At a glance
By Beverley Head
In late 2017, 16,489 people banded together to buy a French castle and contribute the funds for its restoration. The French crowdfunder Dartagnan has collected more than €1.6 million, to secure the future of Château de la Mothe-Chandeniers, south-west of Paris.
The castle purchase is a high-profile example of what is termed fractional property investment, a method which allows people to invest in real property in the same way that the sharemarket allows them to invest in listed companies.
Not everyone gets a share in a castle, of course, but for investors fractional property investment is a route to diversify their portfolios by adding real property.
For would-be home owners it’s an investment that can help build a deposit. It’s also seen as a way to tackle the issue of housing affordability by allowing fractional property investors to own part of a house or apartment and take on its long-term rental.
Greg Dickason, international chief technology officer of property data and analytics company CoreLogic, explored the issue at a recent CPA Australia Changemakers event and has forecast that within five to 10 years, fractional property investment could represent a sizeable portion (10-20 per cent) of the total property market in Australia.
According to Dickason, digital technologies, including blockchain, form the foundations for new ways to buy into portions of a property through fractional ownership.
“This opens up the investment landscape. Not only can investors either buy whole properties or shares in REITs (real estate investment trusts), they now have another option of buying shares in a single property,” he says.
Fractional property investment options
“One of the pioneers in this space is Brickx, which has properties in Sydney, Melbourne and Adelaide, and splits ownership into units, which it calls ‘bricks’, that each represent one 10,000th of the equity in a property,” says Dickason.
“Using valuation data from CoreLogic, Brickx allows fractional owners to earn rental income and to trade their bricks on the platform. A quick look through their properties shows brick prices range from A$60 to A$157 (corresponding to equity in properties ranging from about A$600,000 to A$1.57 million) and net rental yields of 1.2 to 2.8 per cent. They also have historical suburb growth and other statistics to help buyers make investment decisions.”
Another company, DomaCom Australia, provides a platform to allow people to form a syndicate, invest any amount they want starting at A$2500, and work with a financial planner to buy a property.
Newcomer CoVESTA takes fractional ownership to the next level, says Dickason, allowing owners to sell parts of their properties, then rent them back at market value from a syndicate of investors.
“The CoVESTA model seems designed to organise a small group of long-term syndicate members to co-operate through their platform, while Brickx is more aligned to pure investors, with an active secondary market for bricks,” he adds.
“A third start-up in the space is BlochExchange, which is using a blockchain approach to organise fractional ownership, to help manage the identity of its members and track and monitor fractional asset ownership in the marketplace,” says Dickason.
BlochExchange is currently being tested and has yet to launch publicly.
Property opportunities for many
According to Dickason, “These types of innovations in property ownership will allow people to unlock the value in their homes, reduce and better manage debt, diversify risks and allocate investments across different assets by location and type, just as we do with share portfolios.
"Fractional ownership will also allow first home buyers to get exposure to property much earlier in their quest to own a home, ensuring their early investments move with property prices.”
Brickx CEO Anthony Millet says his company’s offering is designed as an “online product that allows everyone in Australia to invest in real estate” one brick at a time, with a minimum deposit of A$75.
Three years post launch, the company has about 8500 members who have invested A$17 million in 14 properties. The majority (52 per cent) are aged under 35 and three-quarters of them havenever before owned residential real estate.
A large proportion, says Millet, are also using their Brickx investment to save a deposit for their own home, benefiting from the 5-15 per cent returns available in property rather than the 1-2 per cent from the bank. Millet says that the solution is making property more affordable, “not cheaper, but more accessible to everyone”.
According to Dickason, fractional property investment will likely resonate with first home buyers (who do not forgo their first home owner grant when they take out a fractional property investment), people looking to rent with security (some of the platforms allow investors to rent the property for five years), and downsizers.
Andrew Toone, general manager of lending at the Bank of Queensland, says fractional property investment “for the first-time buyer is an interesting response to the question ‘how will I ever get where I want to live?’.”
Toone says the prudential regulations set by the Australian Prudential and Regulation Authority (APRA), which restrict banks’ ability to grow their loan portfolios and to issue interest-only loans, have encouraged investors to explore new property alternatives including fractional investment. He adds that it is, however, too early to gauge the impact of any of these measures or opportunities on property affordability.
Alongside opportunity, tax considerations
Buyers will, of course, still have to weigh the tax implications of fractional property investment.
According to a spokesperson from the Australian Taxation Office (ATO): “As with other investment products, there may be a range of tax, superannuation and regulatory issues that investors should consider when deciding whether to invest in these products.
“Often the nature of the structure and terms under which these investment platforms operate varies between different providers and different products, and the tax and regulatory outcomes may therefore differ for each product.
"The ATO is happy to work with industry participants and providers of fractional property investment products to ascertain the ATO’s position in relation to particular products of this nature.”
Investors – particularly people with self-managed superannuation funds (SMSFs) – may be enticed by the opportunity for exposure to the property market without having to buy an entire property themselves.
However, SMSF investors need to navigate the often complex rules very carefully. In December 2017, for example, the Federal Court indicated it would not support an SMSF investing more than 5 per cent of its total assets in a DomaCom sub-fund, if the purchased property was then rented to the offspring of the SMSF owner.
There are also the individual operator’s fees to consider. Brickx charges a 1.75 per cent transaction fee on the purchase or sale of bricks. There are also additional monthly property management and administration fees. DomaCom charges an annual management fee of 0.88 per cent of funds invested in a sub-fund, while CoVESTA charges A$0.55 for registration, a block purchase fee of 2.5 per cent plus GST for properties costing up to A$5 million, along with management and administration charges.
Buy and sell online
DomaCom’s general manager of sales and marketing, Warren Gibson, acknowledges the need for liquidity, and notes that each of DomaCom’s funds has a five-year term to expiry, when the property would be sold unless the holders of at least 75 per cent of units on issue opt for a different sale date.
In addition, the Australian Securities and Investment Commission (ASIC) has allowed DomaCom to list fractional units for sale to inject liquidity, and also granted in-principle relief for a new class of products that will allow older people to release the value in their homes by selling fractions of it through the site, without losing the right to live there.
Dickason says that secondary markets are available, and that at present it often takes just hours to resell a fractional property stake.
“But if there was a credit squeeze that might change,” he warns.
The foundations of fractional property investment are akin to those of the stock market – allowing individuals to band together and take a stake in a larger entity, sharing in both the risks and rewards.
Digital technology has stripped friction from the process and created an opportunity to invest in property in a new way – but it is not without risks or costs, and savvy investors will – as always – study the fine print.
Q&A with Daniel Noble, founder of CoVESTA
What’s the premise for your business?
“For the last 20 years, property has been an unprecedented value multiplier, outperforming most other investments. It’s worth A$7 trillion and is six times bigger than superannuation. It’s grown 400 per cent between 1997 and today.
There are a lot of drivers of that growth – supply, population and negative gearing, which has incentivised investment. There are very few alternative investments for that sort of capital growth, but people with no deposit can’t get into the property market.”So why fractional property investment?
“The Australian Securities Exchange (ASX) is a fractional investment and you see it often in REITs (real estate investment trusts), but it’s new to retail investors. REITs are a black box investment and there’s a relatively high cost to invest – up to A$100,000 for the good ones. [Meanwhile] crowdfunding is emerging, predominantly in the US and underwritten by property developers, to get presales for construction financing.”
How is CoVESTA designed?
“CoVESTA was set up to create a buyer-side platform where every single property can be syndicated. We operate in a managed investment scheme, so have the governance and structure of a REIT with the flexibility of crowdfunding.”
What is your target market?
“The first market is the under-40-year-olds who have never bought property. This is a way for them to get into the market and start investing in property. The second market is investors, a bunch of 40-somethings who between them have A$5 million in savings. Together they could buy five A$1 million properties.
When you remove the reliance on debt, the capacity to ride out the cycles is better. The third market is more sophisticated investors who want to minimise risk. With a A$200,000 deposit, they could invest in 18 A$1 million properties (in different locations) to get more diversification. This is smart for people who want to diversify; the Perth market has tanked but the yields are high, while there is capital growth in Sydney.”
What about somewhere to live?
“If you start a syndicate, you can be the tenant for five years. It can cost as little as 5 per cent of the purchase price to be the tenant. When the property is sold in five years – unless 75 per cent of investors agree not to sell – you have the first right to own it.
“Say you took a 20 per cent stake, the rent you pay will be less than that 20 per cent, you have the security of living there for five years, are paying below market rent, and have the right to buy in five years. This gives you housing security and rental affordability, and lets you live in the place you are investing in.”
Buying and selling real property is one of the biggest transactions people make.
A spokesperson from NSW Fair Trading says that whatever the investment vehicle involved, consumers should carefully read all terms and conditions before agreeing to any contracts, and adds that under NSW’s Property, Stock and Business Act 2002 agents assisting consumers in buying and selling real estate must be appropriately licensed.
“In recent years, concerns have been raised over the conduct of certain property promoters, particularly investment advisers or ‘spruikers’. Investors need to understand the potential risks involved with buying property through promoters.
“People purchasing as part of a group or syndicate are encouraged to obtain independent legal advice before entering into an agreement or contract. Fair Trading is unable to intervene in any contractual dispute, including disputes between purchasers buying as part of a syndicate. Fair Trading will, however, assess any concerns about an agent’s conduct.”