Double-digit yields and reduced volatility are encouraging greater numbers of self-managed superannuation fund (SMSF) investors seeking property exposure to switch from physical property assets (such as houses, apartments, and offices) to unlisted property trusts.
SMSF returns on physical property assets could be shredded by higher interest rates, falling prices, and more stringent borrowing terms. Additionally, crucial changes in fund rules that will go into effect on July 1 could shred returns even further. Changes include draft legislation that counts the outstanding value of a loan as part of an SMSF member’s total super balance.
“We are at a tipping point in the [property investment] cycle,” said Dinesh Pillutla, managing director of Property Investment Research (PIR), a provider of property funds research and analysis.
Meanwhile, Adrian Harrington, head of funds management at Folkestone, said investors in this sector have “done exceptionally well” during the past five years.
“But the easy money has been made. We are now entering a period where the focus of investors needs to turn to income growth to drive value increases,” Harrington said. “At this point in the cycle, with yields nearing record lows, unlisted property funds must avoid the temptation to leverage up to drive higher returns from their funds.”
Roughly 30% of Australia’s $2.2trn superannuation assets (about $640bn) are held in SMSFs. Assets held in unlisted property trusts total more than 10%, making it the third-largest asset category behind listed shares and cash.
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