The government and ASIC are demanding banks and financial service providers strengthen their scam and fraud defences. With this nefarious activity costing Australians $318 million in the past 15 months alone, the industry’s positive response has not come quickly enough.
With industry funds feeling the heat from APRA, it’s likely more members will look for a better option, especially if they are nearing or in retirement. Those choosing to do so need to tread warily.
Self-funded retirees taking a shine to commercial property
Self-managed super funds (SMSFs) have always been attracted to real estate. At September 30, 2024, ATO figures show they held $165.1 billion in this asset class or 16.7 per cent of total net SMSF funds under management (FUM) of $988.2 billion.
Five years earlier, at September 30, 2019, the percentage of property assets of SMSFs’ total net FUM stood at 15.6 per cent, so despite COVID and higher interest rates since 2022, SMSFs have not lost their appetite for property – either commercial or residential.
Dissecting these numbers, commercial property assets, at $107.6 billion at 30 September 2024, comprise about two-thirds of the $165.1 billion – a ratio that has remained rock solid over the past five years.
Although the ATO figures do not break down whether commercial property is a pure investment or business real property (the fund owns the property and leases it back to a related business), it’s fair to assume a sizeable portion of this $107.6 billion is direct investment.
Interest in commercial property, especially industrial and convenience retail – better known as neighbourhood shopping centres – is hardly surprising, says Laurence Parisi, Trilogy Funds manager, property funds.
“There’s no doubt these two commercial property sub-sectors (industrial and convenience retail) are front of mind for SMSF investors. Industrial is enjoying strong tailwinds that is attracting media commentary, and investors are picking up on this.
“On the convenience retail front, the fact these shopping centres are underpinned by major anchor tenants such as a Coles or Woolworths with long leases is very reassuring to SMSFs who want a secure investment offering a healthy yield,” he tells The Golden Times.
Parisi says what property offers SMSFs as an investment is a very human factor – it’s tangible, they can shop, eat and get their hair cut there. It’s also a less volatile asset class compared with other investment options such as equities, forming an integral part of a well-balanced SMSF investment portfolio.
Commercial property comes with regular income – distributions are typically monthly or quarterly – as well as the potential for capital growth.
Another benefit for Australian residents is the opportunity for tax deferred income, meaning some income may be taxed in a different year than the one in which the income was distributed.
Two other factors favour commercial property. First, properties and tenants are selected and managed by experienced professionals, with considered risk management procedures. Asset managers can work with tenants to make properties work better for them while improving the value of the asset.
If the commercial property investment is via a trust, then it’s likely to enjoy diversification across multiple properties in several locations, and with multiple tenants across various industries – an important risk management strategy.
Second, the properties will be in experienced hands. Fund managers will typically have extensive market networks to source potential deals and employ exhaustive processes to decide whether a property is right to buy, develop or exit.
Trilogy Funds recently put this into practice, with the off-market acquisition of a portfolio of convenience and large-format retail funds.
Parisi says the biggest competitor to commercial property is real estate credit that’s experienced significant growth over the past 10 years, domestically and globally.
“SMSFs can have a secured first mortgage investment and get high single-digit returns. From a yield perspective, that’s better than what most commercial real estate is yielding. That said, credit doesn’t offer any capital growth or tax advantages, so it should be yielding higher.
“It’s worth adding that the past couple of years have been challenging for commercial property because of the interest rate rises, pushing up cap rates. Rising interest rates always take a toll on commercial property, while credit funds have been relatively immune.”
He adds that interest rates have likely peaked, so that will favour commercial property as rates fall.
“I have no doubt astute SMSF investors will be aware of what a lower interest rate environment will mean for commercial property cap rates. Investors will largely understand that, as rates fall, it is likely we will see an uptick in valuations, especially for industrial and convenience retail assets.”
