Why isn’t fractional co-investing more popular?

Although fractional property investment only makes up a sliver of the wider Australian property sector, its proponents advocate for it as a mechanism to help low-income earners secure stable housing. 

What is fractional property investing?

Fractional property investing is more or less exactly what it sounds like. Rather than invest in the equity of a whole property, you’re able to invest in a fraction or slice of it. At a high level, it’s not terribly different to how fractional ownership of shares works with things like exchange-traded funds. 

The appeal here is that fractional property ownership requires a significantly smaller initial investment than is needed to break into the traditional property ladder. Naturally, it costs less to buy 1 per cent of a property than it does to buy the whole thing. Rather than wait and save for years to build up a deposit, you can benefit from the rise of Australian housing prices today.

For more information on fractional property investing in Australia, click here. 

Why isn’t fractional property ownership more common?

While the biggest players in Australia’s fractional property scene rely on slightly different ownership structures and business models, a common challenge they share is that of education. 

In short, many potential investors haven’t heard of fractional property, let alone considered it as a serious financial opportunity. 

Speaking to Smart Property Investment, DomaCom’s general manager of sales and marketing, Warren Gibson, admitted that “fractional investing is a relatively new model despite the existence of managed funds and other pooled structures having been around for many years – it takes time for people to engage in a different way of doing things, and the investment world is full of high-profile failures.” 

“It needs mainstream support from financial advisers, who, similarly, can be slow to adapt to new structures. It needs to solve a problem for them to become engaged more fully,” he said.

In order for financial advisers to use either of DomaCom’s fractional property products, they must meet ASIC requirements and individual advisers must pass an accreditation program. 

Mr Gibson also pointed to the incongruities between fractional property funds and traditional banks. 

“Because the fund is non-recourse, borrowing is difficult to secure from banks, which limits investors choices,” he said.

The terms of an ordinarily non-recourse loan typically favour the borrower over the lender, as they limit the amount that the latter can lay claim to in the event that the former defaults.

Interestingly, Mr Gibson doesn’t see fractional property as all that different from traditional home ownership.

According to him, “Most people part own their home and part rent (via a loan) so their bank is their co-investor. Exchange the bank for investors and you have a fractional model.”

DomaCom isn’t the only fractional property player who sees education as a key driver of future growth. 

Speaking to Smart Property Investment, Bricklet CEO Darren Young said, “We are already seeing it becoming more and more popular.”

“It’s like when Airbnb first came out. It took a while for people to get their heads around the idea of staying in a stranger’s house, but now it’s pretty common. In fact, a lot of people use it.”

According to him, Bricklet is seeing a similar trend when it comes to fractional and fragmented property investment. 

Bricklet’s model is slightly different to that of DomaCom, relying on a fragmented title than a fractional one. Mr Young argues that this structure is superior because it gives investors an asset that they can leverage.

The financial adviser’s perspective

Speaking to Smart Property Investment, Adele Martin said that “clients like the idea that they’re in property because they can’t get into property and want to get into property, but when they come to us as an adviser, we sit neutrally on it.”

A multiaward-winning certified financial planner, Ms Martin said that the unique proposition of fractional property products is “they don’t stack up” against other asset classes like shares or index funds. 

Even if the upfront investment needed to get into property are fractionated or fragmented, the specific risks of staying in that market are not. 

“When [clients have] got smaller amounts, it’s hard to justify,” she said. 

Ms Martin noted that “liquidity became an issue” for these sorts of property trusts during the 2008 global financial crisis, leaving investors unable to get their money out easily. 

“When you’re talking about diversification, when you’re talking about less risk, when you’re talking about liquidity – that’s not going to be in one of those property trusts,” she said.