The Calastone data only includes unlisted funds and not listed real estate investment trusts (REITs) or exchange-traded funds and therefore the total flowing into the universe of property funds would be much larger.
UK investment in property funds lags Australia in 2021, says Ross Fox of Calastone.
“For investors, the yield differential between property and cash or fixed income is also extremely attractive to income seekers and the sector has driven long-term capital gains too,” Ross Fox, head of Australia and New Zealand at Calastone, tells AFR Smart Investor.
“These considerations certainly appear to have spurred fund flows across our network in property.”
By contrast, real estate funds globally have been on the nose with investors. In the UK, for example, property funds suffered their 30th consecutive month of outflows in March 2021, Fox points out.
Financial planners and experts canvassed by Smart Investor say REITs and property funds are worth a serious look, especially for investors priced out of direct real estate.
However, Fox notes that ASX-listed REITs, known as A-REITs, have widely different profiles depending on the sectors to which they are exposed.
“Those, like Scentre, that have large retail portfolios are still trading below their pre-pandemic levels,” he says. “Others, like Goodman which has a significant weighting to logistics, a sector that has proved resilient during the crisis, have made significant share-price gains.”
More to the point, arguably no Australian REIT, listed or unlisted, could be positioned as a true alternative to purchasing direct real estate if residential exposure is really what your portfolio desires.
“There are no residential REITs – only industrial and commercial,” explains Sayd Farook, managing director of investment manager Crescent Finance.
That gap in the local fund landscape led Crescent this week to launch two funds it says gives investors access to a “fully diversified portfolio of hundreds of Australian residential properties”.
The Crescent Growth Fund will seek to generate a return to unitholders from the “leveraged capital appreciation” of the value of residential properties it will invest in via the DomaCom fractional property investing platform.
The Crescent Income Fund, meanwhile, will give investors exposure to the rental yields from the residential properties invested in by the growth fund, targeting returns of between 3 per cent and 4.45 per cent per annum.
Alison Dellow of Hewison Private Wealth: “Investors do not need to have a deposit to begin their investment journey; they can own a portion of a property with a small initial investment.” Eamon Gallagher
Farook says the funds offer “unprecedented” access to the “safe-as-houses asset class” of residential real estate, which has returned an average of 10.1 per cent per annum over the past 25 years. They also provide a sharia-compliant product for any Australian Muslim investors.
The launch is an example of the latest solutions attempted by the investment industry to the problem of accessing residential exposure. But they are made possible by an innovation a decade in the making.
‘All or nothing’
DomaCom, the property investing platform used by Crescent to manage its growth fund, was established in 2011 as a pioneer of property crowdfunding – allowing investors to buy a “fractional” share of a residential property.
Regulated as a managed investment scheme, the way it works is that the DomaCom fund actually holds the properties, which are then segregated into individual subfunds.
Investors can purchase between 1 per cent and 100 per cent of the units of the subfund, effectively giving them a fractional share.
Syndicates of owners are created for each subfund via an online crowdfunding campaign, which collectively bear the costs of property management and conveyancing etc.
BrickX joined DomaCom in the nascent fractional property market in 2014 as a “stock exchange” for residential real estate investment.
Sean Condell of Condell Financial says investors should look closely at fractional property fees. James Brickwood
Also technically a managed investment scheme, BrickX allows investors to buy a minimum of $250 worth of units or “bricks” in the BrickX property trust.
Both own about 20 residential properties as of January 2020, according to financial comparison site Canstar.
DomaCom chief executive Arthur Naoumidis believes these new-age fractional investment funds have an edge over traditional property funds and REITs because of the ability to select investments.
“An investment in resi via DomaCom is to a specific property of the investor’s choice and the return will track that property in the area it is located,” Naoumidis says.
“In a REIT, the investment is pooled and spread across a number of properties, there is no choice and the return may be influenced by movements in the stockmarket rather than the underlying property.”
He describes fractional investing as a “modern form” of syndication that is more attractive than the traditional “all or nothing” approach of property investing.
On that point, some financial advisers concur.
“Given there are periods when residential property is a better-performing investment than any other market sector, the opportunity to invest in it without an outlay of several hundreds of thousands, usually borrowed, is potentially attractive,” says Wayne Leggett, a certified financial planner and director of Paramount Financial Solutions in Perth.
Allison Dellow of Hewison Private Wealth agrees. “Investors do not need to have a deposit to begin their investment journey; they can own a portion of a property with a small initial investment,” she says.
There are also diversification benefits. “Fractional property funds and syndicates offer the opportunity to diversify property exposure across different locations and property types,” Dellow, also a certified financial planner, adds.
That said, advisers emphasise that investors considering dipping their toe in fractional property should be aware of some important pitfalls and risks.
Keep a close eye on fees
“The size and age of the fractional ownership sector call into question the liquidity of it,” says Leggett. In other words, the industry is not yet mature, in his view, and the lack of a secondary market means its performance is not yet truly tested.
Sean Condell of Condell Financial on Sydney’s northern beaches agrees that liquidity – meaning how quickly you can access the invested funds if you need them – should be a key consideration.
He also suggests investors look closely at the underlying fees, pointing out that BrickX, for example, charges 3.15 per cent. “If it was a $1 million property [or allocation], that would be $31,500,” Condell says. “Then there are property management fees on top of that.”
For its part, DomaCom says it has addressed the liquidity issue by introducing a liquidity facility, under which investors may be able to sell their interests in the property subfund.
However, that requires them to find a willing buyer at the right time, so there is an inherent element of luck (or risk).
Naoumidis points out that liquidity in unlisted property trusts is often worse, with many including freeze clauses in the fine print which may enable the manager to freeze redemptions for up to six months.
Compared with some other investments, says certified financial planner Joshua Dalton of Dalton Financial, fractional investing platforms could be seen as relatively liquid. After all, directly owned residential real estate is hardly the most liquid of assets.
But the biggest downside of fractional investing in his opinion is you lose the benefit of leverage associated with traditional property investment.
“From my experience, most successful property investors have used leverage or ‘good debt’ to create substantial property portfolios and equity,” Dalton says.
Similarly, you give up potential tax benefits, especially negative gearing.
“And of course you can’t live in a fractional property fund,” he quips.
But if house prices continue on another multi-year tear, they are losses an increasing number of investors may be able to live with.
Originally Appeared Here