Self-managed super is funding a ‘shadow-banking’ system driving property ownership

Apartments for sale in Sydney. William West/AFP/Getty Images

Self-managed super funds (SMSF), which now have a combined $622 billion in assets, or about 29% of Australia’s total retirement savings, are increasingly heading to property seeking better returns.

These retirement savers — more than 1 million of them managing 577,000 funds — are having an increasing influence on the market. Their assets grew by $18 billion in the 12 months to June and they own about 16% of the Australian equity market.

Their Australian equity allocation in their portfolios remains stable at 40%, or about $250 billion, but the amount of cash they are holding is trending lower at 26% or $159 billion.

Analysis at Credit Suisse shows these selfies, as the funds are nicknamed, hold $149 billion in property and that this is growing at twice the rate of cash at the moment.

Source: Credit Suisse

“At this pace, it should become the second biggest holding for selfies in 24 months,” write Hasan Tevfik, Peter Liu and Damien Boey in a note to clients.

“As the Aussie banks are pulling back from lending to developers, selfies are stepping in.

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

The analysts make this observation after discussions with a number of people in the industry of financing residential developers, including the developers, financial intermediaries and others associated with the process.

Returns from equities in 2016 didn’t make the grade. Most superannuation accounts will have staggered, exhausted to the end of the 2016 financial year with a slightly positive result.

Median balanced accounts — those with exposure of between 60% and 76% to growth assets where up to 70% of Australians have their money — will have gained only about 2.3% over the 12 months.

Here’s the trend for assets allocations within self-managed super funds:


“We understand why selfies are ploughing money into residential developments, potentially at the peak of the Aussie housing cycle,” the Credit Suisse analysts write.

“After-all the return on cash is paltry, the return on large cap stocks has also been poor (and volatile) and the track-record of these funds has been good .. since the financial crisis.”

However, the analysts believe believe selfies can enjoy double-digit returns in the equity market without having to buy into an industry that could be peaking.

Their picks include Macquarie Group, AGL Energy, BHP Billiton and Eclipx.

“These companies are in a position to provide double digit total returns,” the analysts write. “We have removed those companies that are more highly leveraged and poor generators of free cash flow.”

Here’s the Credit Suisse selection of stocks that provide a 5% gross dividend yield and are expected to grow over the next two years.