Increased commercial property exposure poses liquidity risk for SMSF investors

Self-managed super fund investors are showing an increasing appetite for adding commercial real estate and residential property into their portfolios.

Figures compiled by the Australian Tax Office (ATO) show that from 2008 to 2012, commercial property investments by SMSFs increased by 77% while residential investments increased by 56%.

In total, real estate assets make about around 15% of SMSF portfolios, compared with 8% for the rest of superannuation industry.

SMSF investment in direct property 2008–2012

Property type Dec 2008 Dec 2012
Commercial property $30.7 billion $54.3 billion
Residential property $10.6 billion $16.7 billion

Source: ATO

This appetite for property comes with its risks, not all of which relate to the unpredictability of the property market.

According to superannuation expert Peter Nicol, there are three issues relating to high exposure to direct property: yield, liquidity and the indivisibility of property.

Nicol, a principal with the Perth superannuation division of accountants RSM Bird Cameron, says the issue of yield relates to the minimum pensions required to be drawn from the fund.

If an investment property fails to deliver the yield required and the SMSF members are in their pension phase (65 or older) they face the problem of “addressing the liquidity issue of the fund for pension payments and meeting compliance requirements”.

This, Nicol says, may require the fund to liquidate assets.

“Property is not noted as being an easily liquidated asset: in some cases it can take months to sell a property and realise the cash for payments,” says Nicol in an article written for The Australian Financial Review.

“Where a pension member is reliant on that regular monthly income for lifestyle, the illiquid nature of the asset can create serious issues and could result in a property being sold on less than optimal terms,” he says.

And the issue of liquidity is a problem because of the indivisibility of property compared with other more liquid investments such as cash, shares or bonds.

“In most cases direct property can’t be sold in pieces to provide the needed liquidity to meet pension payments. This means where cash is short in the fund to meet pension payments of the pension member who is in need of a lump sum to meet medical bills, holidays or for special occasions, there isn’t the ability to partially redeem a direct property,” he says.

However, he says there are options to address these issues including that SMSF members keep the property, if it is being used for some specific purpose such as it is used in the family business or it is to be handed to the next generation

“The SMSF can keep the property effectively until the last member’s death,” says Nicol.

Readers can find more SMSF advice and tips from Peter Nicol via the RSM Bird Cameron website.

This article first appeared on Property Observer.

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