WRITERS: Dan Lander
Housing affordability in Australia has been widely dubbed a crisis. As the Australian dream continues to slip further from reach, savvy investors are looking for alternative ways into the property market.
As a response to high property prices, platforms such as crowdfunding and fractional investment are increasing, enabling partial ownership as opposed to individuals needing to solely raise purchase capital.
As the Australian dream continues to slip further from reach, savvy investors are looking for new avenues into the property market.
Housing affordability in Australia has been widely dubbed a crisis, with various sources suggesting that many households spend between 30 per cent and 48 per cent of their annual household income servicing a mortgage.
Given this figure is one of highest in the world, there has been no shortage of related policy debate in recent times, with a range of solutions floated, from increasing housing supply to restricting investors and even limiting immigration. However, while the search for a silver bullet continues at the official level, exorbitant real estate prices are prompting a different response, encouraging a number of investment innovations.
“A market becomes disruptive when there is a problem that needs to be solved,” Dr Braam Lowies, Senior Lecturer in Property at the University of South Australia says.
“In the property market, the problem is housing affordability; it’s always been the problem and it continues to be the problem.
On the back of that, disruptive vehicles are starting to emerge, and although they have been slow to adapt, the current property market is changing rapidly, so the pace may be about to pick up.”
Dr Lowies suggests that there are a number of characteristics of both the emerging market and the next-generation investor that could significantly influence the shape of Australia’s real estate industry. First and foremost, he expects that the plugged-in, instantaneous nature of our ever-expanding virtual world will have major implications, both demographically and operationally.
“We’re going to start seeing a new type of investor who is tech savvy and wants everything through a screen, and that will increase this rate of disruptiveness”, Dr Lowies says. “It’s currently quite slow because of a Baby Boomer-Generation X market that is slow to adapt to change, but as Millennials and, even more so, the new Generation Z come through, the speed of change and disruption will definitely increase.”
there is an emerging trend towards online platforms that facilitate partial ownership in a property, as opposed to an individual having to raise the entire purchase capital themself.
Largely as a response to high property prices, this new model presents opportunities to people who have been shut out of the traditional property market, and currently operates in two similar but distinct formats—crowd funding and fractional investment.
Crowdfunding: The New Crowd Pleaser
In general terms, crowdfunding is increasingly common in many contemporary industries, where an individual or a company (the promoter) receives online contributions from a large number of individuals to finance a project, such as a book, movie or video game.
According to Christa Viljoen, a PhD student at UniSA’s School of Commerce, this model is currently making quiet inroads into the property investment market.
“The property crowdfunding model is equity based and similar to buying shares in a company. In this case, it acts as a special purpose vehicle enabling buyers to invest in a property or development when they don’t have enough capital to do so by themselves,” Viljoen says.
"It’s a disruptive model for two reasons: firstly, because of the investment opportunity it provides sans solo capital, and secondly because it allows you to diversify. So, rather than just putting everything into one property, you can now invest in a number of different properties without needing to fully finance any of them.”
Most crowdfunded property opportunities are attached to large scale commercial developments such as shopping malls or day-care centres, allowing investors to engage with high-profile projects for as little as $1000, while also enjoying control over the ventures they back.
“Of course, you’ve always been able to invest in property through investing in, for instance, Real Estate Investment Trusts,” Viljoen says. “But if you invest that way, you might not be sure exactly which property you have invested in and what risks are involved, whereas crowdfunding gives an investor the opportunity to only invest in the projects they choose.”
Fractional Investment: A Foot in The Door
Like crowdfunding, disruptive online fractional investment allows an individual to buy a share in a property, but with a distinctly different orientation.
“Some online fractional investment platforms focus on residential real estate,” says Dr Rob Whait, Lecturer in Taxation Law in the UniSA’s School of Commerce. “Premium residences in high-yield areas are held within a trust and managed by the platform administrator, and the investor can buy a unit in the trust to gain a fractional investment in the residential property.”
In the fractional model, these units—generally referred to as ‘bricks’—can sell initially for less than $100 each, and unlike the crowdfunding scenario, which represents somewhat of a gamble on a development, a fractional ‘brick’ is a real holding in an established, revenue-generating property. The investor receives a proportion of the rental income, and the value of their bricks increases in line with capital growth.
The other appealing feature of fractional platforms is that they offer a built-in option, allowing investors the flexibility to sell their ‘bricks’ with a swipe of their smartphone.
“When you want to get out, you simply list your ‘bricks’ for sale on the platform site, and wait for someone to purchase them,” Dr Whait says. “That’s where the disruption comes in, because it’s very easy to transfer some money into your digital wallet and place orders in the order book to buy bricks and sell them later by placing them for sale in the order book—it’s almost like a little stock exchange but is held within that platform.”
Different Strokes, Different Folks
Despite the ease of access offered by these new investment platforms, Dr Lowies emphasises that real estate remains a slow business.
“Investors are cognisant of the fact that property is no quick fix nor a quick way to make money,” he says. “You can speculate on the property market, but it takes time.”
Taking this into account, crowdfunding and online fractional investment platforms currently reflect quite different demographics and motivations. The crowdfunding model appeals largely to older people, with many seeing it as consistent with traditional investment avenues, whereas fractional investing attracts a younger demographic.
“People using the crowdfunding platform are generally over 55, and they perceive it as very low risk, and their return expectations are similar to bank savings. On the other hand, your fractional investor may be looking for something different—in our recent research sample, 85 per cent of fractional investors were under 54 years of age, and 40 per cent were between 18 and 34 years.”
While Dr Lowies suggests more research is warranted into the reasons behind this distinction—including whether the actual presentation and interface of the particular platforms is a factor—there is a sense that fractional investment may offer a better route to future outright property ownership or simply be used as a more attractive saving instrument.
“The fractional model is attractive to younger people partly because it’s online, but also because they don't have to pay stamp duties and fees, except for a small administration fee, which is one of the major stumbling blocks to young people investing in the property market. Also, these are high-end properties that are expected to show really good capital growth, so if they invest in these properties and they keep their money in for the long haul, they actually have an investment that stays in line with the market and can later be leveraged to buy their own property.”
What If The Bubble Bursts?
Those who are in the market to purchase their own property may notice the mortgage landscape is also undergoing something of a metamorphosis. Not only have mortgage brokers and non-bank lenders created an ultra-competitive market, new digital financiers like Tic:Toc are streamlining the application process so owner-occupiers can receive same-day approval, all directly online.
However, with that in mind, there remains concern that one of the biggest changes on the property horizon may be a little more old-fashioned than bleeding-edge FinTech platforms—a long overdue price correction. Already this year Australia has seen real estate markets cooling, particularly in Sydney and Melbourne, and Dr Lowies says we shouldn’t rule out further price adjustments.
“In my personal opinion, the over exposure to interest-only loans for investors is a really big concern,” Dr Lowies says.
“The problem is that in three to four years from now, when a large number of these loans mature and need to be renegotiated, some investors are going to have cash flow issues to pay back that fully amortised loan. If that prompts widespread selling, it can cause further disruption.”
Recent toughening of lending criteria for investor loans may go some way to softening the impact of any adjustment—hopefully shrinking rather than bursting the bubble—but the future of Australia’s property market is more uncertain than it has been for quite some time.
“What a leveraged investor sometimes misunderstands is the fact that, if property values decrease, their loan amount doesn’t decrease with that—the investor remains exposed to the same amount of debt,” Dr Lowies says.
“So that’s the disruptiveness of that side of the market, and that can be quite negative.”
As always, caveat emptor.
Property and financial services have been my passion most of my career—they work together, hand in glove. There is a sense that comes with building something physical and tangible that many people enjoy, whether it be in a commercial or manufacturing setting, or a beautiful piece of community infrastructure.
While the property sector is broad and covers many facets, my own experience with disruption is in the real property sector and the financial services that feed it, and I am reminded of something Bill Gates said: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”
The way that property is built, financed, transacted, utilised, taxed and valued is rapidly changing, meaning all those involved in or servicing the property sector need to be aware of new directions in customer trends and how those trends will impact current business models. Essentially, ‘proptech’ disrupters aim to achieve one (or a combination) of three things: Disrupt an existing cost structure; improve asset utilisation and flexibility of use; and increase revenue through improving customer demand, experience and connection.
Given this disruption is currently occurring across such a wide array of property and financial services, it may be illustrative to look at one example that I am particularly familiar with. In 2017, I helped launch a ‘FinTech’ called TicToc Home Loans, for which I now chair the board. We launched from South Australia as a national business, providing consumers with instant home loans by utilising a fully-digitised approval process.
The traditional home loan financing process is cumbersome, time consuming, costly and lacks transparency. Nonetheless, it is the lifeblood of the Australian housing sector, and with $1.7-trillion of residential home loans outstanding, it is ready for disruption. TicToc, a KPMG H2 Ventures Global 100 Fintech, is the first company in the world to provide a fully-digitised home loan featuring world-class responsible lending outcomes, with loan approvals and documentation ready in minutes, not days or months.
Why was I captivated by this idea? Because the banking sector is heavily regulated, loaded with costs and old systems and I could see that customers wanted change.
How will TicToc go? It’s early days, but with great backers like Bendigo Bank and Adelaide Bank, a quality management team and the market opportunity to change the way people transact home loans, the venture is exciting. The software platforms created by companies like TicToc will change markets and improve the customer experience—remember signing credit card dockets not so long ago.
Amidst all this change, I would also emphasise to those servicing the property sector that long-term holding of property needs to be future proofed, because customer trends and demands will change in the short term. Building infrastructure that can be reconfigured into smaller or larger layouts, for instance, allows for technology to be easily retrofitted, and understanding such future trends will be critical to protecting asset values.
For more information, visit: tictochomeloans.com
OTHER USEFUL LINKS
Dr Braam Lowies is a Senior Lecturer in Property at the UniSA Business School. His research expertise includes behavioural issues in property and finance, housing affordability and property crowdfunding.
Dr Rob Whait teaches Taxation and Taxation Law. His research interests include tax related research, tax compliance and tax avoidance.