(Pictured: David Bryant)
The party is over for SMSF investors, according to David Bryant. For the past 20 years the “three trick pony” of residential property, bank shares and term deposits has worked very well. But he believes it’s not going to work well for another three-four years, let alone 20, as those SMSF trustees move through retirement.
The head of investments for Australian Unity recently addressed some groups of direct investors on the subject. They were clients of Australian Unity, so they were not averse to managed funds. But, Bryant says, they did question why their strategies of the past 20 years would not continue to provide them with the income-oriented returns they want. The answer is all about interest rates and property prices.
“Investors seem to think they are bullet proof,” Bryant says. “They don’t analyse what has to happen for the situation to continue. For example, the housing fundamentals look good, with the expected future demand and its make-up. The supply side is normally a good argument. But we have the second-most expensive housing in the world. Is that realistic?”
Bryant says that rental affordability is 30 per cent too high and house purchasing is 50 per cent too high. “Can I suggest that at best we are not going to get any [house prices] growth for the next few years… I’m also suggesting there will be no wages growth for the next five years. We have seen this before – when property prices have risen by 50 per cent over two or three years and then do nothing for 7-10 years.”
With interest rates, a lot of property purchases, particularly investment property, is at fixed rate mortgages. They are fixed at just below, or around about, 5 per cent, which is 2 per cent below “normal”, Bryant says. “So, for those with interest-only loans, they could see a 40-50 per cent increase in their servicing costs.”
The third warning sign for the economy, Bryant says, is Australia’s terms of trade. Australia has only had such a positive period for terms of trade as we have had for the past few years in the period just after World War II and in the 1920s. “The only last for a couple of years before normalising,” Bryant says. “It’s been because of commodity prices and the strong dollar, which are both coming back. The boom in the terms of trade has had us about 65 per cent above trend, peaking at the end of 2012. This has masked a lot of structural problems in the economy, especially around wages.”
With respect to the banks, which SMSF trustees like because of their high franked dividends, Bryant believes that the inevitable softening in house prices will curtail growth going forward.
“Our banks are managed to perfection,” he says. “They are among the best in the world [for ROI]. Are we really that brilliant? Residential property will cool and we will have a five-10-year period of no capital growth. So, investors will have to look at other assets for their income… On the positive side, TD rates will go up, which is good for retirees. However, there’s a question as to whether there will be enough borrower demand on the other side for the banks. Is it the right thing to be putting your money into three-five-year TDs right now?”
Bryant’s recommendations are to go offshore or, if an investor wants to stick with domestic assets, to rotate out of residential property and into commercial. “There are lots of good commercial property opportunities delivering yields of 8-9 per cent,” he says. With respect to international, he favours the US and Asia for the medium term.
“I think the easiest way to do this is through funds management products, but if they don’t want to do that then use ETFs. I’m agnostic about how they do it, I’d just like to see them do it.”