Super rules not cause of LRBA slowdown

LRBA growth has slowed due to funding issues and tighter lending regulations.

A recent SMSF industry survey has revealed 41.8 per cent of all direct property holders had a gearing arrangement in place in the March quarter, slightly up from 40.78 per cent in the previous quarter, however, the super reforms are not to blame for the slowdown in growth.

The SuperConcepts “SMSF Investment Patterns Survey March 2018” found around 17.4 per cent of the total number of funds in the survey are currently using a borrowing arrangement.

In percentage terms based on the number of loans, 89 per cent of borrowed monies relate to property, with financial asset loans representing 11 per cent of the borrowed monies.

The average property loan amount was $260,000 compared to $78,000 for financial asset loans, so based on loan values, 96 per cent of borrowed monies relate to property, with financial asset loans representing just 4 per cent of the borrowed monies.

“We’re still seeing a small trend upwards in terms of the raw number of funds that are doing limited recourse borrowing arrangements (LRBA),” SuperConcepts technical and strategic solutions executive manager Phil La Greca told selfmanagedsuper.

“That’s really not that surprising because it is still a viable strategy conceptually.

“The biggest issue has less to do with the government’s regulation changes – because they’re fundamentally not attacking LRBAs but strategies that people might use with LRBAs to get around other pieces of the law – but more around the funding issues, so getting the borrowing.

“This is the real reason we’re starting to see a little bit of a slowdown in terms of the actual growth of the numbers of LBRAs.”

La Greca said related-party loans were a lot harder for SMSFs because of the safe harbour guidelines, otherwise funds faced potential non-arm’s-length income issues.

“Or you’ve got to get funding from a financial institution, which is tightening up because these are treated as investor loans – they’re not owner-occupied loans – and therefore caught in the banks scaling back on the proportion of investor loans, scaling back interest-only loans and scaling up deposit requirements,” he said.

“This has obviously had an impact.”

He said another factor impacting on SMSF LRBA numbers was the banks’ concerns around cash flows, in particular when it came to new funds.

“They’ve been very critical because if it’s a new fund that wants to set up an LRBA, you obviously don’t know about the cash flow compared with an existing fund that’s got five or 10 years’ worth of track history and having a regular pattern of contributions to the fund,” he noted.

“So all the things that a new fund doesn’t have impacts its capacity to borrow.

“That’s really where this slowdown is [happening]. But it’s still growing, it’s just a bit of a slowdown, and again, it’s not so much the super rules but the general lending rules.

“Also, remember that we’re coming from a base of zero, so 10 years ago we had none, so when we talk about these things growing in terms of number, one is a big increase from nothing so it’s important to look at it in context.”

He also said broader economic issues have an impact, such as the performance of the property market and United States interest rates, which have potential flow-on effects on funding by financial institutions and, in turn, the rate they charge.

“And the yields have got to be there. At the end of the day, the property investment or asset that you’re buying in a super fund has got to be an investment, so it’s got to get a rate of return that makes it worth doing,” he noted.

“The gearing is just the funding mechanism, so if the yield on the investment is going down because we’re getting market prices falling, does it stack up as a better investment compared to other options.

“That’s really what’s going to drive LBRAs going forward.”

The survey covers about 2600 funds, a sample of SMSFs administered by SuperConcepts, and their investments held at 31 March. The assets of the funds surveyed represent about $3.1 billion.

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