Our super system, SMSFs and property

By Cedric Fuchs

March 23 2018
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Australia has one of the best retirement savings schemes in the world. We now have the third or fourth largest retirement savings pool in the world.

I am often surprised that more people do not appreciate the benefits of the system that is founded on the superannuation guarantee system introduced in the early 1990s. The essence of the system is a compulsory long-term savings regime residing in a secure and tax-advantaged environment that maximises the benefit of compounding.

Reform was inevitable

I understand the frequent criticisms by various vested interests and particularly the view that it is too complicated and has been changed too many times. That’s fair enough, but I think there can be no doubt that some of the changes made by Peter Costello in the 2000s were too generous and more importantly unsustainable. Some people were pumping so much money into their funds they were turning it into a tax shelter and I don’t step back from my public view that it was correct to reign in the madness.

Follow the money

Money always follows assets that have a tax advantage, and in Australia that is housing and superannuation. I have always thought that I should maximise the money I put into super and that a self managed super fund was be a good vehicle for that. Given my role at Charter Hall, I am regularly asked what are good property investments for an SMSF. I have investments beyond my SMSF that sometimes may be more aggressive, or up the risk curve somewhat, but with an SMSF, particularly as one approached retirement, it pays to be risk averse. The large super funds who manage the great bulk of Australians retirement savings via the compulsory superannuation guarantee generally allocate between 8 per cent to 20 per cent of their portfolio to property. These people are the professional money managers and their actions I believe provide a good bench mark for self-directed investors and savers who run their own SMSF. The critical point to note is these professional money managers allocate their property dollars only to investment-grade commercial property. They don’t invest in residential property. The units are too small, the net returns (after transaction costs and taxes and upkeep) are too low and too unpredictable. It’s different in the US where there are very large-scale single owner residential complexes that institutions do invest in.

Follow the professionals

In Australia, the professional money managers look for the best quality commercial and industrial buildings with the best quality tenants, all generally with long leases. This is the type of property that Charter Hall buys and manages on behalf on investors and it’s why the big financial institutions are prominent among our clients. The good news is self-directed individuals can invest in this same asset class through Charter Hall direct property funds and can be co-investors in the very same buildings. We often have buildings in our funds that may have, say, 50 per cent institutional money and the balance made up of small unit holders – the new office building in Parramatta tenanted by Western Sydney University, which is contained within our Direct Office Fund and is currently open for investment, is a good example.

Skin in the game

As well as investing alongside large institutions, SMSF trustees and members who choose a Charter Hall direct fund or AREIT are also investing along side Charter Hall executives, and indeed the listed entity that is Charter Hall. We are great believers in the ‘skin in the game’ concept. We don’t expect members of the public to invest in any fund our business and staff doesn’t invest in. It is when the firm and its staff’s interests are 100 per cent aligned with investors that you are likely to get the best outcomes and performance. Combined with our approach to quality and risk, this is a key reason for our success.

Cedric Fuchs is the co-founder of Charter Hall.

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