Property investment is in the spotlight at the moment, with the growing number of self-managed super funds investing in real estate attracting the attention of regulators and watchdogs.
This increase in super investors, combined with historically low interest rates and rising prices have unfortunately also lured property spruikers out of the woodwork once again.
But the Australian Securities & Investments Commission (ASIC) recently sent out a message to let the industry know it is being watched and any underhand behaviour will not be tolerated.
In a letter to the Real Estate Institute of Australia last month, ASIC warned agents and brokers that it is against the law for them to promote self-managed super funds to their clients.
“If real estate agents are providing advice rather than factual information, they may be carrying on an unlicensed financial services business in contravention of the Corporations Act,” it read. “Providing financial product advice includes making a recommendation or a statement of opinion to a person to set up an SMSF or use an existing SMSF to purchase real property.”
While this is a step in the right direction, the alarming fact is that there is still no regulation in the property investment industry. This means that anyone, regardless of their experience or qualifications, can advise you on how to invest your money in property and there are currently no laws in place to protect you if it all goes wrong.
Thankfully, the Property Investment Professionals of Australia (PIPA)is working to change this situation. The not-for-profit association upholds a strict code of conduct and has created standards and accreditation for its members. It has also been actively lobbying the government to introduce legislation to protect property investors.
“Unfortunately, as long as property investment remains unregulated, Australian investors will remain at the mercy of profiteering property spruikers,” says PIPA chair Ben Kingsley. “However, the new Liberal government had expressed concerns over the lack of property investment regulation whilst in opposition, and we are hopeful that in the New Year we will see some progress made in this regard.”
In the meantime, how can consumers protect themselves? We sat down with PIPA’s Ben Kingsley to find out where the industry stands in terms of regulation and how property investors can avoid being stung by unscrupulous operators.
SMSFs seem to be attracting the attention of regulators lately. Can you tell us where the property industry currently stands from a regulatory point of view?
Property still remains an unregulated environment. Unfortunately we still have a situation where anyone who talks the talk can put on a shiny suit and convince people to give up their life savings without having any very transparent recourse against them. From the Property Investment Professionals of Australia’s viewpoint, that’s unacceptable and that’s obviously why we spend our time lobbying government to try and bring regulation in.
In regard to self-managed super funds, this has been a window of opportunity for the regulation conversation to be further explored. A self-managed super fund is a licensed investment product so the spruikers and anyone promoting SMSFs as an ideal vehicle to have property investments in are crossing the line. If they’re advocating to a consumer to set up an SMSF to buy residential investment property or direct property, they’re not licensed to do so and they will be caught under the Corporations Act.
“We’re really pleased that ASIC are getting on the front foot to put the warnings out there that it’s not the realm of real estate agents, mortgage brokers and marketeers to be selling self-managed super funds.”
So we’re really pleased that ASIC are getting on the front foot to put the warnings out there that it’s not the realm of real estate agents, mortgage brokers and marketeers to be selling the wares of self-managed super funds. That’s the realm of financial planners and also some accountants who have limited authority to do so.
So ASIC’s move is good news for the industry?
It’s definitely ensuring that there’s more awareness out there in terms of someone saying to you, “You should buy an investment property â€“ you can afford it, you just need to buy it through your super fund.” That sort of conversation is simply unacceptable without obviously taking into account the personal circumstances of the individual but also being licensed to provide that kind of advice. So we’re pleased about seeing regulation in that space.
Would you say SMSFs have been an easy target?
It’s definitely the fastest growing space. And some might say rightly so, because there are a lot of people who want control of their own destiny and an SMSF can be a reasonable vehicle for that control. So we’re seeing a lot of people take an interest in that area. And secondly we’re seeing a lot of people take an interest in property as an investment option. But what we want to see less of is the spruiking going on from people who don’t know what they’re talking about when they’re not qualified or licensed to do so.
It’s scary isn’t it? So there’s currently no regulation whatsoever?
Zero regulation. What can happen in an SMSF sense is that if the fund is set up through an accountant or financial planner and the trustees of the self-managed super fund are saying they’re considering property as an investment option, then they’ve really got two options â€“ they can go in through what’s known as a real estate investment trust (REIT) and that’s a structured way of investing, it’s a managed scheme. Whereas you can also go into direct property where you control the asset yourself â€“ and that’s the area that has sales agents and developers and marketeers salivating about how to move their development stock and their properties that they’re building out in the broader marketplace.
How can consumers protect themselves from these kind of unscrupulous operators?
Education is key. One of the best ways to know whether you’re dealing with a legitimate operator is to actually ask them â€“ what qualifications do you have to give property investment advice?
Inside the association we offer a Qualified Property Investment Adviser course so you can become a QPIA, which is in line with the services that financial planners provide but it’s property-specific so it’s tailored for people who are looking to advise their clients in buying residential or even commercial property.
So firstly, look for a qualification rather than just a good talker in a suit. And the other question to ask is â€“ how are you getting paid? One of the key components of disclosure will determine in whose interests the adviser is working. And we’ve got to be careful who we’re calling an ‘adviser’ because there are a lot of property companies out there who promote “free education” or “let us come out to your home and in a 2Â½ hour session we’ll educate you on how to invest in property” and that’s simply not education. That’s ‘tailored selling’ â€“ they’re there to flog a property.
“Education is key. One of the best ways to know whether you’re dealing with a legitimate operator is to actually ask them â€“ what qualifications do you have to give property investment advice?”
From PIPA’s point of view, we do have people who work on a fee-per-service arrangement and we also have people who work on commission arrangements and that’s OK â€“ we just have a strict code of conduct that says that our members must disclose how they’re being paid. So that disclosure is not only the commissions that they may generate from the direct sale to the consumer but also any kickbacks or soft-dollar payments they are receiving through referral agents to get the sale under way. Being an unregulated marketplace we sort of self-govern through the association to try and ensure there is some consumer protection there.
It’s crazy that the government hasn’t regulated this area â€“ it means the majority of genuine property professionals are let down by the few dodgy dealers out there…
Well it’s like the saying goes, “If it seems too good to be true, it probably is.” Not having any regulation around it means you can get the classic smooth-talking spruiker standing up and powering his wares, saying, “You can make this much in six months and tens of thousands of dollars doing it this way…”
That’s one area of concern for us, but another area of concern is that there are financial planners and mortgage brokers who think they understand how to invest in property but they actually have very little knowledge in that space. To give you an idea, you have to do a university degree to get a certified financial planning qualification these days yet you can spend an afternoon talking about property investment and then go out offer professional advice â€“ it’s ridiculous.
“Another area of concern is that there are financial planners and mortgage brokers who think they understand how to invest in property but they actually have very little knowledge in that space.”
And the reason why is because it’s not a licensed investment product. And these financial planners are wooed by developers and stock list providers because for a simple referral they can earn as much as 10 per cent of the purchase price. So naturally they’re thinking, “Well, the client was going to go out and buy an investment property with or without me so if I can provide an introduction and get a kickback then all power to me.” Which is simply wrong in my view.
Who can join PIPA?
It’s the peak association for the property investment industry. The association is really trying to legitimize the industry â€“ there are currently in excess of 70,000 people employed in the services of property investment. That ranges from the likes of qualified property investment advisers, through to real estate agents, through to accountants, conveyancers, valuers, mortgage brokers, property managers and the like.
There are over 1.7 million people who claim a deduction or an interest in property in their tax return and that’s usually residential property, so it just goes to show it’s a very large industry. And as the peak association we’re really trying to identify those specialists in their field. Anyone who has a bias towards residential property or commercial property as an investment. You can join as a member as a financial planner, as a property investment adviser, as a property manager and specialise in that area.
OK, and the other reason property is in the news is constant talk of a housing bubble.
So are we or aren’t we in one?
Not yet. The very short answer is no, we’re not in a property bubble yet. But it is concerning â€“ especially if we see first home buyers come back into the market again like we did post-GFC and just after the collapse of Lehman’s when we saw the flood of cheap credit to stimulate our economy.
We had a big run, we saw government stimulus in the form of grants and bonuses and the like and that was a smart move by the government â€“ for every dollar that goes in to residential property for construction there’s a flow-on effect into the economy for retail in terms of fitting out the home and the general flow-on is enormous in terms of the economic impact from housing so they did the right thing but it also put a lot of demand under the market and we saw prices grow accordingly.
“So our concern â€“ although it’s a minor concern at the moment because we know that it’s very high on the RBA’s radar and on APRA’s radar and the banks’ radar â€“ is that we don’t want this one to overcook.”
This next growth phase that we’re in at the moment is similar in that it’s being driven by historically low interest rates. So our concern â€“ although it’s a minor concern at the moment because we know that it’s very high on the RBA’s radar and on APRA’s radar and the banks’ radar â€“ is that we don’t want this one to overcook. And by that I mean that with low interest rates we get real affordability power, which gives us borrowing power and then there’s a sense of urgency in the marketplace and we get growth too quickly. Before we know it we’ve overcooked it.
But we’re certainly not in a broader bubble. My concern still rests in the mortgage belt and I’m not seeing strong price growth in that particular market as I’m seeing in the inner city areas of Sydney and Melbourne where there is pent-up demand. And that demand is usually always there, but there’s no doubt that a tap turns on from a sentiment point of view when the hype is around and the shortages are there. People get a bit a frustrated and impatient and because they’ve got the stronger incomes they tend to buy now rather than think long-term and that’s OK, but the worry for me are the ones in the mortgage belt. If we see a strong rise in the suburbs with property prices reaching in excess of $600,000 as a median then I think we’ve overcooked that market and I would expect to see a correction there at some point.
And where do you see the market heading?
I still think early 2014 we’ll see strong enquiry. But we’re not seeing radical changes â€“ even though clearance rates in Melbourne and Sydney have been spectacular. Sydney certainly has a property buzz at the moment and it’s tough because there’s a lot of frustrated buyers out there who have missed their window in terms of getting into the suburb that they want. But they’re just going to have to do the typical wave effect and move out to the next best suburb.
But it’s not prevalent in South Australia at the moment. Brisbane’s seeing some signs of an awakening market, but in Hobart and Tasmania unfortunately we’re not seeing any good signs, all being driven by the economy in that particular marketplace and the high level of unemployment we’re seeing down there.
Darwin’s still an interesting story, it’s had some wonderful growth as a gateway to Asia and all of the development going on up through Darwin. So their story could be a positive one this year but it’s a very mature price phase for them. And Perth is also a similar marketplace â€“ it’s a one-industry-led economy over there but prices are holding up in terms of commodity prices and so forth so I’m not concerned about the Perth market â€“ but I also think there might be better opportunities in other markets.
Finally, in your opinion what’s the most important thing when it comes to property investment?
How long have you got? In simple terms, it’s asset selection. So the property selection is key. If you don’t get that right you’ll burn a lot of money in your educational process. If the asset doesn’t deliver yet you’ve got a debt against the property and it’s costing you $20,000 in interest to maintain it each year and it’s not growing in value, well you’ve probably cooked your money. And if you come back five years later and you’ve committed $100,000 in interest and it hasn’t moved higher than that level it’s a very large loss once you work out your opportunity costs of that money. Knowing where to buy and what to buy is an artform and it’s a science and it’s not easy. If it was that easy then everyone would do it. So asset selection is the one thing that’s going to make or break the wealth base.
PIPA will be on the floor helping consumers and answering questions at all the Home Buyer & Property Investor Shows in 2014. For more information, head to www.pipa.asn.au
Ben Kingsley is chair of PIPA as well as the CEO and Founding Director of Empower Wealth Advisory Group of Companies and has over 18 years experience in property investment analysis and advisory work. You can catch Ben in action on the property investor stage at the Home Buyer & Property Investor Shows in Sydney and Melbourne.
28 November 2013
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