PORTFOLIO POINT: Direct property investment currently requires a big allocation of capital, but a new trading platform aims to create a liquid market for investors in property shares.
What do you do after losing your board battles and your time runs out at the company you founded, listed and ran for the past decade?
If you’re former Praemium CEO Arthur Naoumidis, then the answer is to take a holiday and come back with an idea that has the potential to completely revolutionise property investing in Australia.
It’s a bold and ambitious claim, but with his new venture DomaCom, Naoumidis is closer to actually achieving it than anyone.
Whereas Praemium provided technology for investors and advisers to manage equity portfolios, DomaCom is an online platform based around the idea of “fractional” property investment; that is, the breaking down of individual properties into 100 tradeable units. Using his and his team’s experience with investor platforms, Naoumidis wants to achieve several things.
Firstly, create a vast – but relatively simple – managed investment scheme that will act as a market for fragments of property, and then secondly, create a platform for the secondary trading of those shares.
It will not be easy to do. Not only do managed investment schemes have something of a bad name – think of the Trio Capital collapse – but the landscape is littered with failed or aspiring property schemes and platforms. Residential property trusts have run up against problems of scale, diversity, property management and yield, while online real estate platforms offer limited flexibility for both buyers and sellers.
DomaCom, in contrast, aims to link buyers otherwise unable to invest in property with a network of other buyers and sellers, including those who would otherwise be unable to sell.
Why is this needed?
The reasoning behind what DomaCom is trying to do comes from two significant shortfalls of the Australian property market.
Firstly, there is a problem on the investor side that a reasonably-weighted allocation to real residential property is almost impossible to obtain. The most recent data from the Australian Taxation Office puts the median balance in an SMSF at about $500,000, and the mean just under $1 million, and with a standard allocation of 10-15% direct property that gives a range anywhere from $50,000 to $150,000 for the standard investor. Barring illiquid and usually restrictive syndicates, or REITs, this is difficult to achieve in practicality. In other words, you buy a house or you don’t.
“At the moment there’s no solution,” Naoumidis says. “But roll forward a year, you move that $100,000 into DomaCom’s cash and then just log in.
“We’re creating something that’s got the liquidity of a share. Because to buy and sell a $700,000 house is a bigger ask than buying or selling a $7000 share in a house.”
The other shortfall deals with the other side of the equation – property owners. There are already several avenues for home owners to access the equity built up in a property, which have positives and negatives. Mortgage re-draws are relatively simple for those who still have a mortgage, and an income.
Then there are reverse mortgages. This is where an elderly home owner takes out a loan – usually $70-80,000 – with the intention that it is paid back upon death with the sale of the property. Interest compounds on the loan, so instead of paying back an amount each month the cost is added to the loan for the eventual lump repayment. According to Deloitte, there were 42,000 of these facilities in Australia worth $3.3 billion at the end of 2011, and growing.
While the federal government brought in legislation to improve reverse mortgages in 2011, including protections against the loan compounding to greater than the value of the house, there are still limitations. Restrictions on who can take out a reverse mortgage, either because of age or the location of the house, reduce their usefulness, and Naoumidis says “there’s a wave of litigation coming” because the economics of the funding has changed and people are locked in schemes at 9-11% interest.
“The opportunity for us became clear,” he says. “There are all these ageing baby boomers who don’t have super and whose only asset’s their house.”
How would it work?
DomaCom aims to both provide some yield to investors and free up equity for home owners, but of course the devil of doing this is in the detail.
Basically, the design is a managed investment scheme. Within this, there are two types of sub schemes – cash and properties.
At the moment, seven advisers have signed up as founding partners of DomaCom – the largest of these being Lifespan – which together will provide about $150 million to kick off the cash side and create half of the equation.
Then, each time a property lists, a sub scheme will be created with exactly 100 units and only one asset: a contract with the owner of the property. The scheme will break the property down into what are effectively shares and put a mortgage instrument on it.
A yield of 4% will be the base return, plus 2% for fees, which is expected to be paid by rent from investment properties or the option of ongoing sales of small stakes every five years for live-in owners.
“When you buy property, you’re buying the rights to the capital, the rights to the income and the rights to live there … What we’re doing is taking and separating them and moving those rights from the owner of that property to the scheme,” Naoumidis says.
When a property is listed, that first sale will be subject to stamp duty. But DomaCom expects after that it’s simpler – subsequent secondary trading is just units in a fund. To deal with development, a rule of listing is that the property must enter property management.
For those who still have a mortgage, Naoumidis admits it’s a little harder.
“We expect at the beginning of our platform’s life that the bank would say ‘piss off’. They’re not going to let us put a priority mortgage on that property.” However, he is confident that with a lender on-side it would just become a refinance event and demand would see options for this develop.
The way forward
There’s still a way to go, however, as DomaCom is tested to see if it really can be all that its founder hopes.
Naoumidis says discussions with both sides of politics had been supportive, and that with the legal framework decided on and partners signed up it was now a matter for getting regulatory and taxation approval. This is a process that he hopes to be completed by November.
“The risk that we have is that the government and opposition go in and legislate something because they think there’s no solution.”
He says the coming weeks will be about engaging with both ASIC and the ATO to get the concept across, but he recognised they would see it as “something different”.
With all green lights, DomaCom aims to be up and running in February next year – roughly six months’ time – however the full trading platform for the secondary market will take a little longer to set up.
The potential, though, is appealing. The ability to save for a house through the purchase of small stakes in one. The chance to diversify direct residential property investment across suburbs and states within a normal SMSF budget. The ability for couples in a divorce to release equity without selling the home.
“Once it’s going, it’ll be a platform, like the ASX,” Naoumidis says. “We have a fair and equitable transfer of risk and reward. An SMSF buys 10 shares and acquires 10% of the upside and 10% of the downside. It’s exactly the same as property… It’s an elegant solution.”
It will remain to be seen if the elegant solution can clear the hurdles and gain enough momentum to be successful – but it looks to be a project well worth watching.