Australia: Property Warrants

The advent of superannuation has changed the way many Australians invest, but our love of direct real estate as an investment shows no sign of abating.

Marrying the two has proved to be difficult in the past, as self-managed superannuation funds (‘SMSF’) are prohibited from borrowing money, few have the funds to add property to their balanced portfolio. That means that opportunities to participate in the capital growth of a property could be lost whilst the fund accumulates the (ever increasing) amount required to make a property acquisition.

Recently, a number of providers have begun offering property warrants as a means of enabling SMSFs and other investors to take a direct interest in real estate without taking out a loan. The result is that the investor receives the rental return of the property and the benefits of the capital growth, but the payment of the purchase price for the property is deferred.

These property warrants are similar in structure to the instalment warrants that are becoming a popular product for share investments. The investor chooses a property (often one offered by the warrant provider through its ties with developers) and makes an initial payment; which covers the fees, stamp duty and an equity contribution. There is an agreed amount to be paid at the conclusion of the warrant period.

During the life of the warrant, the investor is entitled to receive the rental income from the property and enjoy the capital growth. At the end of the warrant period, the investor pays the agreed amount and title to the property is transferred. The investor usually has the option to walk away from the arrangement at any time.

Different providers have different arrangements regarding the payment of finance charges, (which may be made annually or included in the initial payment) or the manner in which abandonment or defaults are treated. It should be noted however that the Australian Prudential Regulation Authority (‘APRA’) has stated that it does not consider an investment in an instalment warrant to be a ‘borrowing’ where payment of the final instalment is not compulsory (i.e. where the holder may ‘default’ on the remaining instalment). In property warrants, the property is not mortgaged, so the prohibition on charging the assets of a fund is not breached.

Property Warrants may be a tax effective way for SMSFs to invest in property, offering depreciation and capital growth benefits and the potential for the cost of the property to be paid out of tax deductible superannuation contributions. Contact your local Moore Stephens office to see whether a property warrant is suitable for your circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.