The development of a property platform is underway in Australia that could see real property brought into the regulated realm.
The platform is called fractional property investing and, by bringing real property into the realm of regulation, it will enable financial planners to provide advice to investors with the same protections and benefits that managed funds offer them.
Financial planners, generally, do not give advice on investing in real property for a variety of reasons – risk, remuneration and knowledge among them – and as a result property does not hold its rightful place in the asset allocation of portfolios.
Real property is also expensive unless it is fractionalised to enable partial investment into smaller parcels, which this platform will enable when it is finally released, again facilitating asset allocation.
How real gets regular
To do this it needs to be brought under a regulated structure to afford protection for investors, vendors and their advisers.
The structure being considered is a unique managed-investment-scheme (MIS) structure. It is envisaged the MIS would have a sub-fund for each individual property into which go the capital growth rights, the income rights and the residency rights.
This structure would enable the introduction of equity market concepts to the property market, such as model portfolios in managed accounts and investment platforms and an open market via online trading, providing a viable alternative to the equity markets for capital growth investors.
A bigger footprint for advisers
Financial advisers and their clients have little to be excited about at the moment and equity markets are likely to be treated with scepticism for some years to come.
The property market, in particular the residential sector, is enormous by comparison to the equity market, with over 8 million residential properties valued at $4.3 trillion.
What will this do for financial planners? For one thing it will increase their footprint in the community.
They could advise property owners looking for an equity release solution to help them better structure their finances, then create annuity streams and make other investments off the back of these fractional sales.
It may also bring the family home into the equation, which has previously been off limits.
Diversifying SMSF portfolios
And what of their clients? A regulated fractional property platform would facilitate investment in real property up to recommended asset allocation levels and provide diversification across property types and areas just as the stock market does.
This would be a boon to self-managed superannuation funds (SMSFs), which are mostly underweight in property. The average SMSF balance is a little over $1m, so a 10 per cent or 15 per cent allocation to real property is nearly impossible to achieve.
It would also enable SMSFs with 80 per cent or more asset allocation in real property to sell parcels of the property, enabling them to reduce their allocation and diversify their portfolio.
Potential goals achieved
Investors and SMSFs want property but their advisers are uneasy about facilitating it.
Trading will be transacted online via an exchange not dissimilar to the stock exchange, where information about each property will be available and, through their advisers, vendors and investors will have the ability to place offers and bids, transact and settle online.
Fractional property investing is a sustainable model because of the need of the various vendors. Senior Australians seeking equity release from their property to underpin retirement income, property funds and commercial owners looking for liquidity can all be accommodated by investors such as SMSFs.
A regulated MIS through which fractional investments can be made will help alleviate concerns over investing 100 per cent of funds into property and enable investors and property owners to achieve their respective financial goals.
Warren Gibson is head of sales and marketing for DomaCom, proprietor of a fractional investment portfolio platform.