Getting direct property into clients’ investment portfolios has traditionally been a somewhat convoluted and fraught process for financial planners, involving multiple stakeholders and various challenges.
One of these was highlighted recently by Fiona Navarro, general manager of Apogee: “We’ve got this issue where, we’ve got a segment of the market that’s property spruiking, and lending to the average Australian in a self managed super fund (SMSF) through residential property. And I think that’s an area that we all need to watch, to be honest.”
A number of rulings made by the Australian Taxation Office on the terms of limited recourse borrowing arrangements (LRBA) related loans to SMSFs has led to concerns. These are particularly related to loan terms, interest rates charged and the arms-length nature of the agreements. But there are safe ways of introducing direct property into client portfolios while meeting your obligations under the best interest provisions and adding greater diversification for your client.
A fractional solution
Domacom’s chief executive officer, Arthur Naoumidis, believes the company’s new managed investment scheme (MIS) is one of the safest and easiest methods of doing this, using a fractional property investment product called the DomaCom Fund. With some 100 advisers having already undergone the accreditation process required to begin selling the DomaCom product, Naoumidis expects it to start reaching critical mass within the next few months.
This is also likely to be spurred on by the release of the first independent review into the fund, with Rice Warner having given its tick of approval this week. “We believe that the DomaCom Fund and its associated services provide a robust and compliant service for investors seeking to invest in residential and small business commercial property,” stated the Rice Warner assessment.
“Most planners are loathe to put their clients into limited recourse borrowing in an SMSF,” Naoumidis says. “While you can use real estate investment trusts (REITs), they don’t track property, they track equity markets. And the problem with property trusts is that they’re less secure – they have leverage, derivatives and when there are redemptions, there can be a freeze,” he adds.
Naoumidis believes this product will appeal primarily to clients with SMSF, and he says that it has attracted significant interested from financial planners in the two months since it officially launched. “Quite a lot of [our enquiries] are from the big verticals. All of them have had one or two clients they’ve lost recently because the client was hit on by a property spruiker. What’s the weapon the planner comes back with?”
“Coming up with the idea was driven by the need that, out of 18,000 superfunds, 90 per cent had zero direct property and around 10 per cent had nearly 100 per cent property,” says Naoumidis, who sought a way to create a happier median.
With Perpetual appointed as the responsible entity and ANZ holding the DomaCom cash pool, it uses a book-build process to create a fund of multiple borrowers across a number of properties. Once it reaches 30 per cent allocation, conveyancing begins, and when it reaches 50 per cent, a full valuation and property inspection is conducted. Once the book is full, subscription is closed to new investors.
Naoumidis also points out that any liquidity concerns investors may have will also be addressed by the creation of a secondary market. “The risk everyone sees is…what happens if they want to sell $30,000 dollars [of equity] in six months’ time, how do they know there’s a secondary market?”
“We’re in the process of launching a secondary market, that will provide a liquidity solution so that at any point in time, investors who want to get their money back out can sell in a peer-to peer trade.” “We can’t prove there’ll be a buyer, but you will be able to put your units up for sale…there’s no proof of this [because it’s a new fund] but logic dictates that at a price, there’s always a buyer.”
He says the life of the fund is five years, having dropped this from the initial term of 15 years in response to financial advisors’ concerns: “at the expiry of five years, the fund is wound up and the asset is sold. If 75 per cent of unit holders vote to keep the fund going, it keeps going, and those who want to get out can sell on the secondary market.”
Going straight to the source
For those more interested in the direct approach, Nyko Property conducts research into macro trends and valuations of properties, primarily for the investment market.
Bill Nikolouzakis, director of Nyko Property says that anecdotally at least, the property sector is receiving increased interest from financial planners.
But he is concerned that so far, there has been “no industry that’s taken responsibility and said ‘we’re going to give advice on that.’”
Nikolouzakis argues that there needs to be a strategy around the use of direct property as an asset class, and this is where he believes Nyko’s research is useful.
“The thing about our research, we’ve tried to produce a document that can assist an investor or financial planner in making an educated decision in getting into direct property…to stop them either going straight to a property spruiker or even to an auction down the street…that’s what these in depth reports we’ve put together are designed for.”
He agrees with those who raise concerns about property spruikers directing SMSF owners to invest in direct property, without the involvement of a financial planner.
“I think property people, other agents have got no place in setting up SMSFs to buy direct property or anything else, they shouldn’t be doing it.
“There’s legislation in place, and the right people to be doing that are financial planners. We think there is room for direct property within SMSFs, but there should be a step involved before they speak to the property people…including determining where to buy and the price point.”