

    So-called advisers flogging property within that magic tool called smsf is just the latest fad - and certainly a significant one. Sadly, it's equally true that consumers suffer the same affliction and also flock to any regime that seems to offer a short cut to wealth.

    It reminds of a quote by Ivan Misner (founder of BNI), "The secret to success without hard work ... is still a secret." Caveat Emptor indeed.

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