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With more than half of Smart Property Investment’s readers telling us in a recent poll that they’re keen to hear more about fractional investing in the property market, it’s clear this asset subclass is on the rise.
On a recent episode of The Smart Property Investment show, Warren Gibson, the general manager of sales and marketing at DomaCom, broke down this unique form of investing in which DomaCom has been actively involved in pioneering within the Australian market.
Fractional investing: the basics
Mr Gibson describes fractional investing as something like a modern form of syndication, where like-minded people, random or related, come together via a digital platform to acquire an asset. This could be an acquisition that’s income-earning or is expected to appreciate in value to provide a nest egg for the future.
“An age-old strategy, the traditional agreement-based syndicate model has been given a make-over,” Mr Gibson explained. Modern technology, he said, has been able to “replace syndicates with a regulated financial product, professional independent due diligence, property management, regular automated reporting, and improved liquidity options”.
Generally speaking, fractional investing can be applied to a wide range of holdings, and Mr Gibson noted that it’s seen as a way to democratise assets to make them more available to more people.
Applied to housing, fractional investing “can be likened to a ‘share market’ for property with a fixed term to expiry, an online secondary market and voting rights under an ASIC registered Product Disclosure Statement,” he explained.
Through its power to allow more people to get a slice of the property pie, Mr Gibson said fractional investing in property offers a good way to cut down on your investment risk by diversifying your portfolio.
“Diversification’s one of the greatest risk minimisation strategies there is,” he said. By “unitising” a property, an investor can buy “a little bit of this property and a little bit of that property – you can develop a diversified portfolio across a variety of different property types and a variety of different geographical locations”.
For those unsure about the concept of owning an asset with other people – be they friends or strangers – Mr Gibson points out that, essentially, almost everyone is a fractional investor.
“A number of years ago, I remember talking to my wife about fractional investing, and she said, ‘Oh, I don’t know that I like the idea of having a co-investor in a property,’” Mr Gibson recalled. “I said, ‘Well, you have one now, we have a co-investor, it’s called the bank’.”
He posited the question: “What difference would it make if [your co-investor] is the bank, or Betty and Bob down the street, or Joe Blow’s self-managed super fund? You won’t know who they are, what difference does it make whose money makes up the acquisition?”
His personal interest in fractional investing began by considering a system where, instead of getting a loan from a bank, someone could contribute money with a group of other people and be the tenant of a property as well as a part-owner.
How you get in
A relatively new concept in the Australian property market, fractional investing is facilitated through platforms like DomaCom. Many clients come through financial advisers, Mr Gibson said, but anyone can join up.
Potential investors complete an application to become a member and invest a minimum of $1,000. There’s a 14-day cooling-off period, after which they can add further funds and browse the platform, scrolling through the properties on offer.
Users can join up with others on the platform, or they can participate with just friends or family. They can select from properties already advertised or bring an off-market offering to DomaCom, which will create a campaign for them.
How you get out
The thing that concerns some about property as an asset class is the liquidity. According to Mr Gibson, the way DomaCom approaches fractional investing is intended to alleviate that issue.
“We wanted people to be able to get in and get out of property. So, we put a timeframe around the length of the term to expiry of the sub-fund,” he explained.
“So, for residential property, we might make that five years because we think that’s a reasonable period of time. At the end of five years, we’ll wind up the sub-fund, sell the property, and everybody takes their money and goes home.
If some want to maintain the investment, there’s a fix for that, too. “For those who want to keep the property, we’ll put it to a vote, and provided they buy out the ones that want to get out or we bring new investors in, then we can roll it over and keep it going. But those that want to leave, get to leave.”
Mr Gibson explained DomaCom also operates a secondary market, which they call a liquidity facility that operates like an equities trading platform where users can offer to buy units or sell units in different sub-funds. “So, that gives them another liquidity option.”
Property refers to either a tangible or intangible item that an individual or business has legal rights or ownership of, such as houses, cars, stocks or bond certificates.