Housing shortage drives SMSF shift as investors rethink property exposure

Australia’s chronic housing undersupply continues to underpin long-term confidence in residential property, even as affordability pressures intensify.

According to SMATS Group’s Executive Chairman Steve Douglas, the imbalance between supply and demand is not a short-term phenomenon.

“Nationally, a lack of supply, which is far outstripped by demand, has been a continual problem and shows no signs of changing any time soon,” Mr Douglas said.

“It is constant, and this is why the Australian property market continues to be a stable and softly rising market.”

That structural shortage is being compounded by rising construction costs, labour constraints and declining building approvals. At the same time, population growth driven by migration and demographic shifts such as downsizing continues to add pressure to already tight markets.

The result is a housing system where supply is persistently lagging demand, reinforcing price growth over the long term. National vacancy rates remain well below historical norms, further highlighting the depth of the shortage.

For SMSF investors, the appeal lies in accessing an asset class supported by structural drivers rather than cyclical speculation, a key consideration in long-term retirement planning.

The realities of superannuation property investment

Despite its long-standing appeal, investing in residential property through an SMSF is becoming more challenging.

Direct ownership requires trustees to navigate strict compliance rules, including the prohibition on personal use of residential assets. Financing is also more constrained, typically limiting borrowing to lower loan-to-value ratios than outside superannuation.

But beyond regulation, portfolio construction is the bigger issue.

“With direct ownership you’ve got the single asset, so fingers crossed you pick a good one,” Mr Douglas said.

With property prices elevated, a single asset can represent a disproportionate share of an SMSF’s portfolio, reducing diversification and increasing exposure to location-specific risks.

Income is another constraint. After accounting for expenses such as maintenance, management and taxes, net rental yields are relatively modest.

“Usually the net rental in Australia is approximately 2 per cent of the asset value after expenses,” Mr Douglas said.

This creates potential pressure for funds in the pension phase, particularly when unexpected capital expenditure arises. A major repair or vacancy period can disrupt cash flow and require support from other assets.

Liquidity is also limited. Unlike shares or managed funds, a property cannot be partially sold, which can complicate withdrawals or rebalancing strategies.

The rise of residential property funds

As these constraints become more apparent, SMSF investors are increasingly exploring indirect pathways into residential property.

Pooled investment structures, often referred to broadly as residential property funds, allow investors to access a diversified portfolio of properties rather than relying on a single asset.

These structures typically lower the barrier to entry, enabling smaller allocations to property without committing a large proportion of the fund’s capital.

“You don’t have to go overexposed, overextended, or get into a disproportionate property asset against your other assets,” Mr Douglas said.

A key advantage is diversification. Rather than being tied to one property in one location, investors gain exposure across multiple assets, markets and cycles.

“You’re going to be spread over tens or hundreds of properties rather than individually,” he said.

This approach can help smooth returns over time, reducing the volatility associated with individual property performance.

Another distinguishing feature is liquidity. While still subject to restrictions typical of property-based investments, some pooled structures allow partial withdrawals, providing flexibility that direct ownership cannot offer.

Costs and risks are also shared across the portfolio.

“If there is a roof that needs doing, it’s not all your cost, it’s shared amongst the group,” Mr Douglas said.

Residential property funds do come with trade-offs. Returns are typically averaged across the portfolio, meaning investors may miss out on the outsized gains that can come from selecting a single high-performing asset.

“If you got one property that you bought at a bargain and it jumped in value, that would definitely outperform a pooled portfolio,” he said.

There may also be structural features such as minimum investment periods, reflecting the transaction costs and long-term nature of residential property investing.

Such funds are also frequently available only to wholesale investors. A wholesale investor is an experienced, high-net-worth individual or entity qualifying under the Corporations Act 2001 to access exclusive investment opportunities, such as private equity, hedge funds, and sophisticated property syndicates. 

Among other criteria, a person or entity can be classified as a wholesale investor, as opposed to retail investor, if they meet one of the following criteria:

• have net assets of at least $2.5 million
• have a gross income of at least $250,000 for each of the last two financial years.

Strategy still matters more than structure

Whether investing directly or via a pooled vehicle, the underlying principles of property investment remain unchanged.

Mr Douglas emphasised that asset quality and long-term discipline are more important than the ownership structure itself.

“The key is not, should I buy a house, should I buy an apartment? It’s, buy a good property.”

Liveability is increasingly central to performance, particularly as affordability constraints push more buyers and renters toward well-designed apartments and medium-density housing.

“The more liveable, the more profitable,” he said.

Market cycles also remain a defining feature of Australian property. Investors need to be prepared for periods of subdued growth, particularly in markets that have recently experienced strong gains.

“The Australian property market is not an every-year profit market.

“You will have years where you go, why did I do this? I’m not making money.

“But if you’re patient, in the long term it’s going to kick upwards to bring the average in,” Mr Douglas said.

Diversification across locations, asset types and investment structures is becoming a more prominent consideration for SMSF trustees, particularly as regulatory scrutiny and cost pressures increase.

For many, the question is no longer whether to include residential property in a superannuation portfolio, but how to balance exposure with liquidity, risk and income needs.

With a broader range of investment pathways now available, SMSF investors have more flexibility than ever — but also more decisions to make.