Real Estate Investing – it’s not just residential investment property
There have been numerous stories in recent times about the increase in Australian residential property prices, particularly in Sydney, though as outlined below there are other property investments you might consider. Christopher Joye, writing in the Australian Financial Review recently noted that Australian home prices have increased very significantly since the mid 1990s, “massively outstripping any other peer country”. ANZ chairman David Gonski has warned Australia’s booming housing prices cannot go on forever and the market will eventually experience a correction. He noted that all the big banks were “very aware of history” when it came to lending in the residential mortgage market and said that “there will come a time when there will be a correction.” He added, “The fact is, anyone who believes prices always go up is, I think, a fool.”
For investors considering new property investments, it is worth remembering that there are alternatives to residential investment property. For example, there are numerous companies listed on the ASX known as a-REITS (formerly known as Listed Property Trusts or LPT’s). These companies invest in a variety of assets including CBD office buildings, retail shopping centres and industrial warehouses. REITS investing in similar assets are available on overseas stock exchanges.
Many superannuation funds invest in REITS either directly or via managed funds, a number of which are readily available to Australian investors. These REIT investments are typically focused on well located property leased to credit worthy tenants and have a focus on secure rental income with modest capital appreciation over time.
There are also property companies listed on the ASX and other stock exchanges, many of which are somewhat higher risk because they are seeking to achieve higher returns through property development and refurbishment of the existing property.
Other real estate investment alternatives include unlisted real estate funds or property syndicates, many of which own a single asset, such as an office building. Larger unlisted property funds typically own multiple assets to provide greater diversification. Such funds sometimes focus on particular sectors such as childcare centres, medical centres or retirement villages.
Negative Gearing of Residential Investment Property
The majority of residential property investors – over 90% – invest in existing dwellings rather than new construction (see chart), which means that they are adding little to our housing stock but rather turning homes for sale into homes for rent and, arguably, turning would-be owner-occupiers into renters. This has led some commentators to argue for either the modification or even abolition of negative gearing as they question the public benefit.
The Productivity Commission reported last year that “Other aspects of the personal taxation regime — including negative gearing rules, ‘capital works’ deductions for buildings, the 1999 change to capital gains tax for assets held by individuals, and high marginal income tax rates — have combined to magnify the attractiveness of investing in residential property during the recent upswing in house prices, thereby adding to price pressures”.
There is a credible argument that interest payments are, and should be, a deductible expense for any income-producing asset, including residential investment property, but that deductions should not be claimed against non-related wage and salary income. The overwhelming majority of developed countries do not allow such treatment.
Investors in negatively geared residential investment property should be aware that with the Federal government looking for ways to reduce the budget deficit, at some point negative gearing could be quarantined for all assets/investments, not just housing, as was the case when the Hawke Government temporarily ‘abolished’ negative gearing between 1985 and 1987. My personal view is that should the government in the future restrict or abolish the right to offset losses on property against unrelated salary income, grandfathering of existing loans would likely apply to minimise any political backlash.
Further increase in Super Guarantee Payments delayed 7 years until 2021
The superannuation guarantee (SG) will remain frozen at 9.5 per cent until 2021/2022 as part of the Government’s negotiations with the Palmer United Party leading to the successful repeal of the Minerals Resource Rent Tax.
As a result, the next increase isn’t happening for 7 years. The staged increase in the SG to 12 per cent will take until 1 July 2025 – eleven years from now, seven years later than the current law dictates or nine years later than the original Labor legislation intended.
The Federal Government has undoubtedly broken its pre-election promise to make no new “adverse changes” to superannuation in its first term of office. While undoubtedly some employers will be appreciative that the amount of SG they are required to pay will be reduced for a number of years, it would be difficult to find any employee who would not regard lower superannuation payments as an “adverse change”. Needless to say, no changes to the generous superannuation benefits available to federal politicians are to be made. The Financial Service Council (FSC) said the new delay to the SG increase would mean $128 billion less in savings by 2025 for “working Australians”, though it has to be recognised that they have a vested interest in the growth of the superannuation industry.
Preservation Age – it’s gradually increasing
As people reached their 50s, the superannuation rule known as the preservation age can become quite significant. For example, to be eligible to commence a transition to retirement (TTR) income stream the super fund member must have attained preservation age. For members born before 1 July 1960, the preservation age is 55 years and for many members retiring today or wishing to commence a TTR this will be their preservation age.
However, we are fast approaching the time when superannuation fund members will have a preservation age greater than 55 years .Super fund members born after 1 July 1960 are subject to a gradual increase in the preservation age with those members born after 1 July 1964 having a preservation age of 60 years.
The preservation age impacts a number of superannuation strategies including:
• Commencement of a transition to retirement income stream
• The permanent retirement condition of release
• The low tax rate cap applicable to lump sum withdrawals
• The withdrawal and re-contribution strategy (outlined in last month’s newsletter)
Also, eventually the preservation age will align with age 60 and the ability to take tax free payments from your superannuation benefit.
The table below shows the relevant birth date ranges and the increased preservation ages.
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|On or after 1 July 1964||60|
This newsletter contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.