SMSF investors should be able to pinpoint reasons for property rises before they buy
Buyers should be able to pinpoint reasons why a particular property will appreciate in value and, if they can’t, they should give it a miss.
Perth property researcher Gavin Hegney, founding director of LMW Hegney, says this is particularly relevant now as many older buyers – often through their SMSFs - base their retirement incomes on, hopefully, rising property values.
Presently, growth in the self-managed super funds and their frequent use as property-buying vehicles – perhaps in over 70% of transactions - has prompted some commentators to say they are helping create a property ‘bubble’.
While property investing is an acknowledged ‘super’ strategy, it can only be judged on the income a property generates and its increase in value over time.
Mr Hegney says that, to generate a decent income, a property has to have a good reason to grow in value. Investors should be able to identify that - or those - reasons before buying.
‘’My thoughts are not so much the volume, but that often the SMSFs are buying the wrong types of properties,’’ he said.
‘’Regardless of the ownership of the property, be it in a private name or a SMSF, its financial success relies on one thing: that the property goes up in value and that, when combined with the rental return, that it creates wealth for the owner or beneficiaries over time.
‘’History has shown that, to create wealth during the early and mid section of the property cycle, there must be a realistic and identifiable reason why a property will increase in value, and the owner must have a best guesstimate as to what that value should be.
Mr Hegney said experience and research can help identify these points.
He said significant developments in most capital cities will have a knock-on effect on the values of property in surrounding areas. For instance, in Sydney it may be the effect of the Barangaroo development and its flow-on effect to specific pockets of Sydney, or, in Perth, it may be the City Link and waterfront developments and their knock-on effects.
‘’There are numerous examples in most cities which simply require an identification of major changes and then an answer to the question: ‘What would this property be worth if this new development or infrastructure was in place?’
‘’One concern I do have is where a SMSF simply buys a new apartment that has very little identifiable reason to increase in value, and then holds onto that property for 10-20 years .
‘’Typically, that new apartment of, say, $600,000 becomes worth, say, only $450,000 as a 20-year-old apartment in today’s dollar terms.
‘’That difference in value must be made up in value terms, plus a reasonable growth factor as well, before the owner of the new apartment creates real wealth.
‘’If it has a real location reason to increase in value it may be worth buying, but, without it then the prospect of real growth may be very difficult.’’
Mr Hegney said this situation ‘’becomes very interesting’’ considering that SMSFs today control about $200 billion in property investments with gearing of around $2.4 billion.
‘’If they decided to gear up then this sector could increase over 100-fold in today's dollars. Let’s hope most of them get it right.’’
