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Residential property overvaluation a potential risk to SMSFs


SMSFs that are heavily exposed to overvalued residential property could be adversely affected in the future.

In the past decade, Australians have been battling expensive home prices, poorer housing affordability and excessive growth in household debt. Despite this, it’s estimated that 50% of household wealth is invested in residential property. In this article, we compare the performance of residential property against commercial property and make a case for limiting exposure to housing as a superannuation investment.

Performance of residential property versus commercial property

In the 1980s, the rental yield on residential and commercial property (as measured by a mix of office, retail and industrial property yields) was similar. Today, commercial property has an average rental yield which is far higher; around 6% for commercial property compared to around 3% for residential property – this can be seen in the chart below.

Yields are now much higher in commercial property than residential property

chart-1

Source: REIA, AMP Capital

The case for limiting exposure to residential housing

Given that many SMSF trustees are already invested in residential property outside their SMSF, there is an argument against making large allocations to property in superannuation as well.

There are two considerations around this:

The bottom line is that with Australian residential property overvalued on most measures and the strong cities of Sydney and Melbourne now starting to slow, office, retail or industrial property is far more attractive for investors than housing on a medium term horizon as it is less dependent on capital growth going forward and less at risk of a correction.

Final thoughts

Residential property is considered overvalued and over-owned by Australians. As such, there’s a case for SMSFs to be diversifying where they’re not heavily exposed – and that’s probably not residential property.

About the author
Christopher Davitt
Christopher is the Fund Manager for the Wholesale Australian Property Fund. Christopher joined AMP Capital in March 2010 as a Portfolio Manager with responsibility for investing a $500m global mandate to invest in unlisted property funds. In September 2010, he became the portfolio manager of AMP Life’s $1.7 billion property portfolio.
Shane Oliver
Head of Investment Strategy and Economics and Chief Economist at AMP Capital, Shane is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
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