The possibility of a Labor government banning LRBAs could be a cause for concern for commercial property lenders like Thinktank, which recently hit the $1 billion mark in loans under management.
Thinktank has urged the Australian Labor Party (ALP) to “think carefully” before imposing a ban on limited recourse borrowing arrangements (LRBAs), particularly when it comes to commercial property.
The lender’s CEO Jonathan Street acknowledged the “genuine need” for “tighter regulation” in the residential self-managed super fund (SMSF) LRBA market.
He recently noted that there have been reports of instances where the interests and motivations behind LRBA finance applications may have been “inherently conflicted”, investment strategies were “negligent”, and the types of property used as security were “fundamentally ill-suited to small balance SMSFs including concentrations of off-the-plan, inner-city, high-rise apartments”.
While the Council of Financial Regulators and the Australian Taxation Office ultimately concluded that SMSF LRBAs are “unlikely to pose systemic risks”, they expressed concern over the “prevalence of property as the main asset purchased” under an LRBA, noting that the purchase of property as the main asset is “most commonly by low-balance SMSFs (those under $500,000)”, which have “little investment diversification and high [loan-to-value ratios]”.
Based on Thinktank’s experience, Mr Street noted that LRBAs are “proving [to be] a very important debt instrument”, allowing small to medium-sized enterprises (SMEs) and self-employed owners the ability to “dovetail their commercial and superannuation ambitions to very positive effect”.
“Business operators are typically financing their business premises via their super fund and pursuing a very tax-effective wealth management strategy squarely aimed at best supporting themselves and their families in retirement,” the CEO previously said.
He further pointed out that, since December 2013, Thinktank has financed more than 300 commercial property-secured LRBAs, accounting for $165 million of its loan book.
“Importantly, we have had practically zero arrears history – only one loan has ever defaulted in the wake of a cyclone (and that loan did not incur a loss) and 81 per cent are currently repaying principal and interest in alignment with their retirement targets,” Mr Street said.
“It’s proving an excellent, highly performing borrowing and wealth management option when in the hands of responsible, disciplined lenders and well advised borrowers.”
While the scrutiny has been around residentially secured LRBAs, the Thinktank CEO sees the potential ban on LRBAs, if the ALP is elected into government, as the only “foreseeable wrinkle” in the lender’s growth path.
The specialist lender had confirmed its entry into the residential SMSF market last month, after six years of providing SMSF LRBAs secured by commercial property. The entry followed a number of withdrawals from the SMSF residential market by lenders such as CBA, NAB, Westpac, AMP and Macquarie.
The Thinktank chief executive admitted in March that, thanks to the outgoing banks, there is an “even greater market opportunity” for a “pragmatic and experienced lender to assist well informed, well advised borrowers with their own long-term wealth creation plans”.
Thinktank’s call for caution around LRBA changes coincides with its announcement of hitting $1 billion in loans under management since its inception in 2006.
The lender has been growing its loan book by 35 per cent or more a year since 2013, and expects to surpass $2 billion in loans under management by the end of 2021.
“Self-employed small businesses and SMEs are behind the demand for our loan products,” Mr Street said.
“The sector has proven itself to be a vital part of the broader economy over the past 70-plus years and, with our experience, that means few loans are in arrears, and the number of loans that have defaulted and resulted in a loss over our 13-year history is minuscule at about 10 out of the more than 2,500 we’ve made.
“Considering this period includes an event such as the GFC, it’s a record we are very proud of.”
Thinktank expects to report a turnover of more than $75 million in the 2018-19 financial year.
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