SMSFs, our shadow banks, funding property market: Credit Suisse

The self-managed super funds are part of the “shadow banking” market financing property developers.

Credit Suisse analyst Hasan Tevfik. Picture: James Croucher

The $622 billion self-managed superannuation fund sector is ­becoming an increasing part of the “shadow banking” market fin­ancing residential property developers even as traditional lenders step back.

In research that may startle regulators, Credit Suisse’s equity strategists claimed SMSFs had stepped up their exposure to a “potentially vulnerable part of the economy” even as the banks “don’t want to touch” developers.

“Selfies are ploughing money into residential developments, potentially at the peak of the Aussie housing cycle ... helping to fill the void left by the major banks,” said Hasan Tevfik, who ­researches SMSFs, or “selfies”, due to the impact their $622bn in assets can have on markets.

“Our work highlights that the Aussie banks are appropriately pulling back from more risky ­financing at the right time — before the defaults begin in earnest.”

The findings follow repeated warnings by the RBA in recent years to SMSFs about gearing up to make “speculative” direct property purchases with their retirement savings in a risky asset class.

More recently, the RBA and several economists have flagged risks in the commercial property market following a 42 per cent jump in units under construction to 110,000 in the past year across Sydney, Melbourne and Brisbane.

With the RBA cutting the cash rate to a record low 1.5 per cent, Mr Tevfik, who masqueraded as an SMSF operators as part of the research, said SMSFs were getting exposure to residential developers through buying senior debt, mezzanine debt and preferred ­equity. Mezzanine debt — a lower ranking, typically unsecured ­security — was the most popular, delivering an internal rate of return of 15-20 per cent a year, versus the “paltry” 2 per cent return on cash, he found.

“Selfies have now become part of our shadow-banking system,” he concluded. “SMSFs have been financing residential developers since the global financial crisis and the pace looks to have picked up this year.”

As the risk of an apartment glut grew, Mr Tevfik said the major banks had pulled back lending to residential developers with annualised growth of just 5 per cent this year, down from 20 per cent last year.

Drawing cheers from banking analysts, the big banks’ residential developer exposures shrank in the June quarter as foreign banks continued to take market share, according to Australian Prudential Regulation Authority data.

Unlike the highly leveraged banks, Mr Tevfik said SMSFs had little debt and were using equity, reducing the risk of a “systemic crisis” like the US experienced when shadow banks, such as ­Fannie Mae, fuelled the subprime crisis: “If any of these loans turn bad, selfies will bear the pain.”

After 45 per cent growth in real house prices since 2012, a global study by UBS released this week claimed “bubble risk” was imminent in Sydney, which ranked fourth riskiest after Vancouver, London and Stockholm.

CLSA analysts this month warned that the bubble was only being held aloft by strong interest from foreigners, tipping the “crisis” to start with problems in cheaper apartments and then defaults among small developers.

Mr Tevfik said there were many intermediaries that helped SMSFs channel money to residential developers, including through buying into unlisted trusts set up since the GFC that struggled to explain how defaults were dealt with.

Senior debt was the safest investment, but that paid lower yields of about 8 per cent, versus more than 20 per cent and about 16 per cent for the riskier options of preferred equity and mezzanine debt, respectively.

Mr Tevfik said estimating the total size of lending by SMSFs to developers was difficult. But just based on the “fraction” of intermediaries he had spoken with, SMSFs were piling in billions of dollars a year.

The banks have repeatedly played down concerns about the property market, saying underwriting standards and the jobs market have held strong. RBA governor Philip Lowe has said he is “more comfortable” than a year ago as credit growth and price gains have slowed.