Should you hold Commercial property in your Super Fund?

We see a lot of super funds that hold commercial property. In fact, for some super funds they were set up for this purpose – often so that a business owner could purchase their business premises with their super fund. After all, if you have money in super that you can’t access it makes sense to have a less liquid investment in that vehicle while you’re still accumulating your retirement savings.

It’s also nice to have an asset in the super fund that provides a regular income like weekly or monthly rent.

Things to keep in mind if you’re thinking of having property in your super fund

Before you invest in property using your super though (or if you’re reviewing your holding in your super) it’s worth remembering a few important points:

1.  One day you have to start drawing out of your super fund.

When you commence a pension from your super fund you will have to draw a minimum amount every year. Then, as you get older, the amount you have to draw each year increases.

Minimum pension payments (as at 2017/18)

Under 65                4%

65 – 74                     5%

75 – 79                     6%

80 – 84                     7%

85 – 89                     9%

90 – 94                     11%

95+                           14%

As a trustee of a self managed super fund, you need to make sure that you have the cash flow to meet these minimum payments each year. Having property in your super funds might provide your with regular income, but will it be enough to meet your cash flow requirement? While your rent might be enough to cover the draw downs at 4%, do you have enough other income in your super fund to meet the drawdowns when they increase to 6% or even 14%?

2.  Because of the size of investment in property it’s often hard to get diversification

Whether it’s meeting cashflow requirements, or managing risk, it makes sense to hold your retirement savings in more than one basket (especially if interest rates start going up and property prices take a breather).

A self managed super fund should have (in fact is required to have) an investment strategy that outlines it’s asset allocation. Over time this should include the full range of asset classes:

• Cash
• Fixed interest
• Property
• Australian equities
• International exposure
• Infrastructure

This will help your investments weather the volatility that can (and will) happen in any one of these areas.

Typically, having property will take a large percentage of your fund, which can make it harder to gain diversity and manage risk.

3.  Liquidity can be an issue

Liquidity is an extension of the past 2 issues really. If you do need to increase cashflow, need some funds urgently, or want to take advantage of an opportunity, property isn’t a particularly liquid asset.

You can’t sell a part of it, and it can take time to sell (and, as with any investment, you never really want to be in a position where you are forced to sell).

This is very different to cash (which you can access immediately), or shares (which can be accessed in 3 days), or managed funds (which are usually within 2 weeks).

So it’s not a bad thing to have commercial property in your super fund. Part of your long term plan, though, should be how to diversify before you reach retirement, which will give you more freedom with your cash flow, and lower risk than having all your eggs in one basket.