Why SMSFs are increasingly investing directly in property

Read almost any financial magazine, website or flick through the financial pages of a newspaper and you’ll soon come across articles and advertisements focused on self-managed superannuation funds (SMSF). What used to be more typically referred to as DIY super funds are in a period of rapid growth.

A decade ago DIY funds accounted for about 10% of superannuation balances, now DIY has matured into SMSF accounting for 30% of the nation’s $1.4 trillion of super savings or an estimated $439 billion. And this is a trend that is expected to accelerate.

According to APRA (Australian Prudential Regulation Authority) at June 2012 funds in SMSF now exceed the funds held in retail funds 26.6% $372.1 billion, industry funds 19% $266.1 billion, public sector funds 15.9% $222.2 billion and corporate funds 4% $55.86 billion.

SMSFs have truly consolidated their position as one of the most popular forms of superannuation savings. In previous posts I have looked at the popularity of direct property investment and I see some overlap of motivation with the rise of SMSF.

Let’s highlight some of the reasons SMSFs are attracting such a level of popular support and such rapid growth and the overlaps are evident.

Is there a link between SMSF and the appeal of direct property ownership?

Heading this list is the common appeal of control if you want control then an SMSF is the best solution because as the trustee of the fund within the bounds of the law, you can make trustee decisions that take into consideration individual circumstances.

Increased choice and flexibility is another and unlocking the ability to consider different strategies, including the choice of investment options and that choice can include property. However, like every option care is required and the same selection criteria need to be applied to property.

Better tax management is another SMSF plus because with most other funds, but not all, an account is taxed on realised and unrealised earnings. But with an SMSF, only realised earnings are taxed.

Improved cashflow management is another benefit with transition to retirement pension strategies; you can contribute to and withdraw from super simultaneously. An SMSF also allows you to manage this within one pooled account.

Investment risk management is also an influence because with other funds as money is received a previously nominated investment strategy is automatically employed. An SMSF gives more flexibility of investment options and risk profiles.

Direct property investment a selective option

As already outlined legislation allows SMSF the ability to borrow and leverage funds into both residential and commercial property and there are clear trends this is happening. A recent survey conducted by Smart Property Investment revealed that, 72% of respondents plan to switch to an SMSF in the near future and 92% of those said they would borrow to invest in direct property inside of their SMSF.