With a background in finance, Daniel Gibbs was looking for a property investment to add to his self-managed super fund that was easy to buy and sell and did not require a huge financial outlay.
"I have to be comfortable all my investments are compliant and are easy to get into and out of," he says.
These can be tricky boxes for SMSF investors to tick, given property is generally a lumpy asset; it takes time to buy and sell a property. It is also expensive compared to many other assets.
Additionally, there are multiple rules to which SMSF investors much adhere when investing in property.
For instance, SMSF investors who directly buy property with their fund must do so through limited recourse borrowing arrangements, which corral the fund's other assets. This means in the event the investor defaults on the loan related to the property, the SMSF's other assets are preserved.
In his quest to find a suitable property investment, Gibbs came across a property investment platform called BRICKX that allows investors to acquire small interests in residential properties. SMSFs can trade their interests on secondary markets accessed through the BRICKX platform.
Gibbs says he is expecting a return of 5 per cent to 7 per cent from his BRICKX investments over a five to ten-year investment horizon.
In terms of risks, Gibbs says the fact BRICKX is a start-up was a consideration. "How they carry their debt was the main risk. But that's fully transparent."
BRICKX is a managed investment scheme. It buys properties, then splits the asset into 10,000 units – or bricks – it sells to investors. Each property is held in its own unit trust, separate from the BRICKX business.
The price of each brick is based on the initial purchase price. Investors trade their units on the site and receive revenue through rents plus capital growth
BRICKX CEO Anthony Millet says : "It allows SMSFs to invest in high-quality residential real estate, without the cost of buying the entire property."
"SMSF investors can take bite-size chunks of individual properties and create a diversified portfolio of property investments," he says.
Millet says it took three years to get the approval from the Australian Securities and Investments Commission for the product to ensure it was suitable for retail investors.
"BRICKX is the manager of the product and the scheme. In the event things don't go to plan with BRICKX, investors still have their holdings in a specific trust, which contains a property," he says.
"We were the first business within ASIC's innovation team, and we're at the forefront of making [innovative property investments] happen," he adds.
Millet says the product has been particularly popular with SMSFs. They typically invest six-and-a-half times more than other retail investors through the site. The average number of properties in which SMSF investors have an interest is 2.7. "They're really embracing the ability to diversify on the platform," he says.
BridgeLane Group, a private equity firm, underwrites BRICKX's properties. The underwriter owns any bricks that are not initially sold. Millet says the underwriter can sell the additional stock on the exchange hosted on the BRICKX platform, post completion of the transaction.
BRICKX is one of a number of different property investment start-ups that have been developed to meet investor demand for property, given strong returns from the sector.
Australian Bureau of Statistics' data shows residential real estate values rose year-on-year to 31 December 2016 by 3.5 per cent, following a record 10.7 per cent increase in 2015.
Peer Estate is another real estate platform. It gives investors the ability to pick their own portfolio of property investments. Investors can take an interest in a property for as little as $5000.
"They can match their risk tolerance [to their] investments, from lower risk and returns all the way up the risk spectrum," says CEO Adam Broder.
Commercial real estate values have risen over the past few years, but not to the same extent as residential property prices. So it may be worth SMSF investors considering this asset class as it may be able to deliver stronger returns than residential real estate in the near term.
Steven Bennett, head of direct property at commercial property business Charter Hall, says investors are increasingly looking for a diversified exposure to commercial property assets.
"Rather than an investor coming to us with $100,000 to $150,000 and allocating it to one fund, or buying a small unit, they are creating a property portfolio that suits their individual strategy. So they might put $50,000 with our office fund, $50,000 with our industrial fund and $50,000 with another manager altogether," Bennett says.
He says commercial property is not as widely used in SMSFs as residential property is. But with low interest rates and other sources of yield hard to come by as a result of low rates, there is a growing appreciation among SMSF investors of the income and growth commercial property assets can provide trustees.
Additionally, upcoming legislative changes that mean investors can only have assets of up to $1.6 million tax-free in pension phase, mean SMSF investors are increasingly looking outside direct residential real estate to obtain exposure to property. So this is making investments in property funds, as well as newer structures, rather than direct assets, more attractive to SMSF investors.
