SMSFs are wrestling with the same dilemma that big super funds are wrestling with: what to do with their rising pile of cash? More of it, according to the annual survey of the SMSF Association, is going into commercial property. But residential property is getting difficult for SMSFs.
The latest SMSF Association survey, produced by researcher CoreData with the sponsorship of Nabtrade, is its fifth and as such is starting to present a reasonably good longitudinal view of SMSF trustee behaviour. The uncertain investment environment, with possibly fully priced Australian and US share markets, and the ongoing political and market concerns about residential property tended to dominate discussion over the 2015 survey – called ‘Intimate with Self-Managed Superannuation’. In many ways the issues for SMSFs are similar to those for big super funds.
Andrea Slattery, the chief executive of the SMSF Association, said at a media briefing last week that the research series showed that there was increasing self confidence in their investment and other decisions making by SMSF trustees compared with non-trustees – those who did not have their own fund.
One outcome of this was a continued decline in the number of SMSF trustees who take their super as lump sums. The proportion taken as income streams has risen from 75.7 per cent to 93.2 per cent between 2009 and 2013.
Andrew Inwood, the chief executive of CoreData, which has been researching the SMSF space for more than 10 years, including producing all the association’s annual surveys, said that the main investment driver at the moment was “what to do with the cash”. Roughly 22 per cent of SMSFs’ asset allocation was currently in cash, he said. Other recent surveys, such as that by Vanguard Investments, put the figure a little higher (26 per cent).
“The decision is very complex now,” Inwood said. “But one thing we are starting to see is more SMEs [small-medium enterprises, which sponsor an SMSF] buying their own commercial property.”
Perhaps one reason for this is the increasing difficulty that SMSF trustees have in borrowing within their fund for investment residential properties. Inwood said three of the four big banks (Westpac being the outlier) had made it more difficult for SMSFs to borrow for residential property by moving the decision to the commercial lending area. Others, such as AMP, last week put a hold on this lending. The RBA has previously requested banks restrict this lending growth to 10 per cent a year. Inwood noted that two of the banks had also increased rates in the area.
“Broadly, in the SME area, the data suggests that people are looking for a safe haven for their surplus business cash,” he said.
The main reasons for the rising cash holdings by SMSFs were that: more people were entering or closer to entering retirement and therefore wanted greater security; many people were not confident in either the Australian Government, to keep the rules unchanged, or the direction of the Australian share market; and many were waiting to re-enter the market at lower valuations.
Anecdotal evidence on big super funds is that their cash levels are once again approaching the record proportion hit in 2008-2009, when market uncertainty was at a peak. This time, the problem is fully valued share markets and the prospect of rising interest rates. In such an environment, the best option would tend to be alternatives, which presents a different challenge for trustees.
Global markets drop, ASX200 down most in five months, Orica (ASX:ORI) and Afterpay (ASX:APT) smashed