Homeownership has long been the “Great Australian Dream”. For many it has been the next best way to wealth over having a job. And over the last 25 years, the median house value has risen by over 400% or almost half a million dollars. For a principal place of residence, this increase has also had tax advantages over other investments. Many have taken these benefits and invested in income-producing property (whether residential, commercial/retail or industrial. Many of the same capital gains benefits have also accrued, although overlaid with different tax treatments (CGT and negative gearing).
While traditional property investment often involves purchasing a property, either to rent out or to sell at a profit, there are several alternative methods available that can help you diversify a portfolio and minimise risks associated with the property market. Some of the alternative methods for investing in property in Australia, include real estate investment trusts (REITs), property syndicates, crowdfunding and property-related stocks.
- Real Estate Investment Trusts (REITs)
Real estate investment trusts, or REITs, are publicly traded companies that own, manage, and finance income-generating (and hopefully capital improving) real estate properties. They provide a way to invest in property without the need for direct ownership. In Australia, REITs are listed on the Australian Securities Exchange (ASX) and are subject to regulatory oversight.
There are various types of REITs, some diversifying their exposure across different property types and others focusing on different property sectors. Some common types with their predominant historic sector weightings include:
- Retail REITs: These invest in shopping centres, malls, and other retail properties, i.e.: Vicinity Centres, Scentre Group
- Office REITs: They invest in office buildings and business parks, i.e. Dexus, Charter Hall
- Industrial REITs: These focus on warehouses, distribution centres and other industrial properties, i.e. Goodman group, Australia’s largest REIT
- Residential REITs: They invest in apartment buildings and other multi-family housing, i.e. Mirvac
- Diversified REITs: These invest in a mix of property types to provide broader exposure to the real estate market. Most of the above REITs are diversified in some way, as we have seen larger declines in sector specific areas that have been subject to attacks from market forces such as online shopping; Others have diversified from ownership into development to diversify income streams.
Like most things, there are Pros and Cons of Investing in REITs.
REITs provide diversification by owning a variety of properties, reducing the risk associated with investing in a single property. They offer much greater liquidity than direct property ownership because they are traded on the stock exchange, making it easy to buy and sell shares. Generally, REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, providing a steady income stream, and they are professionally managed by sector experts. They can have downsides, however, because they are subject to stock market fluctuations and may be affected by general economic conditions; Management fees may also be high, reducing returns; and changes in interest rates can have a significant impact on REITs, as they rely on borrowed capital to finance property acquisitions.
Property crowdfunding platforms connect investors with property developers or projects seeking funding. If the investing entity holds a Retail Australian Financial Services Licence (AFSL) then investors can contribute as little or as much as they want, and their returns are proportional to their investment. If the investing entity holds a wholesale licence, then they can accept investments only from people who hold the requisite financial minimums of assets and/or income. These are regarded as sophisticated investors. Sometimes both classes may be in a particular property product. This method allows investors to participate in property development without the need for significant capital.
There are two main types of property crowdfunding. Equity crowdfunding allows the purchase of shares or units (the “product”) in a property development project, receiving returns based on project profits. There are hybrid versions of this – where investors may invest in a ‘product’ that provides a fixed return, commensurate with the level of equity risk they are taking and some may offer a little of both – a fixed return and a share in profit.
Investors may also lend money to developments on a first mortgage basis in exchange for interest payments (similar to the equity style fixed return product above, with the exception that the equity return does not have the security of a first mortgage, although it may have a lower ranking security). First mortgage investments are usually first in line for repayment from any return in capital, namely, from sales.
Property Crowdfunding allows access to development projects that may otherwise be inaccessible to investors. They will usually have a lower minimum investment and investing in multiple projects can help spread risk.
Being development projects rather than income producing properties, many of these projects are higher risk. Potential delays, cost overruns and market risk are usually less controllable than buying an income producing investment. These investments are therefore higher risk but also should forecast higher returns than income producing assets.
- Property Syndicates
Property Syndicates involve a group of investors pooling their resources to purchase a property, usually commercial or industrial. This is a form of Direct Property Investment. Each investor owns a share of the property and receives a proportionate share of the rental income and potential capital gains. Syndicates can be managed by professional property investment firms or set up informally among friends and family.
A property Syndicate operates through a legal structure, typically a unit trust or a company, which holds the property on behalf of the investors. Investors purchase units or shares in the trust or company, and the trust or company acquires and manages the property. The rental income generated by the property is distributed to the investors, and any capital gains are realised when the property is sold.
The benefits of Syndicated property ownership include diversification as Syndicates allow investors to access larger properties or multiple properties. Like REIT, many professionally managed syndicates are sector specific with professional property and funds management capabilities.
Those Syndicates set up by friends and family usually have the benefit of some sector specific knowledge. An example might be a restaurateur and a group of investors investing in a chain of restaurants.
Syndicates usually also have lower minimum investment requirements compared to purchasing a property outright.
Like REITs, investors usually have less control over the property’s management and may not have a say in major decisions which are made by the manager. Selling your share in a Syndicate may be challenging, as there may not be a ready market for it, although groups like VentureCrowd are creating the technology for digital secondary market transactions. Professional syndicates also usually charge management fees and other expenses, which can reduce overall returns.
The risks or cons of Syndicated Investments also apply to Crowdfunding investments (and often the difference between the two types of investment are semantic, because Crowdfunding can be a syndicated type of investment).
Things to do or look at before jumping in
Before jumping into alternative property investment, it’s crucial to have a solid understanding of the Australian property market. Familiarise yourself with the various property sectors (residential, commercial, industrial and retail) and research the key factors that influence property prices and rental yields. These factors can include population growth, employment trends, infrastructure development nearby and local government policies.
Have a look online and read up – there are property investment platforms and tools to help you identify and analyse alternative property investment opportunities. Many platforms provide detailed information on investment properties, performance metrics and market trends. Additionally, some platforms offer investment management and reporting tools, which can simplify the process of tracking and managing your property investments, giving you clear statements at tax time.
Know that outside influences may also impact your investments. Regulatory changes, government policies, taxation laws and industry regulations can all impact the property market and your investment returns. Usually, professional managers are abreast of likely changes but as we have seen recently, examples like State Government thought bubbles to charge stamp duty on interstate properties or to limit rental increases (even though the cost of bank debt is not so likewise constrained) can broadside even the best laid plans.
Property investment is generally considered a long-term wealth creation strategy. While short-term fluctuations in the property market can occur, focusing on long-term trends and performance can help you make better-informed investment decisions. By adopting a long-term perspective and remaining patient, you can potentially benefit from the compounding effect of capital growth and rental income over time.
Investing in property through alternative methods in Australia can offer a range of benefits. By understanding the various investment options, conducting thorough research, and seeking professional advice when needed, you can build a strong, property investment portfolio. Real estate investment trusts (REITs), property syndicates, crowdfunding and property-related stocks each have their unique advantages and drawbacks. It is essential to carefully consider your investment objectives, risk tolerance, and available capital before deciding on the best alternative method for your property investment journey, and to continuously assess the performance of your investments and consider rebalancing your portfolio to maintain an optimal risk-return profile. Regularly reviewing your strategy also allows you to identify new investment opportunities and adapt to changing market conditions.
Finally, if you’re unsure about the best alternative property investment method for your situation, consider seeking advice from a financial professional, such as a financial planner or investment advisor. They can help you assess your goals, risk tolerance, and financial circumstances and help advise on the suitability of an investment.
By David Whitting, Head of Property at VentureCrowd
About David Whitting
David Whitting leads VentureCrowd’s property team. He is a former lawyer and a senior property development executive with over 25 years of experience with some of Australia’s leading property organisations. David was previously the Queensland General Manager for Grocon, State Director for Multiplex Developments and Project Director for Laing O’Rourke. David specialises in strategy, acquisitions, disposals, structuring, project initiation and approvals of institutional-grade real estate assets across the commercial, residential, retail and hospitality categories.