Fractional property investing (FPI) is a method of acquiring an interest in real property of the investor’s choice without having to purchase the whole property. The structure behind FPI enables multiple investors to have a stake in the same property to the dollar value they individually wish to invest.
The idea behind the creation of a fractional property investing fund was to democratize property investment to make it more easily attainable for more people and to meet the asset allocation strategies that advisers recommend which vary from investor to investor. The large cost of this asset class precludes many people from investing without establishing significant loans.
It is a syndicate-like managed investment scheme (MIS) legal structure approved by ASIC. Each investment property is segregated in a sub-fund under the MIS with investors holding units in the sub-fund in proportion to their contribution towards the purchase of the property. Investors can purchase a 100th or 1000th share or more of any property in Australia.
Any type of property, residential, commercial, retail, industrial, leisure, rural, land at any stage of development including off-the-plan, to any value, can be syndicated in this manner.
Generally with property you either buy the whole property or none at all. However, the fractional property investment model enables investors and SMSF trustees to achieve the right asset allocation for property in their portfolios. This approach to fractional investment provides a better way for investors to meet their particular risk/reward profile and need for income and capital growth without the need to borrow money to purchase a whole property.
Fractional property investing is an intermediated model meaning that investor accounts must be established by an Authorised Representative (AR) of an Australian Financial Services Licensee (AFSL) who has access to a fractional investment fund, such as the DomaCom Fund, added to their approved product list (APL).
Fractional property investing is now a fully regulated online managed fund or unit trust that enables investors and property owners to select one or more properties of their choice and create or join a book build process with other like-minded investors to form a syndicate to purchase the properties.
These properties tend to be subsequently held in a segregated sub-fund that issues units to each investor in proportion to their committed investment.
One of the major issues in relation to property which is liquidity. The fractional investment models rids this issue by creating an online secondary market that allows investors to sell their units when it suits them.
As a result, investors can rest easing knowing that their money can be accessed as a secondary market always exists, unlike traditional property trusts.
For administrative efficiency managed funds have a minimum investment requirement and fractional property investing is no different as it is structured within an MIS. You might think that property being a high cost asset would have a higher than average minimum investment however it is not necessary to apply that. Online technology should make small applications easy to process and the objective afterall is to make property as accessible as possible to as many people as possible.
To create a book build cash must be committed to meet the expected purchase price. Whilst it is being amassed and transferred to a cash account it should be earning maximum interest so the investor is not disadvantaged during the due diligence and purchase process. The DomaCom Fund for example returns the cash rate plus 60 basis points. This is currently 2.60 per cent.
A strong and growing market for this type of fund is the SMSF market where a specific asset allocation can be maintained across a variety of properties and eliminate the need for a LRBA. Fractional investing for SMSFs also eliminates serious overweighting in the sector which can lead to problems should a lack of liquidity exist in a SMSF that holds a single property with debt. Such circumstances can result in an early fire sale situation.
There are significant benefits to your clients, explained in more detail in the following brief, and there are benefits to your practice in facilitating property investment in this way.
