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Following the government’s surprise last-minute concession to the Greens last week, future limited recourse borrowing arrangements (LRBAs) for residential property through self-managed super funds have been banned, although not before a 45-day transition period following royal assent.
While the government has said SMSF borrowing represents less than 1 per cent of total residential property borrowing, Accendo Financial founder Trent Carter said he believes the changes could prompt investors to look more closely at other asset classes.
Speaking on Broker Daily’s Finance Specialist podcast, Carter told host Liam Garman that commercial property was likely to become increasingly attractive to SMSF investors following the residential lending changes.
“I think the attraction will continue to fall to other asset classes than residential and established residential property as a mechanism to grow wealth,” Carter said.
“I think the government’s been loud and clear that they don’t want people growing wealth through houses that mums and dads can live in. That’s fundamentally what they’re trying to shift people away from.
“That means retail property, office, warehouse-type property, commercial yards and big warehouses. Industrial property will become more attractive in terms of investment assets because of the tax deductibility that still sits around – negative gearing’s okay on all those assets, for example.
“I think there’s going to be a natural shift.”
With the transition period now underway, brokers have reported a surge in last-minute inquiries from both existing SMSF trustees and new clients, as have some non-bank lenders.
Turning rent into a retirement asset
For business owners, Carter said one of the biggest opportunities could lie in purchasing their own commercial premises through an SMSF and leasing the property back to the business at a market rate.
The strategy could be particularly relevant for self-employed borrowers who have historically contributed little to their super while directing significant amounts of money towards rent.
“That means you can actually buy your own premises inside super and then pay yourself the rent inside super, which will help service that loan that you’re going to potentially raise to buy that property,” Carter said.
“Now you’re building an asset inside of super with a business expense that previously was going off to another person.”
Carter said that the approach could provide a longer-term wealth-building strategy for business owners who often prioritise the financial needs of their businesses over their own retirement savings.
“It’s a good wealth-building way for a lot of self-employed people who are usually light on the way that they pay themselves. They usually pay themselves last in terms of salary. They usually pay themselves very little, if any, super,” he said.
“So this is a good way for them to set themselves up for retirement and move some of their risk outside of just the business that they operate.”
No room for ’sweetheart deals’
However, Carter said that commercial property held within an SMSF remains subject to strict requirements, including rules around the acquisition price, rent, and use of the property.
“My understanding is there’s no sweetheart deals,” he said.
“If it’s property you own outside of super and you want to bring it into super, you can’t give yourself a really fantastic purchase price.
“It needs to be purchased at a marketable value as a single acquirable asset, is what they call it. And that’s measured by a market valuation. The rent that you structure must be a market rate of rent.”
Carter said that even the way a property is used can create issues, warning that business owners cannot receive a personal benefit from an asset held within their super fund.
“If you’ve got an office warehouse and you’re storing your boat out the back of it and that boat doesn’t have anything to do with the operation of your accounting business, then that could be deemed as personal benefit and gain from the asset inside your super, and that would be deemed as a breach,” he said.
“It needs to be actually something that’s purely for business use and the rent arrangement needs to be for the business to use that asset only. It can’t be for personal use.”
A commercial niche
With residential SMSF lending set to close to new borrowers, Carter said brokers looking to move into the commercial SMSF space should first build their understanding of the lenders and structures involved.
“I think the very first step that you need to do is have a chat to the key players who are operating in this space – who’s offering the finance to start with,” Carter said.
“They’re going to be a really good guide about what you need to know and who you need to speak to in the area.”
Reflecting on his own entry into the sector, Carter said he initially used a spot-and-refer model to learn from transactions before writing the deals himself.
“They would actually do the transaction. I wouldn’t actually broker the deal per se, I would just get a referral fee from it. But I was learning from the transaction the whole time,” he said.
Alongside understanding lender policy and SMSF structures, Carter urged brokers to build relationships with accountants and lawyers experienced in the sector and remain clear on the boundaries of their role, particularly around financial advice.
“Because we’re not financial advisers, we are lending experts in this space. So get familiar with the lenders, get familiar with their policies. What does a transaction look like? What are the structures that need to sit around it?” he said.
“If you can understand that, you’ll quickly start to identify and qualify transactions that are going to work and ones that won’t.
“Go speak to these experts and then finally set your network up with those experts. Go find the accountants and the lawyers who are working really well in this space and become their best friends.”
[Related: Brokers must accept ‘a new world’ has arrived: FBAA]
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