Crowdfunding of property investments has attracted a lot of attention in Australia but before it can really take off, laws will need to change.
One of the key selling points of crowdfunding property is that it allows small investors who couldn’t afford to buy a whole property to get into the property market.
However under current laws, putting equity into property via crowdfunding is limited to sophisticated investors – those with investible funds of at least $2.5 million or an annual income over $250,000.
This effectively cuts out the retail investors who make up the potential market for property crowdfunders.
It was a problem encountered by crowdfunding platform VentureProperty when it teamed up with property developer Mirvac to test the waters and market a couple of Sydney apartments earlier this year.
That a developer of the stature of Mirvac was marketing properties this way was a sign that fractional investment in property via crowdfunding was being taken seriously in Australia.
Mirvac was offering investors the opportunity to put in as little as $100 to help fund the construction of an apartment in Bondi and another in Harold Park, in exchange for an ownership stake upon completion.
Yet six months later, the apartments have been taken off the property platform owned by VentureCrowd without having raised the required cash.
“I think we were probably just a little ahead of our time,” says Tim Heasley partner and chief operating officer in Artesan, a venture capital investor which owns the VentureCrowd business.
“It was very much an experiment for both parties. We were testing a new product and means of delivery and a brand new market.
“We just couldn’t generate sufficient interest. What we realised is they were effectively a retail product.”
Rewards crowdfunding – where people put money towards a new record or a film in return for a token such as a signed CD – is distinct from equity crowdfunding, where investors are hoping to earn a financial return from their investment.
Heasley notes the irony that rewards-based crowdfunding is completely unregulated, “but the minute that an equity-based crowdfunding business tries to give equity back to the person contributing the money it becomes horrifically regulated”.
The Federal government has made reforming the law one of its “highest priorities”.
“Addressing crowdfunding issues, support for angel investors – they’re things that you can do quickly,” Innovation Minister Christopher Pyne said in early October, adding that new measures will be announced “in the coming months”.
Strong interest from developers
Heasley says VentureProperty is in talks with developers about putting larger developments on the platform, and is also planning to crowdfund the debt component of property developments. “Developers are very interested in this as a financing mechanism,” he says.
Despite the initial setback, Heasley remains optimistic about the potential of crowdsourced property. “I think property’s an enormous opportunity,” he says.
Melbourne-based DomaCom offers investors an alternative way to access fractional investing.
Investors put money towards the purchase of a property via a book build (in the same way that listed companies sell shares) and end up with a proportional share in the property.
While DomaCom is in theory open to the general public, the sales so far have been via what is termed a private bookbuild. This is where an investor identifies a property they want to buy and then puts it on the DomaCom site to raise money through their own network, with DomaCom facilitating the deal.
DomaCom applies an independent due diligence to the properties: checking the title, doing a building inspection, and a full valuation. The properties are held in trust by Perpetual.
Chief executive Arthur Naoumidis says the key difference with other crowdfunding property sites is that DomaCom is paid by the investor, not by the property company. This means it is classified as a registered managed investment scheme, which allows it to take funds from retail investors.
The rent is distributed to investors every month and after five years the investors vote whether or not to sell the property. Unless all of the investors agree then the property is sold – however there is an option for remaining investors to buy out those who want to exit at current market valuations.
Investors also have the option of selling their stake via a secondary market.
DomaCom charges investors 0.8 per cent of the asset value every year, which Naoumidis says is at the “low end” of the wholesale managed fund rate.
Naoumidis says the platform will be modified so that when investors make a book for a property they will be able to leverage up to 50 per cent of the property, subject to the investment being positively-geared.
The site’s main clients are financial planners, who put their own clients into the property via the platform. So far it has been put on the product list of 33 financial planner dealer groups, which Naoumidis says is about 5 per cent of the Australian market.
In total, 10 properties have been acquired through the site, although more than 50 are now listed.
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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