The number of self-managed superannuation funds (SMSFs) is on the rise as Australians seek to have greater control over their retirement funds. Many trustees of SMSFs are attracted by the potential of property investment, but while residential dwellings are the more obvious choice, industrial and commercial direct property offers several distinct advantages.
SMSFs have been allowed to borrow money to invest in property since 2007 and, since then, the number of SMSFs in Australia has steadily increased to 516,925, according to the latest Australian Tax Office (ATO) figures. The ATO data reveals that almost one million Australians are SMSF trustees and hold 42 percent of the national $1.4 trillion in superannuation funds.
According to the Reserve Bank of Australia’s September 2013 Financial Stability Review, “The potential for a further increase in property gearing in self-managed superannuation funds is a development that will be monitored closely by authorities for its implications, both for risks to financial stability and consumer protection.”
Here are four advantages of investing your SMSF in commercial direct property, in preference to other asset classes.
- Commercial property is one of the few assets that can be bought by an SMSF from its members. Your SMSF can potentially buy your own business premises and then you can pay rent to your SMSF. A residential property, on the other hand, cannot be lived in by a fund member or any fund members’ related parties, nor can it be rented by a fund member of any fund members’ related parties. For further details visit the Australian Securities and Investments Commission’s MoneySmart website.
- The MoneySmart website also details the strict rules against using borrowed funds to make improvements to residential property that forms an asset in your SMSF portfolio, so don’t even think about buying a renovators’ delight. This can severely limit potential capital gains as you cannot renovate it to increase its value. In contrast, an investment such as a bulk storage unit or warehouse has very low capital expenditure requirements.
- Commercial leases are typically for a longer period than residential leases – usually around five years with a further option for another five years with incremental rental increases built into the lease. If you choose the right property and tenants with stable businesses which are unlikely to be adversely affected by an economic downturn you won’t have to deal with a regular turnover of tenants and can rely on a steady rental return.
- Many industrial properties are purely functional in design and construction, so there is less concern about tenants maintaining them or investors having to pay for costly renovations, which is often the case with residential property investments. That said, it’s important to ensure any essential, expensive upgrades, such as those required to meet new fire safety or health and safety standards, have already been carried out before investing in a commercial premise.
As with any potential investment, it’s important to tread carefully and be fully informed. To ensure a safe entry into property investment with an SMSF, seek professional advice and make sure it is the right fit for your investment portfolio. Visit the Australian Securities and Investments Commission (ASIC) website to familiarise yourself thoroughly with all the rules and regulations surrounding SMSFs and property investment.