Pending changes to superannuation rules and a bank clampdown on lending to the sector is driving DIY super investors into unlisted property trusts, according to the head of funds management at mall landlord SCA Property Group (SCP).
ASX-listed SCP recently launched its second unlisted fund holding two malls, the Woolworths and Big W-anchored Katoomba Marketplace in the Blue Mountains and the Dan Murphy’s-anchored Mittagong Shopping Village in the NSW Southern Highlands.
The fully-occupied malls have a combined value of $55.1 million and are forecast to deliver an annual distribution of seven per cent with most of the income coming from long-term leases to Woolworths.
Seeking to raise $29.5 million for its SCA Unlisted Retail Fund 2 (SURF2) fund manager Melissa Kingham said the majority of commitments to date had come from SMSF investors.
“With changes to superannuation and banks restricting loans to SMSFs, unlisted retail property has become an attractive alternative for SMSF investors,” she said.
She added that demand was also being driven by a lack of suitable investment vehicles, with the tightening of cap rates across the convenience-based malls, making it harder for fund managers to find suitable properties.
SCP, spun out of Woolworths in 2012, owns a $2.2 billion portfolio of 79 convenience-based retail shopping centres.
The A-REIT branched out into funds management in 2015 with the launch of its first unlisted retail property trust holding five malls divested from its listed parent.
SCP is selling non-core assets into private vehicles to free up funding to grow its listed portfolio of Woolworths and Coles-anchored malls. “Our plan longer term is that every year we will launch one or two more lots of unlisted funds” Ms Kingham said.
From July 1, a new $1.6 million cap on tax-free savings held in a super pension account takes effect. Balances above that amount must remain in the accumulation phase and are subject to tax (15 per cent on earnings and 10 per cent tax on capital gain).
Borrowing to become more difficult
Jordan George, SMSF Association head of policy, said the government had recently released draft legislation, which would make it more difficult for SMSFs to undertake borrowing to finance investments, most of which are either residential or commercial property.
“The key [draft measure] restricts the outstanding value of a loan included in a SMSF members total super balance. So if its $1.6 million or more, the SMSF member can’t make any more after-tax contributions to super, which impacts on their ability to service the loan. So borrowing becomes more difficult and banks are less likely to lend,” Mr George said.
He added that banks were also “quite conservative” when lending to SMSF members, with its own research showing loan-to-value ratios of 60 – 70 per cent and lower on SMSF loans, depending on the lender.
“If SMSF members are adjusting their investment behaviour according to the draft amendments, we will see them looking at alternative investments and going to property trusts to get similar asset exposures,” Mr George said.
The latest SCP fund received an AA investment rating from analysts Property Investment Research (PIR).
“In PIR’s opinion, [SURF2] would be best suited to investors seeking a predictable and sustainable income yield, supported by a strong corporate tenant and a long-term tenancy agreement in place. The investment structure is straightforward, offering a low risk income yield over the term of the fund,” PIR said.
Ms Kingham said SCP had engaged retail consultants Location IQ to compile data on research demographics and the assessment of trade areas and retail catchments, included in the PDS (product disclosure statement) for potential investors.
“We consider this to be an important consideration when assessing properties for our unlisted retail funds as this data can greatly assist in assessing population and sales growth, market competition and the viability of tenants in retail centres now and into the future,” she said.
