Real estate has long been one of Australia’s favourite investment options.
In some ways, it’s a reflection of the great Australian dream. A kind of dream-by-proxy. The traditional belief was that owning a home could lead to a better life. That home ownership is a reflection of success and security. Owning an investment property, or a portfolio of properties, is seen as a way to set oneself up for life.
Unlike other asset classes, property is decidedly mainstream. If you read the headlines and look at the stats, it can seem like everyone and their dog has an investment property. According to ATO records, nearly 1.9 million Aussies declare rental income or losses. And that’s just the ones that are rented out — not bought and sold for capital gains.
The problem is, buying a property is no longer as accessible as it once was. We’ve got a perfect storm of conditions for skyrocketing property prices.
Record low interest rates, capital gains tax concessions, negative gearing — it all adds up. The charts below, from AMP using ABS and RBA data, show that prices are about 14% above trend. And that the latest uptick coincides with a higher level of growth in investor debt.
Source: AMP Capital
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Most commentators agree that this exuberance is driven by expectations of capital gains. It’s certainly got almost nothing to do with rental yields. Yields are going backwards across the country. According to research firm CoreLogic RP Data, they’re at about 3.3% in Sydney, and 3.1% in Melbourne.
But while residential property yields go backwards, other types of real estate continue to perform soundly. For example, according to a number of private sector sources, commercial and industrial property still offers decent returns.
Source: AMP Capital
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What’s needed is a scalable way to gain exposure to different types of property. Property that most individual investors wouldn’t be able to access on their own.
Crowdfunded property investment will be one way that many Australians get that access.
[Not familiar with crowdfunding? Not sure how it applies to property? I’ve written a beginner’s guide, which you can access here. It’s about a three minute read.]
For those interested in the potential of property crowdfunding, a new opportunity recently opened up to Aussie investors. Popular US based platform Fundrise is now accepting Australian investors.
Fundrise is an online platform that allows users to log in, browse opportunities, and buy units on the spot. Users can track their investments and their progress through a personal account page. Just like you track your stock portfolio through your trading platform or online banking account.
To get in to the nitty gritty of what Fundrise is all about, and what it can offer Aussie investors, I had a chat with co-founder and president Daniel Miller.
Eva: Why Australia?
Dan: Beginning to take on international investors is an enormous step for the investment crowdfunding industry, and one that requires a significant amount of research and work to comply with U.S. regulations. Other countries have different laws governing crowdfunding, which adds another layer of complexity. So, we started with countries that have relatively similar regulatory regimes and no language barriers.
E: How does the Fundrise story apply to Australian investors?
D: Our mission at Fundrise is to offer a low-fee, low-minimum, easy-to-access alternative to traditional private real estate investment. By expanding to Australia we’re one step closer to making our platform available to everyone.
E: How long have you been working on bringing Fundrise to Australia? Specifically, how did you get around Australia’s notoriously tough regulatory environment?
D: The expansion has been a result of months and months of work from our accounting, investment, legal, and product teams. The biggest challenge has been understanding the Australian regulatory framework and building a system to effectively protect foreign investors.
Since we launched Fundrise more than three years ago, we’ve received thousands of requests from international investors, looking for ways to diversify into U.S. real estate. This is the first step in our effort to expand more broadly.
E: How does Fundrise compare to other large group real estate funding models? What does Fundrise offer Australian investors that they can’t get from a local platform?
D: Fundrise is the first online real estate platform, originating, underwriting, investing, and then syndicating real estate to individual investors. We’ve funded more than 70 real estate projects in top markets around the United States.
We do things differently than most other crowdfunding platforms, funding all our investments up front, using our own [US]$25 million balance sheet, before offering them on our website.
This model provides for a few key benefits.
One, you start earning immediately. Interest starts accruing as soon as your investment settles — typically within five days — eliminating lengthy escrows. This model more closely resembles stocks, bonds, and other publicly-traded securities.
Two, you see higher quality investments. We can negotiate better deals with top real estate companies because they require certainty of funding. By funding real estate projects upfront, we believe we are able to achieve superior pricing and terms, and source more investment opportunities from the best companies in the country.
Three, your interests are the same as ours. Fundrise pre-funds every real estate project, using our own balance sheet. This puts our ‘skin in the game’ and shows our conviction in the deal.
E: As a platform, how does Fundrise make its money?
D: Fundrise was founded against the high-fee, low-transparency model that has previously been the industry standard. As such, we intend to make up for low fees with high volume.
Fundrise charges investors a flat servicing fee, which currently ranges between 30 and 50 basis points.
Real estate developers pay Fundrise an origination fee between 1-3%, as well as a flat underwriting fee.
E: Who underwrites the deals?
D: We underwrite all deals in house, which allows us to create flexible structures. We then fund the deal upfront, off our own balance sheet, allowing us to provide capital more efficiently and at a lower cost than anyone else in the market.
This year we’ve grown our investment capacity by 1,500% and are closing 2–3 deals per week. This includes funding assets in almost every major metro market, including the iconic 3 World Trade Center in Manhattan.
E: Who is going to be eligible to participate from Australia? Will Fundrise be open to retail investors? Or will only institutional investors/wholesale investors be eligible?
D: At the moment, Fundrise investments are open to what the Australian Corporation Act defines as ‘sophisticated investors’.
[NOTE: He’s talking about the Corporations Act 2001 (Cth) s708(8) and attached regulations. The definition of ‘sophisticated investor’ is usually someone who has net assets of at least $2.5 million, or gross income of over $250,000 per year for the last two years. This can mean high net worth individuals, family trusts, self-managed super funds, and others. You need an accountant’s certificate to prove this. Please discuss with your financial adviser if you’re unsure.]
E: From what date can Australian investors sign up for accounts?
D: Any Australian investor is welcome to sign up on the site effective immediately!
E: You’ve probably noticed the Aussie dollar falling against the US dollar recently. How do you think that could impact Australians’ decisions to get in to Fundrise?
D: With increasing uncertainty in the global economy, there continues to be a flight to safety with most investors viewing the US as the most stable place to be investing today. In particular, US commercial real estate like apartment buildings, retail centres, and offices, are seen as secure investments that will continue to hold their value as other assets around the world fall in price.
Diversifying is always a smart move when investing, and we think many Australian investors will jump at the opportunity to diversify into US real estate particularly because of the low minimum, low fee, and transparent model that we have created.
E: Does Fundrise want to start facilitating projects in Australia at some time in the future?
D: Right now we are focusing on finding and sourcing top investment opportunities in the US, something our background as commercial real estate owners and operators is well suited for. To expand into Australian investments we’d need to bring on a team of Australian real estate professionals. It’s certainly not off the table, but it’s not something we’ve done yet.
In any market we work in, we look to find quality investments that may fall under the radar of bigger institutional capital, which provides a lucrative niche for us to operate in. In the US, we’re partial towards multifamily, mixed-use, office, and retail opportunities in the top 25 markets. In particular, we like cities like Atlanta, Denver, Salt Lake City, and Seattle.
Contributor, Money Morning