Will super funds investing in rental housing work?

super funds investing in rental housing work

The government is looking for ways to utilise this pool of savings for greater social benefit. Super funds love regulated returns but they have to be high enough to make sense.

Housing assets have a high level of costs (fees paid by members). Management of the assets must be conducted by the funds themselves, they are directly owned after all. These are often a special vehicle that has its own governance and reports to multiple super fund investors.

Direct costs of housing assets can be in excess of 2%. In addition, Housing also has high maintenance costs to keep buildings to the high standard expected by tenants, even higher in buildings with many communal facilities. In addition, government taxes such as rates and land taxes (only the ACT and NSW so far but others will follow) eat into returns. Corporations are also subject to Capital Gains Tax (CGT) if they sell the properties for a gain which do not apply to owner occupiers.

Many of these costs are either non-existent or far lower when the home is directly owned by the occupant. Think of how much it costs an owner to change a washer in a leaking tap compared with a call out for a plumber, and fees for an agent.

Even assuming a solid long-term capital return of 4-5% per annum, gross rental returns must exceed 6% in order to close to earning a target of 7-8%. This would require significantly higher rents than the current market. This may be possible for niche developments but is unlikely to be widely adopted.

Further, most of this hypothetical return is tied up in capital gains which aside from being unrealized, also further exacerbates the liquidity problem for funds as members draw down during their retirement. In short, there are far more attractive infrastructure investments for super funds and no shortage of opportunities across the globe as the world seeks to decarbonize. A rapid process over the next 2 decades which will require trillions of dollars of fresh capital investment. Visit Our Leg Up to find out more.

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