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LRBA risks still not evident

LRBA lending

The move by major banks away from the LRBA lending space was a business decision unrelated to risk, which has rarely been an issue.

The ongoing presence of non-bank lenders in the limited recourse borrowing arrangement (LRBA) space and the lack of problems with this form of lending are proof they are still a valid instrument for SMSF property investment, according to a property lending specialist.

Thinktank head of research Per Amundsen said the ongoing absence of major banks did not prove the LRBA sector held inherent risks, but rather reflected their inability to engage in this type of lending compared with non-bank lenders.

“In the wake of the Murray inquiry, the major banks began to step back from LRBAs. For critics, this was further evidence that the system was faulty; if the banks were wary of LRBAs, then surely the risks were too high,” Amundsen wrote in a column for the SMSFConnect website produced by the SMSF Association.

“We would argue that was simply not the case. The banks had concluded this form of lending was too time-consuming, difficult to manage and deliver consistently across large retail networks, and not as profitable as other types of lending.

“Non-bank lenders have been happy to service this market with their more centralised processes and agility to effectively work in with the differing professional advisers servicing this space, thereby allowing it to happen far more efficiently and profitably.”

Amundsen said the shift away from LRBAs by the major banks was a business decision and worked well for the non-bank lenders, which were continuing to grow their share of the commercial real estate debt market.

He noted that despite the pressures on SMSFs holding property during the COVID-19 pandemic, there had been very limited problems with LRBAs as a credit facility, which is “arguably validation for conservative loan-to-value ratios (LVR) and the input of good specialist advice to SMSF trustees going down this path”.

“The rogue adviser using an LRBA to push a property sale was the rare past exception, not the rule, with ASIC’s (Australian Securities and Investments Commission) crackdown on this practice having had a salutary effect,” he said.

“Just as significantly, most LRBA lenders require their mortgage brokers to have undergone specific training to ensure they can competently manage a specialised credit product and a process that is highly regulated.”

He added based on Thinktank’s experience in the market since 2013, SMSFs using LRBAs had sound and well-informed investment and/or commercial reasons for doing so based on considered reasoning and professional advice, while LVRs were conservative.

“In many instances the asset is business real property that serves the dual purpose of putting their businesses on a sounder commercial footing while contributing to their superannuation nest egg and a self-funded retirement,” he said.

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