SMSFs ‘limiting housing downturn risks’

Self-managed super fund owners are plugging a property financing gap left by big banks, says Credit Suisse.

SMSFs are looking to fill a hole opened as the big banks pull back from funding residential property developers.

Self-managed super fund owners are plugging a property financing gap left by the big banks and in the process limiting the risks of a significant housing downturn, Credit Suisse contends.

The activity is predicated on a push away from cash given stubbornly low interest rates, with SMSF owners looking for alternative asset opportunities.

This search has led them into the shadow banking sector, Credit Suisse’s Australia equities analyst Hasan Tefvik said, as they look to fill a hole opened as the big banks pull back from funding residential property developers.

“Over the last few months we have had numerous discussions with people in the business of channelling money towards residential developers from investors like SMSFs,” Mr Tefvik said.

“From our discussion we find ‘selfies’ are essentially buying three types of resi-developer securities — senior debt, mezzanine debt and preferred equity.”

Mezzanine debt is proving the most popular, with an internal rate of return of around 15 to 20 per cent per annum as against just 2 per cent returns in some savings accounts.

On the surface the move into shadow banking may appear a risk factor for the economy, although Mr Tefvik notes a crucial difference between the troublesome shadow banks that have been slammed for their role in the GFC.

“Unlike the infamous shadow banks of the US subprime crisis, selfies carry very little financial leverage,” he said.

“So we have leveraged intermediaries, banks, stepping away from financing a potentially peaking industry and an unleveraged financier stepping in.

“We think this limits the potential systemic nature of any downturn in Aussie housing.”

SMSFs currently manage $622 billion in assets, highlighting how a modest shift from cash to the financing of residential property could make a significant impact.

As it stands, around 40 per cent is directed toward domestic equities, with around 25 per cent in cash assets and a similar amount in property assets.

However, cash as a percentage of the average portfolio has shrunk significantly since a peak above 30 per cent in 2012.

Mr Tefvik added the activity should aid the banks in continuing to deliver strong returns for investors given they are able to take risk off the table with reduced fear of dampening the crucial housing market.

“The banks, which are currently priced for sharp dividend cuts, are less likely to endure sharp dividend cuts,” he said.

“They are pulling back from more risky ventures at the right time, before defaults pick-up in earnest.

“We are not particularly bullish on the banks but we think they make dangerous shorts.”