TO LRBA OR NOT TO LRBA – THE GENERATIONAL SHIFT

Australians love property – there is no two ways about it. Sure, a lot of Australians have share exposure – but generally through their retail and industry superannuation fund investments. If I gave a 30 year old $500,000 and told them that they had a week to buy an investment, what percentage would come back with an investment property and how many a share portfolio. And here’s a laugh – how many would come back with a balanced portfolio?

I quite often speak to younger Australians and give them this exact quiz and most of them choose to invest in property. Now that leads into an interesting savings problem. A lot of Australians under 50 have children, student loans, mortgages, school fees and the cost of living that eats into their salary and wages so the chances of building an investment property portfolio has reduced over the decades. Particularly with banks tightening lending criteria in the last ten years.

HOWEVER, a couple aged 40 who have been working for fifteen or more years generally has more than $200,000 each salted away in an industry or retail superannuation fund. That is a $400,000 capital base ripe for a SMSF. And with a conservative LVR of 60% that is an opportunity to secure more than $1M in investment property.

But will more younger Australians take their super into their own hands and leap into property? Well yes … but not just and here’s why. The current 600,000 SMSFs are mainly populated by Baby Boomers and to a lesser extent the Silent Generation before them. This is because –

1. The Silent Generation had no super unless they worked in a bank or insurance company – SGC was not around in their time and the lucky ones made their money from property;
2. The Baby Boomers who were born between 1946 and 1964 came too late to the SGC party and many have also made their money from property, particularly thanks to the pushing of negative gearing where tax deductible interest, depreciation and capital allowances could be offset against salary and wages with any capital gains attracting a 50% discount;
3. The real beneficiaries of SGC have been Generation X and Y whose superannuation balances have grown incredibly. A 35 year old who has worked for ten years post university has way more superannuation than a Baby Boomer did at age 50.

To the Future

I love this chart which predicts superannuation over the next 20 years where the War Generation will no longer be part of the equation nor will the size of the remaining Baby Boomer superannuation assets.

Now let’s chat about this chart:

1. In the next 20 years, superannuation is going to grow three-fold while the older generations wind down their balances through pensions or via death.
2. The current 55 and under members will be taking the lion’s share of superannuation and with SMSFs expected to hold at 30% of superannuation balances this means there will be up to $3 trillion in SMSFs by 2040.
3. My Favourite: Where will all that superannuation money be invested? It must be good news for Australian property!

No wonder the industry super funds are going hard to demolish every other type of super fund except themselves – what will the landscape be like with $5 Trillion sitting in union-controlled funds? Imagine that funding the Labor Party!

Super and Property

The shift to SMSF and property is well under way and expect with any significant market correction, industry and retail super fund members will choose to do their own thing – be captain of their own ship courtesy of their balances going down. It happened in 2009 – 2012 and will happen again. Everything is cyclical and SMSFs are demographically cyclical and counter-cyclical to the markets. I did a talk last year and a participant with $1M in an industry super fund could not see the benefit of being in a SMSF because his returns were so good. Obviously, he did not remember the GFC!

The problem with the next generation coming into super is they have good starting balances for SMSFs – more than the $200,000 suggested by ASIC and a long-term growth plan, after all if a SMSF buys a property with the members aged 40 when will that property ever need to be sold? Thirty, forty or fifty years. Here’s another fun fact – how many companies on the ASX in 1980s and 1990s are still around? Quintex, Ariadne, Bond – the ghost list is big.

But the Banks stuffed it

With a balance of $200,000 or even $400,000 if we consider our earlier 40-year-old couple means it is difficult to build a meaningful and diversified property portfolio without borrowing. So, the blessing for the property market was the introduction of Limited Recourse Borrowing into the SMSF market. The problem everyone went to the banks and they made it ridiculously difficult in terms of reviewing deeds, getting sign off and much more. We have all had experiences dealing with them and then they pull out of the market as they deemed it too risky. And post Royal Commission don’t expect to see them come back in any time soon and you know what I say – it’s a good thing. With a new demographic who are not slaves to the banks like their parents were, there are great opportunities for second tier lenders, peer to peer lenders and credit unions to take their place. Plus, the new breed of SMSF lenders are not there to put a wall between super and property. And with $3 Trillion to be accrued in SMSFs in the next 20 years my feeling is that there will be a lot of property in these funds.

To find out my views further, book in for next our Current SMSF Lending Landscape on January 22 at 12.30AEDST webinar where I will interview Michael Jeffriess and Chris Jones who is from EMoney who are the forefront of new SMSF lending. To register, click here: THE CURRENT SMSF LENDING LANDSCAPE