Traditional property asset allocation models typically involve either the acquisition of a specific retail property or investing in one of a myriad of unlisted property trusts or listed shares in Australian real estate investment trusts (AREIT).
For investors, their returns come via income and capital growth, with their investment goals determining the focus of their choice. For SMSFs in pension phase, for example, the need for income may suggest an unlisted commercial property trust. By contrast, a young couple might look to negatively gear a residential property for the capital growth.
Then there’s the issue of how individuals invest. Those with padded wallets might want to look at small direct commercial, retail or industrial properties according to their preference and insights. In some instances, accountants and financial advisers organise syndicates for their clients to acquire a more significant property. Others will be more attracted to the housing market.
But for some mum-and-dad investors, they may be limited to investing a smallish amount in a property trust, thereby eliminating direct purchase altogether, particularly as residential in most major capital cities is expensive. The bottom line is all options have their pluses and minuses.
AREITs and unlisted property trusts mostly invest in larger commercial properties, such as office towers, shopping centres and industrial property. Whether investors opt for a listed or unlisted vehicle, there are four key factors to consider: investment amount, liquidity, volatility and income distributions.
AREITs not only offer a cheaper starting point, they also give investors liquidity. Because they are an Australian Securities Exchange-listed stock, their share price changes daily as market conditions change. Although the performance and value of the underlying properties is a factor, prevailing stock market sentiment will usually be the dominant influence on the units’ prices rather than the property value. It also means investors, whether bullish or bearish, can buy or sell accordingly, regardless of the underlying property value.
Unlisted property trusts operate differently. Instead of the market setting the unit price, the underlying property portfolio uses independent valuations to determine entry and exit prices. While this may ensure more price stability, it comes at the cost of liquidity. Unlisted trusts operate with a redemption process rather than an open market buy/sell, so if the fund manager is experiencing liquidity issues, the offering can be frozen. There are plenty of examples of frozen funds as a result of the global financial crisis. And the pooled structure may also be a capital gains tax disincentive.
Where unlisted property trusts have an edge is their regular payment of income, with investors getting monthly or quarterly distributions. By contrast, shareholders in AREITs are likely to only get paid twice a year after the distributions are declared with the half-yearly and annual results. And the yields are usually not as attractive.
However, property investors today are not limited to these traditional investment vehicles. To this end, another option rapidly gaining traction is fractional investing, a term interchangeable with syndication or crowdfunding.
The fractional model enables multiple people to combine their investments to acquire a specific property where they each own a share via a sub-fund that unitises the asset; it’s very similar to investing in stocks, except the underlying asset is property.
The reason its appeal is growing is that it offers several advantages compared with the traditional routes, including greater flexibility, low entry price, easy exit and the opportunity to diversify across different property types and geographic locations. Most of all it offers what other structures don’t –
choice. Unlike AREITs or unlisted property trusts, investors are able to choose the property they want.
It also enables groups such as families and friends to join forces in a private syndicate to acquire the property or properties they want. And the fact they have the option of exiting via an online liquidity facility similar to an equities trading platform is a bonus.
For example, the minimum investment via the DomaCom offering is only $2500, enabling almost everyone to get a toehold in the property market. There’s also the opportunity to access leverage of up to 60 per cent of the value of the property.
Where the fractional model will have appeal is to millennials who can use this investment vehicle to access the property market at a fraction of the cost of buying a retail property outright. It means they are getting income and capital growth to assist them in building the capital to eventually buy their own house.
Property is the one investment most Australians like and understand; it’s in their DNA, explaining why more than 2 million own a rental property. With the advent of fractional investing, that number is set to rise.
The fractional model has resulted in a number of strategies emerging for all types of investors. For example:
- young people can invest a small amount in a property they wish to live in and apply to be the tenant, thereby part-owning and part-renting,
- family and friends can club together to acquire an investment property and again one can be the tenant,
- SMSFs can invest via the fractional model without acquiring an entire property and they can also invest with debt without the use of a limited recourse borrowing arrangement, and possibly a relative could be the tenant,
- SMSFs overweight in property can sell part of the property while retaining part in their fund, and
- investors can come together for a development, such as a dual occupancy or a larger development.
In addition, DomaCom has a fractional model that also embraces the senior equity release market, with a new product disclosure statement for seniors looking to downsize in situ (without moving) and opt for a lump sum or a staggered settlement. Relatives as well as unrelated investors can buy into the property, thereby securing an investment they know and understand while giving equity release to a senior.
The fractional model has many applications and may well be worth a look.