With this dream becoming a nightmare for many young Australians, it has inevitably become a political issue with politicians of all shades adding their tuppence worth to the debate. Is negative gearing to blame? What has been the impact of the halving of the capital gains tax? Even self-managed super funds have been accused of crowding young home buyers out of the market. On the supply side, should state governments release more land for development? Your political viewpoint is likely to colour your assessment.
This column has no intention of entering the political debate, except to say one thing. If there are policy changes, they will not happen overnight. Housing has always been a hot political potato, and all politicians will tread warily in their search for the “right” solution.
While this debate rages on, are there any options for young people seemingly locked out of the market. Well, yes there are. It’s called fractional investing, and, as the name implies, it essentially means you have exposure to a fraction of a property. It’s not the same as owning your own bricks and mortar (hand in glove with the bank, of course), but it does get your foot on the property ladder.
Perhaps the best way to explain it is to compare it with buying shares. With the latter asset class, a purchase of shares gives you a stake in a publicly listed company (as well as the rights that accompany that ownership, such as voting for board directors), with the opportunity to share in its growth via a rising share price and dividends.
It’s much the same with a fractional property investment. Investors nominate a property (or properties) they would like to invest in, and once 100 per cent of the price is committed to, the purchase is made. The property is then held in a sub-fund with each investor holding units in the sub-fund, entitling them to any capital gain and a share of the rental income in proportion to their investment. Typically, the cost of investing fractionally is a minimum $2,500, which means investors have the option of buying without having to borrow.
Like shares, investors get to pick and choose which property will get their money; all those factors that govern a decision to buy a house outright, such as location, can be exercised. But because they are only buying a “fraction” of the property, their risk is minimised.
In essence, what fractional property investment offers is rental yields, potential capital gain as property prices continue to rise, the opportunity to diversify across multiple properties, and an asset allocation solution, adding to their overall investment diversification.
The other positive is liquidity, especially important to those nearing or in retirement when income becomes all-important. The fractional model offers more liquidity than other forms of property investment, with a liquidity facility allowing online trades between buyers and sellers.
Liquidity is also a reason why fractional investing is often a better option than either a joint venture or syndicated property investment. With the former, all investors are jointly responsible for the property, while fractional investing allows an asset to be beneficially owned by individuals, giving them the right to respond separately in accordance with their personal circumstances.
Property syndicates have their own issues, not least of which are the cost to set them up, the compulsion to invest for the duration, and the lack of liquidity.
The liquidity issue, in particular, has ramifications for SMSF trustees, especially as they either transition to retirement or are in retirement. It all boils down to an asset allocation issue. If property is a high percentage of the fund’s assets, then that could be an issue as they look for income in retirement. Under the fractional investment model, those trustees with a high percentage of property have the option of selling down.
The fractional model also has significant equity release potential and future models will enable senior Australians to share their property with the next generation of investors, while they unlock equity to help fund their retirement years. For the first time, the emergence of fractional property investment will provide a sustainable equity release model, allowing the family home to become part of the overall wealth strategy.
But at a time of rising house prices, the opportunity fractional investing offers younger Australians to get a toe in the property market is, perhaps, its most compelling feature. Certainly a far better option than waiting for a political solution.
Warren Gibson, general manager – sales and marketing, DomaCom
