For those baby boomers nearing the end of their working days or those parties that are planning for that retirement period in future years…be careful. The acquisition that you entered into already may be one of the worst financial decisions you have made or perhaps you may have created an untenable retirement period already for the future years ahead.
Let’s face it, the real estate market specific to Metropolitan Melbourne has witnessed a sustainable increase in levels of value unparalleled for many years. More so since the Global Financial Crisis (GFC). The dollar quantum increases in value in fact, is outstanding and no one in their right mind could argue that those parties that have already prudently acquired real estate over the years will benefit when retirement arrives.
For those parties, however, of whom have acquired real estate property within a SMSF format over the last stage of this current property cycle, be scared, be nervous and start to consider that maybe my initial decision might not have been so prudent after all.
At this stage you may be asking yourself, what is the writer telling me? What is the concern and what is the problem?
Simply, if a retiree had to pick perhaps, the worst time in a property cycle to acquire real estate especially in a SMSF holding it may have been over the last 12 month period or so.
Regardless of what the remainder of this blog professes to inform you, I can categorically tell you that unless you have been extremely lucky, you have regardless of circumstance purchased real estate at the height of the current real estate market. What you have seen over the last 5 years, will not be replicated in dollar value increase terms in the next 5 years, I can guarantee you that.
Why do I say this you ask? Fundamentally, we as a property fraternity are out of sequence both in relation to property advice and market forces. The experienced investors have been leaving the real estate market for the last 5 years; ask leading real estate agencies of the like of CBRE, Savills and JLL etc. about the number of supermarkets, shopping centres and prime Melbourne City office buildings having been sold throughout this period, with parties eagerly cashing up, and for a better term, waiting for the ‘Big Bang’. There seriously cannot be much more uplift in values. Yields at 2.5-5.0% are unsustainable long term, 5% initial yields across all sectors of the commercial market segments is the new ‘norm’, with variations applicable dependant on market segment, price point, lease covenant and other variables and usually providing yields to be even further compressed.
Income streams commercially are also at the upper end of any sustainable level. Generic reference by professionals in the industry sprouting $350-$400 per square metre for suburban office buildings, subdivided industrial units having a floor plate of 100-300 square metre gross building areas having projected rentals being $100-$170 per square metre, and city office rental ranges in the vicinity of $450-$650 per square metre, the story goes on and on.
To sustain these levels based on ‘economics 101’, the thought process is either the new ‘orange’ or that awakening that I have been referring to may be more severe and devastating than we all think.
So if your acquisition has been made by you via a SMSF, stop, pause and perhaps act, or in fact don’t act.
Everyone’s world is different and depending on who you talk to and at what time of day or what environment you travel within, your perspective of the real estate market is different. Coupled with the last 10 year moratorium on the need to be only ‘positive’ even if you don’t really believe it.
So with this is mind, a couple of grabbing statements that may start to place some degree of attention by the reader if nothing else. “Tightening of bank lending guidelines with reductions in loan to value ratios existing and with more to come”, “Interest only loans – where can I get one in today’s market and if so for less than 8.00%”, “Moving interest rate rises over the foreseeable period” , “Its easier to get a business loan than a property loan”, “what was processed by a bank in 30 days now takes 90-120 days”, “are global purchasers still interested in Melbourne”. Moving onto the marketing agent (you notice that I don’t use the term real estate agent) “We have over 200 enquiries for this one bedroom apartment”, “the market is just starting to take off”, “pre sales to SMSF’s are the norm”, “You can’t imagine how many sales are made to SMSF’s”, “It doesn’t matter what the rental is, it’s a SMSF, they will do a lease back or whatever”.
OK, you get the picture, the whole and I mean the whole of the property industry has been spruiking and the time is shortly arriving where we need to be aware that a possible change is in the air.
I am not too sure why, but even some of my competitors in the valuation sphere, are as conservative as they have been for over the last 20 year period, primarily in the last 3 month period of this year.
Again, this is currently my world, so if you speak to Joe Blogs, the usual response will be, mate, what are you talking about? I purchased a property 2 years ago and its now worth 30% more. I say, well done, but the awakening that may occur if my comments are correct is the fallout that may take place in today’s values and in the near future.
Again, if I am in some way correct to even 10% of the current market value of properties, what would happen if the property was held in my SMSF holding?
What happens if the owner has to top up or pay rental equivalent of a rental sum for a 12 month period or longer if the property falls vacant? Remembering the shortfall or amount can only be taken via the holding entity within a SMSF vehicle.
What happens if the so called 10% value actually eventuates and the lending institution also drops current levels of ‘loan to value ratios’ by a further 10%? Where do I top up from? Your SMSF cash holdings are the only means to which payments within the SMSF vehicle can be derived from.
This is the awakening. What happens if I haven’t taken this factor into account?
I am a property expert only and to be honest, the reader needs to speak to their accountant, financial planner or lending institution, but if there is one area in the Melbourne property market, that does not need a whole lot of deviation, it’s real estate which is held on a SMSF basis. An awakening of frightening proportions may shortly be upon us.
The questions that the reader should be asking is, what actions will banking institutions take if a shortfall prevails by an SMSF holding? Do they sell the property? How do I make good on a loan to value ratio if the only means of topping up is via cash holdings within that SMSF vehicle?
The other factor that one should consider is “capital appreciation”. If interest rates as in fact are predicted, increase in the near future and property values have peaked and property at worst case scenario remains static, where is the end game? What does my investment in real estate provide? Or is it simply the usual scenario where most participants believe that real estate in Australia always goes up and has been doing so for the last 25 years and values do not go down. Remember, a generation of participants believe and live this, as there has not been a real decrease for the duration of such period.
If you haven’t started to wonder about your SMSF acquisition thus far after reading the above, you are an optimistic person so you don’t need to read the rest, if however, you are in agreement with a couple of the points, read on.
What can I do to remedy my actions? The simple fact is from a property perspective there isn’t much you can do, especially in a SMSF vehicle. The question being should you have purchased it in the first place and if so as a SMSF or alternatively as a standalone property investment via other legal forms of holding?
Regardless of legal entity, some dark clouds may arrive within the next 6-12 months. I certainly feel that we are closer to the top of this cycle. It has been extremely difficult to make a return on property investments based on the fundamentals, but in saying this it has been relatively easy to be speculative in property acquisitions currently. With APRA and financial institutions now focusing on making good with the necessity to bring their books in order, expect change. The SMSF market may be just the catalyst we were not looking for.
