Self-managed super fund members will next week face a new setback when NAB announces tough new controls on business property lending, despite offices, factories and surgeries being one of the sector's most popular investments.
The $726 billion SMSF sector is facing several challenges amid proposals to reform use of franking credits, restrict lending and impose minimum amounts for assets under management.
Small business is complaining about a new credit crunch as lenders clamp down following the Hayne banking commission that is impacting their ability to employ, expand and invest. Lenders are also intensifying scrutiny of property investments as property prices continue to slide and small businesses, particularly in retail and building, are under growing financial pressure.
From next Friday, NAB SMSF business borrowers will require a loan of $1.5 million or more for each transaction; have a minimum of $5 million in total assets in the fund; and have an 'existing relationship' with the bank for at least two years. Only customers that have held a business lending facility for at least two years will be eligible. The lender is also imposing several tougher credit conditions on new SMSF loans. For example, borrowers will only be allowed principal and interest loans fully amortised over the term of the loan.
Cash reserves remaining in the SMSF at settlement must be the equivalent of 12 months repayments. All members of the fund must be in accumulation phase – which means pre-retirement - when the funding is provided and for the life of the loan.
The bank will tell customers it will no longer accept new applications "unless all the criteria are met". But it will continue to support existing SMSF lending arrangements. The tight lending terms reflect changing market conditions.
For example, SMSF loans have generally allowed up to 70 per cent leverage and 30-year terms, with up to five years of interest-only repayments. The minimum loan amount is about $100,000 with no set maximum, subject to lender approval of the property and borrowing capacity of the fund.
"We regularly review our policies and products and after careful consideration of customer outcomes, we have decided to change the parameters for the business lending to SMSFs," a spokesman said. "Lending to SMSFs is more complex and requires additional consideration. NAB has altered the SMSF offering to ensure our customers are in the best position to obtain their desired financial outcomes."
What's in it for small business?
SMSFs have rapidly grown from a cottage industry into a financial powerhouse in the $2.7 trillion superannuation sector, the world's fourth largest pool of managed funds. Non-residential commercial property typically funded by limited recourse borrowing arrangements (LRBA) for about $71 billion, making it the second largest asset class after listed shares.
The benefit to businesses is that the owners can borrow to buy their factory, professional suite or office with the loan amortised over their working lives and, at retirement, can be sold capital tax gains free, or 15 per cent income tax. Leveraging super has been attacked in government reviews, typically for private investors being sold residential property by spruikers as a single asset in their superannuation fund.
Jonathan Street, chief executive of Thinktank, a commercial lender with more than $1 billion in its loan book, said a future Labor government and regulators need to be aware of the advantages to small and medium-sized enterprises (SME).
"LRBAs are a very important debt instrument that allow SMEs and self-employed owners the opportunity to dovetail their commercial and superannuation ambitions to positive effect," he said. "It's a high performing wealth management tool in the hands of disciplined lenders and well-advised borrowers."
Macquarie Bank this week announced it was axing borrowing for self-managed super fund investment property. AMP and CBA, the nation's largest lender, both pulled out of SMSF lending last year amid rising regulatory concerns and falling property values. CBA was the last of the big four to exit the market.
Story – Courtesy - Duncan Hughes AFR