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Written by Per Amundsen, Head of Research, Thinktank
For a self-managed superannuation fund (SMSF) debt instrument that has, in most instances, delivered in spades for its various borrowers and lenders, Limited Recourse Borrowing Arrangements (LRBAs) have never been far from controversy since their inception in 2007.
Whether it be an SME using an LRBA via their SMSF to acquire their business premises (a “business real property” transaction under the relevant SIS Act) or a couple opting to buy an investment property, the record shows very few have encountered issues with this type of credit facility.
Even the pandemic hardly shifted the dial – arguably validation for conservative loan-to-value rations (LVRs) and the input of good specialist advice to SMSF trustees going down this path. The rogue adviser using an LRBA to push a property sale was the rare past exception, not the rule, with ASIC’s crackdown on this practice having had a salutary effect. Just as significantly, most LRBA lenders require their mortgage brokers to have undergone specific training to ensure they can competently manage a specialised credit product and a process that is highly regulated.
There’s no argument that more SMSFs are choosing to use LRBAs. At 30 September 2021, ATO figures show LRBAs stood at $62.9 billion out of $860 billion in total SMSF assets. Measured against the 30 June 2016 of $26.5 billion, that’s a 137% increase. But in the past three plus years, from 30 June 2018, that growth has slowed quite markedly, up 37% from $45.8 billion.
Yet some critics seize on the growth rates to say it represents a systemic risk to the superannuation system and property markets because, well, it’s growing. However, there is no valid attempt at any quantitative analysis to demonstrate this is the case; the argument is simply that more LRBAs equal greater risk.
In arguing this line, they draw support from the Murray report that handed down its final report in December 2014 that recommended that LRBAs should be abolished – a proposal the Coalition Government chose to set aside. But the inquiry’s argument was qualitative in its analysis, based on the premise that SMSFs should not be taking debt into retirement. [Close to 100% of LRBAs, incidentally, are in the accumulation phase at the state of the loan with trustees usually paying off the facility before retirement.] The report simply didn’t produce hard evidence of LRBAs being intrinsically flawed.
By contrast, the Productivity Commission, in its January 2019 final report into superannuation, said the low level of borrowing in the SMSF sector meant there was no “material systemic risk”, although it did add that LRBA borrowing should be monitored to prevent this happening in the future – a sensible proposal for any type of finance.
In the wake of the Murray inquiry, the major banks began to step back from LRBAs (except ANZ that never offered them). For critics, this was further evidence that the system was faulty; if the banks were wary of LRBAs, then surely the risks were too high.
But we would argue that was simply not the case. The banks had concluded that this form of lending was too time-consuming, difficult to manage and deliver consistently across large retail networks, and not as profitable as other types of lending.
But non-bank lenders – any lender that isn’t a bank, credit union or building society – have been happy to service this market, with their more centralised processes and agility to effectively work in with the differing professional advisers servicing this space thereby allowing it to happen far more efficiently and profitably. Quite simply, it was a business decision. Indeed, it is an outcome that has suited the banks and non-bank lenders to mutual effect, especially the latter with its share of the commercial real estate debt market set to hit $50 billion by 2024.
Thinktank’s considerable experience in this market, which it entered in 2013, suggests SMSFs taking out LRBAs have sound and well-informed investment and/or commercial reasons for doing so. Their decisions are considered, professional advice is sought in all cases, and the LVRs conservative. In many instances the asset is business real property that serves the dual purpose of putting their businesses on a sounder commercial footing while contributing to their superannuation nest egg and a self-funded retirement.
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