Some self-managed superannuation fund investors who borrowed heavily to buy real estate have lost up to 75 per cent of their investments in two years, say investment counsellors, despite boom property markets and record low interest rates.
These investors have typically bought their properties off-the-plan and have paid above-market prices thanks to incentives offered by the seller, such as guaranteeing rental income for the first 12 months.
Financial experts who are advising them fear they could be the first in a possible flood of investors who have been poorly advised, paid too much for the property and then been unable to sustain repayments.
“Borrowing in your self-managed super fund to buy property is a very, very high-risk strategy,” says Neil Kendall, managing director of Financial Rescue, a company that attempts to extricate investors from bad investments and poor advice.
The massive losses incurred by these investors are despite a buoyant property market posting double-digit increases and some of the lowest interest rates in history. “These people have been sold properties on promises of big returns, major tax savings and capital gains,” says Kendall.
“Instead they have suffered massive negative equity – which happens when the value of a property falls below its purchase price – that combined with the high cost [of setting up the fund] has consumed their super savings.”
Kendall, who is a certified financial planner, says the investment victims typically had super lump sums of between $100,000 and $150,000, and were encouraged to take out loans of up to $500,000.
This latest round of SMSF victims who have geared their assets have replaced their retirement nest eggs with huge debts that could take the remainder of their working lives to repay, Kendall says.
Each month more than 3000 property buyers are borrowing via their DIY super funds to purchase business or residential property, according to the recent Financial System Inquiry (FSI).
“All those special offers that come with the properties are not free,” Kendall says. “Developers are not charities, they operate on big margins. They need to cover the cost of things like rental guarantees from somewhere – and that somewhere is in the profit margins in the price.”
A recent survey by investments watchdog the Australian Securities and Investments Commission (ASIC) found that borrowing in superannuation is often a result of poor advice.
A review of more than 100 selected investors’ files found that much of the poor advice involved SMSFs leveraging to buy property. It also found that about 1 per cent of advice was considered “good” and 28 per cent was rated “poor”. The rest was professionally poor or unacceptable.
But property agents and unqualified advisers are being encouraged with promises of big commissions – usually about 10 per cent of the purchase price but up to 20 per cent. On top of that, there are cash bonuses and more bonuses for additional sales. These, of course, are factored into the sale price.
Differences between regulators about disclosure of commissions means that many buyers are unaware of the cost of recommendation.
The dangers of leveraging super savings were again stressed in the FSI interim report, a high-level review by some of the nation’s best and most experienced financial brains. “Leverage (or borrowing) should not be a core focus of SMSFs – or any superannuation fund – and is inconsistent with Australia’s retirement income policy,” the report said. But that’s not stopping thousands of investors committing hundreds of millions of dollars a week into what are often highly speculative investments that could turn their savings into squalor.