Property market ‘flooded’ as DIY super investors panic about rule changes

Australian Financial Review

16 December 2016

Duncan Hughes

More than one in three commercial property sales are a result of “panicked” self-managed superannuation fund (SMSF) investors fearing changed super rules will increase potential liabilities. This is up from one in four a month ago.

So says Rorey James, head of strip retail sales for CBRE, the nation’s largest commercial property company. He says feedback from its national network of sales teams suggests sales volumes are steadily rising as private investors divest assets.

This is despite repeated warnings that pre-emptive sales might be unnecessary and result in more costs if another property is bought.

From July next year, the tax-free status of super income generated from pension balances greater than $1.6 million will change. Further, pre-tax contributions to super will be capped for everyone at $25,000 a year.

It means SMSFs with more than $1.6 million in the pension holdings of their super fund will be required to move any excess into the accumulation holdings, where earnings will be taxed at 15 per cent. It also means SMSF trustees relying on current higher contribution caps to service loans in their super funds may have to make other plans.

Property agents warn supply of retail and office complexes is turning from a “drought to a flood” as worried super scheme trustees dispose assets ahead of the June 30 deadline.

SMSF specialists fear trustees are being panicked into selling because of misplaced fears that retail and commercial property assets could turn into expensive liabilities.

“There is no need to panic,” advises Peter Hogan, technical specialist for the SMSF Association. “There is no requirement to sell off any assets in preparation for the rule changes.”

Hogan recommends those in doubt, or needing to restructure their fund, contact a specialist accountant or financial adviser.

James estimates about 25 of 70 deals in the past two months have been initiated by SMSF owners and says numbers are increasing.

“We are expecting a pretty strong supply in the first half of next year,” says James about proposed sales in the pipeline. “Superannuation sales and pent up demand will drive the market.”

Doctors, lawyers, factory owners and business people have been making the most of generous tax concessions to buy their surgeries, chambers, factories or offices in their super schemes.

The average commercial property holding in an SMSF is about $700,000 compared with $400,000 for residential property, according to the Australian Taxation Office. In total, $70 billion is invested by SMSFs in commercial property, three times that invested in residential.

James claims there has been a turnaround from the first half of the year when lack of supply helped push up demand in a strong buyers’ market. A well-presented retail property in a popular retail spot with long leases and quality tenants potentially offers strong revenues from rental income and capital growth, particularly in Melbourne and Sydney.

Recent sales include a 350-square-metre, single-storey Centrelink office on Burwood Highway, Belgrave, about 48 kilometres south-east of Melbourne. The property, which was bought by an SMSF investor in 2012 for about $1.3 million, sold for nearly $2 million, according to CBRE.

“The seller believed there were hefty tax implications from June 30 next year if the property was retained in the fund,” says James.

‘From a drought to a flood’

A shop opposite one of the nation’s strongest performing Coles supermarkets in Melbourne’s Glen Huntly Road, Elsternwick, is another SMSF investment being being advertised for sale. The 278 square metre property is fully leased to two longstanding tenants that provide annual income of $107,000.

ANZ Bank premises at 307 Clarendon Street, South Melbourne (which a couple acquired for $1.52 million 16 years ago as a retirement nest egg), sold for $5.7 million at auction this month.

“It has turned from a drought to a flood,” James says about the pick-up in second-half sales of retail properties under $5 million. “The market is still good but a lot of people are reviewing their portfolio as they enter, or get close to, retirement.”

Hogan cautions trustees with concerns to “not act rashly and sell down assets” before receiving advice on the impact of the new super rules.

He adds investors with commercial properties in their super portfolios do not have to sell them if they are worth more than $1.6 million.

“There has been confusion on this issue,” says Hogan. “Just because a property exceeds $1.6 million in value, you don’t have to sell.”

Assets exceeding $1.6 million in an SMSF will have to be spread across two holding accounts within the fund — the pension account and an accumulation account, he says.

“It’s worth remembering there is nothing new about the process,” says Hogan. “It is common practice for actuaries to apportion values across the two accounts in an SMSF.”

Two accounts are routine in an SMSF when there are various members and some are already retired and drawing a pension.

“Another misconception among some super investors is that they will be hit with a retrospective capital gains tax (CGT) if they don’t sell a property before June 30,” says Hogan.

“That’s wrong. The government has waived the CGT liability on any increase in a property’s value up to June 30, 2017, if the asset is moved into the accumulation account.

“It’s also worth comparing how these funds would be treated outside the SMSF/super environment – 15 per cent [in an accumulation account] is still a very attractive rate.”

Those considering the sale of a property should also consider the transaction costs and time involved.

For example, agent commission for selling a commercial property is about 3 per cent, there may be CGT and the purchase of another property will attract stamp duties.

Trustees unsure about their fund’s holdings should seek advice from an accredited financial adviser and accountant with specialist experience.

Also confirm whether property fits your fund’s strategy, says Andrew Peters, managing director of Semaphore Private, an accredited financial adviser.

Investment strategies need to consider accumulation of assets, investment risks, likely returns, liquidity, investment diversity, risks of adequate diversity and the ability to pay member benefits