Tria Investment Partners has added itself to the list of pundits screeching about SMSFs pouring into property, and the potential bubble SMSFs are creating.
In this report, the consultants appear alarmed that SMSF borrowings have risen much faster than even the critics think, climbing 88% from 2008 to 2012 to $6.3 billion. At current rates they say borrowings could easily be over $10 billion.
The report is unclear on how much of that goes into commercial property rather than residential, which could be a major factor. Many small business owners borrow through their SMSF to buy their business property. In June 2013, 77% of SMSF property holdings were in commercial property, according to the Reserve Bank's Financial Stability Review.
The ratio has hardly changed since 2010, when 11.5% of total SMSF assets were in non-residential property, and 3.7% was in residential property, according to ATO data. Add to that a recent survey that suggests that only a small proportion (18%) of SMSF trustees invest in property through their SMSF.
The RBA estimates the value of all SMSF direct property holdings at around $76 billion (split roughly $58.6bn commercial, $17.5bn residential). Even against $10 billion in borrowings, the risk of things going pear-shaped for the asset class and most SMSF investors appears low. That doesn't mean it can't happen though.
What I would be very concerned about was if the gap between borrowings and estimated value narrowed sharply.
My theory is that direct property investment is a fairly new thing for SMSFs, and as trustee knowledge grows, more and more SMSFs will look to diversify away from the current main two asset classes of Australian shares and cash.
The Fairfax press also has an interesting article on the alarm over SMSFs.
For those SMSFs looking to get exposure to property – there's a better way. Through property developers, A-REITs (property trusts) and property-focused exchange traded funds (ETFs) listed on the ASX.
Investors may want to take a closer look at two Western Australian property developers Cedar Woods Properties (ASX: CWP) and Finbar Group (ASX: FRI) – both of whom pay decent fully franked dividends. Other potentially profitable alternatives include industrial property trusts, including the Australian Industrial REIT (ASX: ANI) and Industrea REIT (ASX: IDR), as I mentioned in this article.
Foolish takeaway
It always pays to remember Warren Buffett's immortal words on leverage, whether its property, shares, or other asset classes.
"Stay away from leverage," he said. "Nobody ever goes broke that doesn't owe money."
