Fragmented property: a new disruptive property investment class
You can’t afford to be a property investor right?
Maybe you can’t afford a loan for a property yourself but you might be able to buy 10% of a good investment property with strong returns.
That’s called Fragmented Property Investment.
Property investment is seen as one of the bedrocks of a well-rounded investment strategy. However, as house and land prices have risen, many would-be investors have been forced out of the market.
Fragmented property could be a solution to unaffordability, could open the doors to accessible property investments for Self-Managed Super Funds (SMSF) and might also bring first home buyers into play.
What is fragmented property?
“investors hold the fragments in their own right with their own title deed”
Fragmented property refers to property that is broken down into fragments for investors to purchase.
It is a new real estate asset class, whereby a residential property could be divided into 10 fragments, with each of those fragments purchased individually and valued at one tenth of the total cost of the property.
Importantly, the fragment is registered to the investor on the title deed, which means investors hold their fragments in their own right, without needing to purchase an entire property outright.
How much will property prices rise or fall this year?
Fragmented property investment could be a great way for first home buyers to break into the property market, see their investment blossom and be able to afford a full property in future.
Especially, as prices are forecast to rise: (table below from CoreLogic and Westpac)
Residential property (home) prices in Sydney are forecast to rise 6 per cent in 2020.
Residential property (home) prices in Melbourne are forecast to rise 6 per cent in 2020.
Residential property (home) prices in Brisbane are forecast to rise 8% in 2020.
Residential property (home) prices in Perth are forecast to fall 0.5% in 2020.
Residential property (home) prices in Adelaide are forecast to rise 2 per cent in 2020.
Residential property (home) prices in Hobart are forecast to rise 5 per cent in 2020.
The median residential property (home) price across five major Australian capitals is forecast to rise 5 per cent in 2020.
SMSFs and fragmented property investment
“Fragmented property could be groundbreaking for SMSFs”
Fragmented property offers a passive investment, with no property management required. Fragmented property investment benefits investors looking to optimise their property portfolios through wealth accumulation or within an SMSF.
Greg Dixon, Managing Director and Licensee at FUTUREALTY.com.au says of this new asset class, “Fragmented property gives investors the choice of where and which type of property to invest in. It's not a fund, nor is it a trust. It is an investor deciding on purchasing a fragment of the exact property they want. This means you can utilise your property market expertise and knowledge to purchase fragments in areas where you think the market may boom.”
The introduction of fragmented property could be ground-breaking for SMSFs as it gives investors all the benefits of property without many of the risks or compliance issues.
There are several benefits.
Exposure to the property market will no longer require the purchase of an entire property. This benefits smaller SMSFs will may now no longer have to use a large proportion of their funds or take out a loan to add real estate to their fund.
One problem in adding a property to an SMSF is ensuring appropriate liquidity to pay a pension or any unforeseen expenses that may occur in retirement.
According to accounting firm BDO, “This is why investing in fragmented property could be a good solution for SMSFs who would like to have the benefits of real estate exposure, but not at the cost of risking fund liquidity. By investing in fragmented property, the investor would receive a fragment of the rental yields for that property and the capital gains when it is sold but at a lower upfront cost. In the same way, an investor might choose to ‘drip-feed’ funds into shares over time, the SMSF can increase its investments in a property or a selection of properties by purchasing additional ‘pieces’ over time. This puts less of a strain on the liquidity of an SMSF as well as supporting trustees who wish to take a more risk-averse approach.
“Secondly, there is added flexibility of purchasing fragments of different properties, diversifying your exposure across different locations and property types, for example, commercial and residential real estate. This could improve your investment strategy and reduce the SMSF's risks to house price volatility as you're exposed to different property markets.”
Fragmented property and the blockchain
With a new asset class comes new technology to drive it.
Lakeba Group, named as one of Australia’s most innovative companies by the Australian Financial Review, reaching the top ten for technology firms, is using blockchain technology to fragment property titles into ‘bricklets.’
According to Lakeba CEO Giuseppe Porcelli, “Bricklet will fragment property deeds into individual units and make them available for purchase through an online market.
“As a purchase is made, the fragment of that property deed will be transferred from vendor to owner, who will be listed directly on the property deed.”
Two residential apartments in Adelaide have been sold – the world’s first properties to be fragmented using this method.
The sales attracted the attention of David Ridgway, Minister for Trade, Tourism and Investment in South Australia, who said “Australians will potentially be able to become investors in property for as little as $25,000 – directly holding the fragment of the property deed rather than investing in a trust, financial product, or other intermediary platform.”
Expect Lakeba to roll Bricklet out into other states this year.
Real Estate Investment Trust (REIT) vs Fragmented Property
You have heard of Real Estate Investment Trusts (REITs). These are funds that collect money from investors and invest it collectively in commercial and/or residential real estate.
Let’s compare real estate investment trusts (REIT) vs Fragmented Property Investment.
Fragmented property could potentially hold larger benefits than fractional property or REITs.
Greg Dixon says, “With fractional property and REITs, investors do not have complete control of their investment. If the majority decides to sell a fractional property, then all have to sell. And, the same with REITs. If the trustee decides to hold a position, you are also stuck holding that position no matter what your better judgement may tell you. The added worry with both is if they crash and burn and cease to exist, your investment will go with them as you do not ‘own' the fragment – you aren’t on the title. You just own a portion of their trust or fund.”
BDO suggests further benefits include investors making all the decisions as to which specific asset they want to invest in, how much they will invest and when they want to sell.
“This gives you complete control over your risk exposure levels,” said a BDO spokesperson.
It should be noted that investors are still subject to stamp duty and capital gains tax.
Plus you can’t live in a fragmented property.
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