Article written by Pitt Street Research. For the full report click here
Revolutionary property investment platform
We believe today’s property investing in Australia is archaic and ripe for disruption. Property investors can essentially only acquire entire properties, e.g. in their SMSF, or buy units in property funds without any influence on the investment strategy. DomaCom Limited (ASX:DCL) has developed two fully regulated financial products that we believe can revolutionize property investing in Australia. DCL operates property investment platforms that enable investors to invest in fractions of properties rather than having to buy an entire property. Additionally, the company’s Equity Release product enables “asset rich/cash poor” home owners to release some of the capital locked up in their family homes without needing to downsize.
Own part of a property with Fractional Investing
Fractional Investing is ideally suited to property investors looking to diversify investment portfolios across multiple properties, or for people with limited investment funds available that are looking for exposure to the property market and first home buyers. DCL recently cleared all regulatory hurdles for this product and hopes to have the final building block in place shortly, i.e. debt funding to introduce leverage to the property investments on its books.
Equity Release: Ideal for the “asset rich/cash poor”
DCL’s Equity Release product will formally launch in the next two months and is primarily targeted at Baby Boomers looking to release capital from their unencumbered homes, helping them to fund their retirement and for intergenerational wealth management.
Strong take up expected by financial advisers
Given that DCL essentially adds another, important, asset class to financial advisers’ advisory tool box, we expect both products will garner very strong interest once fully launched. The company is targeting the investment property segment of the SMSF market, valued at A$ 700BN in total. Additionally, DCL has its sights set on first home buyers and the market for retiree homes worth around A$ 500BN.
Generating revenues from asset management fees
In his previous venture, Praemium (ASX:PPS), DCL CEO Arthur Naoumidis achieved a 4% market share with SMSFs. Even if the company only achieved 1% share of SMSFs > A$ 700BN funds under management and in retiree homes, this would signify a tremendous revenue opportunity for DCL, given its 0.88% management fee on Funds under Management.
Valuation doesn’t seem to reflect DCL’s opportunities
The company’s current A$ 14.5M market cap seems to reflect a lack of awareness and understanding of DCL’s products and market opportunities on the part of equity investors. We would expect this valuation to substantially increase if and when the market latches on to the company’s future potential, reflected in growth of Funds under Management.
The problem with property investing today
If property investors today want to purchase real estate, they can essentially only acquire entire properties, e.g. in their SMSF, or buy units in listed property funds. Buying an entire investment property is impractical if an investor has limited funds available or if he prefers to diversify his investments across different properties. And buying units in a property fund restricts investments to whatever investment decisions the fund manager makes, i.e. the fund manager decides on what type of properties to invest in, the location of these investments, when to divest etc. Fund investors have no influence whatsoever.
Additionally, property funds typically don’t invest in residential property. In other words, we believe property investing today is archaic and ripe for disruption.
The solution: Fractional Investing and Equity Release
Fractional Investing: Buying part of a property
DomaCom Limited (ASX: DCL) is a Melbourne-based operator of real estate investment platforms (Figure 1). DCL enables investors to partly own real estate through fractional investing, e.g. instead of purchasing an entire house, investors can purchase a fraction of a house together with other investors. DCL is the first regulated operator of its kind in Australia that provides an online platform for fractional investing in property, which includes investing in residential, commercial, industrial and rural properties.
Currently, DCL only has one product in the market – Fractional Investing.
However, it has already received regulatory approval to launch another product – Equity Release, which enables home owners to sell part of their family home. This allows retirees, for instance, to release part of their equity that is tied up in their homes.
Equity Release: Unlocking equity tied up in a family home
In November 2018, DCL received the required regulatory approval to launch the Equity Release product. People who own their own home, but have limited cash flow, such as retirees, can monetize their properties by partly selling their mortgage-free home and releasing the equity tied up in their home.
The Equity Release product is similar to a reverse mortgage as offered by financial institutions, the difference being that investors are crowd funded on DCL’s platform, rather than a financial institution providing the funds. With ~15% of current Australian population aged over 65 years, we believe DCL’s Equity Release product offers an ideal opportunity for elderly people to access the equity tied up in their homes.
Additionally, with major banks having withdrawn from the reverse mortgage market, there is a significant investment opportunity to be captured by DCL, in our view.
The DomaCom Fund facilitates Fractional Investing and Equity Release
The company operates through a registered managed investment scheme (MIS), called the DomaCom Fund. Through this fund, DCL provides a structured investment vehicle which is a combination of a managed fund and an online crowdfunding platform. Through its online platform, the company supports property listings, real estate trading, unit registry, and book build processes for existing properties and proposed developments.
DCL generates revenues (management fees) from the provision of management and platform services to the DomaCom Fund. The standard management fee is 0.88%. The fund provides investors the flexibility to pick and choose their preferred investment properties, rather than being dependent on the fund manager’s decisions. This unique proposition allows the investor to diversify and avoid high exposure to a single asset at a relatively low cost.
DCL’s platform facilitates the equity release product and fractional investing/crowdfunding through this fund and creates a niche for retail real estate investment. Apart from retail investors looking to build a real estate portfolio, the DCL platform and the fund provide a significant opportunity for self-managed superannuation fund (SMSF) investors.
Fractional Investing: New era in property investment
Fractional Investing is a method by which a group of investors collectively raises capital to purchase a high value asset, such as residential property, day care centers, solar farms, rural properties etc. This gives an individual investor exposure to an asset at a fraction of the total cost. Fractional investment is a way for investors, who would otherwise not be able to purchase an entire property by themselves, to build exposure to property assets. It also allows investors to diversify their investment portfolio by giving them, fractional, exposure to different properties.
Compared to traditional property investing, the barriers to entry for DCL’s investors are low, i.e. investors can sign up to DCL’s platform in a few simple steps.
Why Fractional Investing makes so much sense
Given that Australia has become the third least affordable country for housing, fractional property investing is an ideal solution for investors looking to enter the market without having to purchase an entire property.
According to the 14th Annual Demographia International Housing
Affordability Survey in 2018 (Figure 2), the average house price-tohousehold income ratio is 12.9x in Sydney. Consequently, it is extremely difficult for an individual to invest in real estate in an individual capacity. Consequently, we believe the concept of crowdfunding of property investments shows great promise.
A boon for financial advisors
We believe Fractional Investing is a very welcome addition to financial advisors’ investment advisory toolkits. Typically, financial advisors struggle to allocate funds to property investments and diversify their clients’ portfolio through traditional investment vehicles, such as unlisted trusts, AREITS and traditional syndicates, have difficulty in diversifying across property types and geographic locations. Also, property investors do not get to choose the properties they invest in and liquidity is typically low. Fractional property investment overcomes these problems as clients get to choose the specific property they want to invest in. DCL conducts due diligence before purchasing a property, which assuages most concerns a financial advisor might have. It reviews the purchase contract and provides legal oversight. It conducts property valuation so that investors do not buy an over-priced property and it also conducts property and pest inspections to ensure that the property is in sound condition. Lastly, DCL appoints a buyer’s agent to negotiate best price and a property manager to ensure minimum vacancy.
Fractional Investing is a new asset class
Since fractional property is a new asset class, it is a regulated product and only authorized representatives (AR) under an Australian Financial Services License (AFSL) can recommend it to their clients. The financial advisor is required to hire a property advisor to select the property based on his client’s requirement and risk profile. Hence, the financial advisor only recommends the structure and not the underlying property to its clients. We believe Fractional Investing helps financial advisors optimize their clients’ investment portfolios by adding fractional property as a new asset class.
Equity Release: Ideal for the “asset rich/cash poor”
In Australia people over 65 years of age hold a significant proportion of the country’s overall real estate holdings, typically in the form of the family home. In most cases the mortgages on these family homes have been completely repaid. However, the average pensioner doesn’t have very large monthly cashflows from pensions. And while the family home represents a very substantial equity value to the owners, it is very difficult to extract funds from the home, short of selling the entire property. Reverse mortgages provide this flexibility, but they only represent ~1% of total housing equity to date. Additionally, all major banks have gradually withdrawn from reverse mortgages over the years. The lack of liquidity problem for pensioners is exacerbated by the fact that Superannuation guarantees only started in the early 1990’s. This means older generations did not put funds into superannuation in their early years. DCL’s new Equity Release product enables those who are seeking to obtain cash by partially releasing equity in their homes to be matched with investors who wish to make investments in such properties. Recently approved by regulators, DCL’s Equity Release product provides an attractive solution to ‘asset rich/cash poor’ retirees and enables them to stay in their home while simultaneously unlocking part of the value of their home.
As people live longer, they’ll need more capital for retirement
The need and the opportunity for the Equity Release product become very apparent when looking at the current demographic situation in Australia. Just like most developed countries, Australia’s population is
ageing while the increasing life expectancy implies people will need more capital to retire. Furthermore, the demographics that are worst hit by the continuously rising costs of living are mostly comprised of retirees, i.e. people who do not have an independent, growing source of income to support their expenditures, unlike their employed counterparts. Add to that the tightening underwriting standards by mortgage providers, and we believe DCL has the perfect recipe to leverage their Equity Release
Please note, the usual disclaimers apply – click here
Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.