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
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:
- Australia still has a shortage of property but there will be certain suburbs in areas such as Sydney and Melbourne where we’re going to have a potential oversupply. For example, in the inner city parts of Melbourne and also the Western suburbs of Sydney, the supply of units is starting to have a dampening impact on prices. If SMSFs are investing into areas where there’s a lot of new supply, this could affect the building valuations. SMSFs may not be directly affected by it because they’ve got financing themselves, but they may end up being indirectly affected by weakness in the broader market.
- Until recently, the Australian Prudential Regulation Authority (APRA) had been underestimating the amount of money flowing to residential property investors. Off-the-plan residential property is particularly worrisome since investors who have bought off the plan may have difficulty getting finance from the banks further down the track. There could be a period of short-term indigestion and some of the recent surge in unit construction or apartment construction coming into the market could be a dampener on prices in some areas.
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.
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 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.
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.