As with other professional disciplines like accounting, legal, risk, finance and broking, property is a specialist field, but not a daunting one. In the same way you engage a solicitor on estate planning matters or a stockbroker to create an equities portfolio for a client you can engage a buyers agent to help in the property selection process. Good agents are qualified, carry PI insurance, are members of a reputable organisation and most of all don’t sell property – they buy it. So you need someone who is research based and able to demonstrate a sound methodology.
DomaCom have spoken to a number of buyers agents around Australia to introduce them to financial planners who want to embrace property and bring it into their service offer in some way.
Provided you and/or your colleagues can assemble enough investors to create a syndicate to complete a book build then you can buy whatever you want, or rather have a professional buyers advocate find a suitable property. If you have enough investors with sufficient money to invest you may be able to create a portfolio of properties in which they all have a share – a diversified property portfolio.
The process is simple. You know your clients individual situations in regard to income and capital growth needs and you know the asset allocation that suits their risk profile and objectives. You can divide them into 2 or 3 camps, income, growth or a combination then brief a buyers agent to select one or more properties to meet the need.
The information they provide will help you complete a SOA.
What are the issues with investing in property?
Apart from debt the main cause of failure in a property investment relates to tenancy, or lack of it. This simply comes back to over extending on the loan and not being able to cover shortfalls between rent and repayments. In DomaCom’s fractional model there is no debt (a leverage options is being investigated) as each investment is cash only, and in the case of tenancy, what are the chances of every property in a diversified portfolio of properties being untenanted at once? These two factors limit the potential for the property investment to come undone.
The strategy we’re talking about here is simple diversification and the DomaCom Fund provides a structure that enable that to happen. The structure is a managed investment scheme, similar to any other except each property rather than being pooled is ‘housed’ in a separate sub-fund with its own identity, or APIR code.
In the equities world for example, you might have a portfolio model that gives you blue chip, small cap, resources and retail to give you a spread, and depending upon your clients need a focus on growth, higher yielding fully franked dividends or a balance of the two.
Bringing this scenario across the property asset class, DomaCom can facilitate a diverse portfolio of residential (inner city and urban) property for growth, and commercial property with some student accommodation for higher yield. You can include in that mix strata car parks and rural property. By diversifying geographically if one property theme falters another may surge.
Investors benefit from geographic diversification too. Different economies are driven by macro trends at different stages in the cycle which helps reduce volatility across the portfolio.
It is impossible to rebalance property portfolios as you would equities so it’s important to be positioned across these economies.
A good example of property themes that surge and fall are the towns and cities with close ties to the recent mining boom in West Australia’s Pilbara region and in parts of Queensland like Gladstone and Mackay. The boom sent property prices spiralling up and now they’re falling and we’re seeing business dry up, people closing shops and moving away.
In these situations it’s a bit like musical chairs with property. When the music stops whoever is left holding the property loses.
Opportunistic investments like these, like speculative stock trades, may be OK for a small part of your property allocation but long term they could spell disaster. Similarly holiday properties are usually the first to go in a significant market downturn so should be regarded as a small portion of a property portfolio.
And finally, in relation to a potential property bubble, by taking the fractional approach to investing in property you will help insulate your clients from over-exposure by maintaining a realistic asset allocation. If the bubble bursts then not the end of the earth. If it continues to grow, then happy days.
The DomaCom Fund is a specialist product that requires the adviser to be accredited to use it. Details are available along with further information on the DomaCom Fund and the fractional style of property investing at www.domacom.com.au
