Personal guarantees have role to play with LRBAs

Thu, 10 Oct 2019 20:50:51 +0000

Per Amundsen

Calls to prohibit the use of personal guarantees to support limited recourse borrowing arrangements (LRBAs) fail to understand this is common practice with almost all lending to small businesses, says Per Amundsen, Head of Research, at the specialist commercial property lender Thinktank.

Amundsen says: “The reasoning behind this practice is quite simple – the ultimate beneficiaries are those individuals whose guarantees are sought.

“Guarantees used to support LRBAs are specifically provided for in the SIS Act and ensure that their recourse to other SMSF assets is no less limited than the original lender, and if funds are provided as a source of repayment these are then deemed to be contributions to the SMSF.”

LRBAs have remained in the spotlight since their introduction in 2007. The Financial System Inquiry (2014) recommended their abolition as did the Council of Financial Regulators in its February 2019 report. At the last election, it was Labor Party policy to abolish LRBAs. To date, the Government has resisted all recommendations to end SMSF borrowing, although it wants another review in three years.

Amundsen says: “Although the Council of Financial Regulators did recommend banning LRBAs, and if that proposal were not adopted to prohibit the use of personal guarantees to support LRBAs, its report still concluded that LRBAs posed no systemic risk to the superannuation system.

“This is hardly surprising. The fact that real property investment represents only a relatively small proportion of total SMSF assets – 14.3 per cent as at March 2019 – compared with 56.7 per cent for cash, deposits and listed shares and trusts. Real property investment is broken down to 4.9 per cent residential and 9.4 per cent non-residential.

“In the February 2019 CFR report, non-residential real property made up 46 per cent of that supported by LRBAs and is known as ‘business real property’ when used ‘wholly and exclusively’ for business purposes.

“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them. The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.”

Amundsen says: “The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses.

“The ATO’s efforts with respect to Investment Strategies and the late submission of Annual Returns is a great start to this as are ASIC’s enforcement actions in recognition of failings by licensed advisers and others who owe a duty of care to trustees and members.”

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Investors need to keep sharp eye on commercial property opportunities

Thu, 05 Sep 2019 21:50:20 +0000

Per Amundsen

The Sydney and Melbourne office and industrial property sectors still offer solid investment opportunities for investors, says Per Amundsen, Head of Research for the specialist commercial property lender Thinktank.

“Industrial property ratings in both cities were upgraded to ‘strong and improving’ last month by Thinktank, matching the Office sector ratings there, making these four market sectors the investment standouts.

“By contrast, Perth still has four out of five property sectors – Residential Housing and Units, Office and Industrial – rated as ‘weak’, while for Adelaide Retail and Industrial are rated ‘weak’. However, Adelaide’s Office and Residential markets are ‘improving’. Brisbane’s markets are all rated ‘fair’ with Office and Industrial offering some upside with an ‘improving’ tag.

Amundsen says investors need to tread warily with the MSCI All Property Index for the year to 30 June 2019 down to 8.3% compared with 11.6% last year and 10.3% six months ago – the lowest level since September 2010.

“But for investors, and especially SMSF trustees wanting income, the outlook is more optimistic. Although income returns hit 5.4% at 30 June 2019, they have traded in a fairly narrow band since peaking at 7.5% in June 2010.

“Capital returns have been far more volatile over this period, peaking at 6.8% in March 2016 and then falling gradually to 3.4% in June 2019.” [This excludes the negative returns of June 2009 to June 2010.]

He says the Retail sector was proving a real drag on the property market, with total returns falling to 3.7% from 8.4% a year ago as Retail capital growth went into negative territory.

“With the Australian Bureau of Statistics showing a July retail sales slump of 0.1%, as well as plans by major retailers such as David Jones to substantially cut back on the number of stores they operate and the space they rent, is clearly having an impact on investor sentiment.

“But the Office and Industrial sectors continue to bubble along, especially in Sydney and Melbourne, with the latter showing a 13% return and the former an 11.6% return in the year to June 2019.

“Although Sydney and Melbourne are the strongest markets for both these sectors, it’s worth noting all capitals show a fairly even and steady income return.”

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AdviserVoicePer Amundsen Archives - AdviserVoice

Personal guarantees have role to play with LRBAs

Calls to prohibit the use of personal guarantees to support limited recourse borrowing arrangements (LRBAs) fail to understand this is common practice with almost all lending to small businesses, says Per Amundsen, Head of Research, at the specialist commercial property lender Thinktank.

Investors need to keep sharp eye on commercial property opportunities

The Sydney and Melbourne office and industrial property sectors still offer solid investment opportunities for investors, says Per Amundsen, Head of Research for the specialist commercial property lender Thinktank.