'Just because you can doesn't mean you should': the super property trend worrying experts
Property Buzz host says a wave of ill-informed commercial buys through SMSFs could erode retirement savings and draw regulators and super fund lobbyists into the debate.
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Investors piling into commercial property through their self-managed super funds are setting themselves up for losses that could erode their retirement savings, according to Property Buzz host Phil Tarrant.
Speaking on the Property Buzz podcast with co-host Liam Garman, Tarrant said he expected regulators and the bureaucracy to start examining the trend.
"Just because you can invest in commercial property through leveraged borrowing doesn't mean you should do," Tarrant said.
He drew a sharp line between the forgiveness of residential property and the consequences of getting commercial wrong. A bad residential decision might slow an investor down or cost them in missed opportunity, he said, but it is usually easier to exit.
"You make a bad decision in commercial, in or out of super, has consequences. But if you do it inside a super, what that is going to do is erode people's retirement savings."
Tarrant pointed to the risk of investors being unable to service debt inside a super fund, where borrowing is limited and non-recourse, and where contributions may not support the repayments.
Super funds watching closely
Tarrant said retail and industry funds and their lobbyists would be monitoring the shift of member money into commercial property held in SMSFs.
"You're going to have every single super fund, retail or industry fund in the nation, and no doubt their lobbyists are already in there saying, watch this, watch this," he said, adding they would be telling government why the trend is not good for Australia.
He said they would probably have a reasonable argument, given the quality of some of the decisions being made.
Tarrant also flagged the price point problem. With deposits of perhaps $200,000 to $300,000, SMSF buyers are not accessing prestige commercial assets.
"You might be getting stuff that might yield better, but it's considerably more risky as a result of it," he said.
Tarrant was careful to say he was not talking the asset class down. He holds both commercial and residential property and described commercial as a good asset class, "but it's got to be done right".
Buyer's agents moving into commercial
Garman said he hears multiple times a week from people who have been sold bad commercial property or followed bad commercial advice.
"If you do it wrong, you can lose hundreds of thousands of dollars," he said, citing a lack of process and due diligence, and in some cases fake leases where there is no actual business operating at the premises.
His bigger concern is who is selling the advice. With investor loan volumes dropping and buyer's agents having a harder time in the residential space, Garman said a growing number who have never worked in commercial are now promoting it on social media.
"You can't scroll through Instagram without seeing a buyer's agent trying to flog you commercial. Hey, you've got a lot of resi. Now it's time to move on to commercial. It is not that simple," he said.
Yield is a reflection of risk
Garman said the most common mistake is treating a high yield as a bargain rather than a warning.
In residential, he said, a landlord facing a vacancy can usually drop the rent $10 to $20 a week and find a tenant. Commercial does not work that way. He pointed to high streets where shop after shop sits vacant, naming Military Road in North Sydney as an example.
He said properties in places such as Karratha or Broome might show yields of eight, nine or 10 per cent, but that premium reflects the risk of a local shock at a mine or port leaving the owner untenanted for a long stretch.
Victor Kumar of Right Property Group, who features in a new six-part series on commercial property investing alongside Tarrant, has argued investors need to earn their stripes before moving into the sector, Garman said. That includes holding a buffer capable of covering six months or more of vacancy.
Garman also urged investors to read the lease rather than just the building. Property management fees and upgrades can sit with either party, and he cited an example of an owner left with a $200,000 bill for air conditioning units in a large industrial space.
Listen to the full episode: Government Supermarkets, Visa Caps & Perth Property | Property Buzz Live
