RBA warns on property and hybrid securities

Central bank worried about SMSFs investing in property

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published September 25, 2013 1:40 pm AEST

In its bi-annual Financial Stability Review, the Reserve Bank of Australia has warned trustees of self-managed super funds (SMSFs) to be fully aware of the risks of investing in property and hybrid securities.

Changes to legislation in recent years have permitted superannuation funds, including SMSFs to borrow for investment, such as buying property. Since then, property holdings by SMSFs have increased and has been heavily promoted, which could lead to speculative demand – and a housing bubble.

What SMSF trustees need to understand is that in many cases, they are personally liable for making repayments on the property loan in the SMSF. Additionally, if there is a large downturn in the property market, not only will SMSFs be hit by falling asset values, but if they also hold shares in the banks, sliding bank share prices could deliver a double-whammy hit to their portfolio.

THE RBA has also warned SMSFs and retail investors to make sure they fully understand the risks embedded in complex hybrid securities. Many companies including ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have discovered that they could issue hybrid securities with potentially mis-leading returns, with buyers accepting most of the risk if anything should go wrong. For example, interest payments can be withheld, the issuers have a large degree of flexibility in buying them back and in some cases interest payable was lower than the return available on the normal shares.

The RBA also warns that banks are being forced to adapt to an environment where balance sheets grow more in line with borrower's incomes and the economy. A return to the double-digit growth rates of the 1990s and 2000s is highly unlikely says the central bank. That could see the banks underperform other sectors of the economy over the longer term.

Foolish takeaway

If your SMSF holds bank shares and property as well as hybrid securities issued by the banks, your portfolio is not as diversified as you may think it is. A falling property market could affect all three asset classes, and cause major damage to your retirement plans.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.