FRACTIONAL INVESTMENT IN RESIDENTIAL PROPERTY IN AUSTRALIA Braam Lowies Robert B. Whait Christa Viljoen Stanley McGreal 20 April 2018 DOI 10.4226/78/5acdb6c135896
1. Introduction Fractional investments have been around for many years and have enabled investors to purchase an interest in an asset when it would not have been possible for them to purchase it outright. In the property sector, various vehicles are available for this purpose. These include Real Estate Investment Trusts (REITs), listed or unlisted property trusts and even good-old fashioned partnerships. Most of these vehicles typically invest in commercial property with a lesser focus on residential property investment. This investment focus creates a situation where investors may miss out on potentially higher gains that residential property might offer. Furthermore, in using these vehicles investors don t have full control over the properties invested in as it is based on a fund management model. Investing fractionally usually also meant going through a financial intermediary, such as a financial advisor, or filling in forms. Now it is also possible to invest in property through the online environment. With fractional residential property investment platforms, investors can invest fractionally in residential property that they choose via a simple and accessible online process for as little as $100. There are no upfront costs such as stamp duty and transfer fees, only a small transaction fee and the ability to freely list interests for sale at the investors time of choosing. This research sought to determine the characteristics of the typical investor in online fractional property investment platforms. It was conducted via an online survey designed to obtain information about investor demographics, information and knowledge, risk, return, and ownership expectations from investors who have participated in online fraction residential property investment vehicles. The research was conducted by academics from the University of South Australia in partnership with BrickX, the developer of the online fractional residential property investment platform. The results from the survey are summarised below followed by a brief conclusion. 2. Investor demographics The sample group is predominantly male comprising 75% of all respondents (Figure 1). The age distribution is skewed toward younger investors with 18 to 34 year olds comprising nearly half the sample (44%) with 37% of total respondents being aged between 25 to 34 (Figure 2). The number of investors decreases sharply in the 35 to 44 year age bracket, but those aged between 35 and 54 still account for 41% of total respondents. Furthermore, only 15% of respondents are aged over 55 and there are no respondents aged 75 or over. The platform is clearly not popular with older people, especially older females. Nearly two-thirds of respondents earn an annual income between $50,000 and $150,000 (64%). Interestingly, the number of investors on low incomes almost equals the number who have high incomes with 12.5% of respondents having an annual income of $50,000 or less and 16.67% of respondents having an annual income of more than $150,000 (Figure 3). This is consistent with the view that those on relatively high incomes do not need to invest fractionally due to having the resources to purchase residential real estate outright. Nevertheless, some investors with relatively high annual incomes find the platform attractive. Most investors have a tertiary qualification as their highest qualification (90%), most commonly an undergraduate university degree (37.5%) although there are numerous respondents (27.5%) with post-graduate qualifications as their highest (Figure 4). 1
Below are graphic representations of investor demographics based on the survey responses. 8 Gender distribution 7 6 5 4 3 2 1 Female Male Figure 1: Gender distribution 4 Age distribution 35.00% 3 25.00% 2 15.00% 1 5.00% AGE 18 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65 to 74 75 or older Figure 2: Age distribution 2
35.00% Gross income distribution 3 25.00% 2 15.00% 1 5.00% INCOME $0 - $50 000 $50 001 - $100 000 $100 001 - $150 000 $200 001 - $250 000 $250 001 - $300 000 $300 001 - $350 000 $350 001 - $400 000 $400 001 and above Figure 3: Gross income distribution 4 Highest academic qualification 35.00% 3 25.00% 2 15.00% 1 5.00% QUALIFICATION Secondary school Diploma / Certificate Undergraduate Postgraduate Figure 4: Highest academic qualification 3
3. Information and Knowledge The survey included questions about respondents knowledge of fractional property investment generally and this investment platform in particular. Equal numbers of respondents considered themselves to be well-informed (46%) or had some idea (46%) as to how fractional property investment operates. Surprisingly, 7% of respondents had no knowledge of fractional property investment while less than 2% considered themselves to be an expert (Figure 5). Informed respondents received their information predominantly from the Internet (62%). Print media was the next most common source of information with 19% of respondents obtaining information from it. Only 13% of respondents were informed through contact with people equally split between professional advisors and non-professional in the form of family, friends etc (Figure 6). The ease of access to the investment assisted 92% of respondents in their decision to invest (Figure 7). Ease of access is a key feature of this investment platform and may have facilitated those without knowledge of the platform to invest in it. With respect to tax implications, 72% of respondents indicated that they were aware of the tax implications of their investment (Figure 8). Below are graphic representations on information and knowledge based on the survey responses. Knowledge about fractional property investment 5 4 3 2 1 KNOWLEDGE I do not have any knowledge about fractional property investment. I have got some idea as to how fractional property investment works. I am well informed about fractional property investment. I am an expert about fractional investment in property. Figure 5: Knowledge about fractional property investment 4
8 How did you learn about fractional property investment? 6 4 2 SOURCES OF INFORMATION Internet Printed media (local newspapers, magazines, radio, TV and newsletters) Financial professionals (stock broker, accountant, banker etc.) Friends, co-workers, parents and other acquaintances Other Figure 6: How did you learn about fractional property investment? 10 9 8 7 6 5 4 3 2 1 Ease of access to fractional property investment platform MOTIVATION - EASE OF INVESTMENT Yes No Figure 7: Ease of access to fractional property investment platform 5
8 7 6 5 4 3 2 1 Familiarity with the tax implications of fractional property investment TAX IMPLICATIONS Yes No Figure 8: Respondent s familiarity with tax implications. 4. Risk, return and ownership expectations Respondents were asked questions about their expectations for their investment in terms of risk, return and investment time horizons. They were also asked about the aims of their investment. Most investors saw it as a general savings vehicle (52%) with others (23%) using the vehicle to gain access to the property market for the first time. Some respondents (7.5%) invested as a way to save for a deposit to purchase residential property outright at some future stage (Figure 9). With this in mind, 47% of respondents intend to hold their investment for at least 5 years. Nearly as many respondents (36%) plan to hold their investment for 2 to 5 years. Fewer respondents see fractional property investment as a short-term vehicle with 15% and 2.5% intending to hold the investment for 6 months to 2 years and less than 6 months respectively (Figure 10). These investment horizons broadly correspond to expectations of the investment with short-term speculators comprising 12% of respondents compared to a 70% who are seeking rent and capital returns (70%). Out of the remaining respondents, 15% are interested in capital returns only whereas 2.5% are interested in rental income only (Figure 11). Expectations around returns are realistic varying between 0% and 10% for 87% of respondents. An equal number of respondents expected returns between 0% to 5% and 5% to 10% (Figure 12). This corresponds to an average risk perception in the eyes of 67% of respondents (Figure 13). 6
Below are graphic representations of risk, return and ownership expectations based on the survey responses. 6 Investor's aim of fractional property investment 5 4 3 2 1 AIM Gain access to investment in property for the first time Save for a deposit to buy a house General saving SMSF Investment (Self-Managed Super Fund) Other Figure 9: Purpose of the fractional investment. Expected investment time horizon 5 4 3 2 1 INVESTMENT HORIZON Figure 10: Expected investment horizon. Immediate short term (< 6 months) Short term (Between 6 months and 2 years) Medium term (More than 2 years but less than 5 years) Long term (longer than 5 years) 7
Ownership expectations 8 7 6 5 4 3 2 1 FUTURE EXPECTATIONS Short term speculation. Future ownership and expected returns that will be based on capital growth only. Future ownership and expected returns that will be based on rental income only. Ownership - capital and rent Figure 11: ownership expectations. 5 45.00% 4 35.00% 3 25.00% 2 15.00% 1 5.00% Investors return expectations (annual) RETURN EXPECTATIONS 0% - 5% 6% - 10% 11% - 15% 16% - 20% 21% and above Figure 12: Annual expected returns. 8
8 Risk perceptions 7 6 5 4 3 2 1 FINANCIAL RISK Very high High Average Below average Figure 13: Risk perceptions. 5. Further investor perspectives Property is a global investment asset, so respondents were asked about the geographical market in which they invest in property. Respondents could tick all the markets that applied. Almost all respondents invest in Australia (99%). Only a small number of respondents invest in other locations such as Europe (5%), the United States (6%) and Asia (2.5%) (Figure 14). 12 Geographical property market(s) invested in 10 8 6 4 2 GEOGRAPHICAL ANALYSIS Australia Asia Europe United States of America Rest of the world Figure 14: Geographical location of property investments. 9
6. Conclusions Based on the sample group surveyed, this research indicates that that the typical online fractional property investor in Australia is male, aged under 55 and is university educated with an income between $50,000 and $150,000. Based on the survey responses, the typical online fractional property investor is very well informed about the nature of the investment and its tax consequences. Information about the investment was obtained predominantly from the Internet. Investors found the investment process easy which also facilitated the decision to invest. The typical investor saw the fractional investment as a general savings vehicle that would derive capital growth and rental returns. Most intend holding on to their investment for more than 5 years with an expected annual rate of return of up to 10%. This return commensurate perceptions that the investment carries average risk. Interestingly though, it does not seem that fractional property investment is perceived to save for the possibility to enter the property market at a later stage. Rather it is used as a substitute savings vehicle that offers slightly higher returns in line with the capital growth offered by the underlying residential property asset. The Internet has created opportunities for entrepreneurs to disrupt existing markets and the property investment market is no different. Although in its infancy, online fractional property investment platforms offer investors an easy to understand and easy to access investment vehicle that allows access to the residential property market on a fractional basis. It also allows the investor more choice and control over the particular property to invest in. This research helps in understanding who is currently taking advantage of this investment vehicle and what their perceptions are using online fractional property investment platforms. 10