CPD: Enrich an investment portfolio with alternative alternatives!

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Fractional investing can open up a myriad of alternative investment opportunities.

Diversification is a basic tenet of investment, and most investors have a mix of the traditional asset classes – equities, property and fixed income. The next significant cohort of investors, the millennials, are increasingly looking beyond the traditional asset allocation to alternative investments.

In this article, DomaCom explores how fractional investing can open up a myriad of alternative investment opportunities to all investors.

When the term ‘alternative investments’ is used most people think of the more ‘traditional’ alternatives – hedge funds, commodity funds, strategies using derivatives, or private equity. In the context of this discussion, the range of alternative investments has been expanded to include the next-gen mix, those facilitate by the burgeoning fintech industry.

Millennials and fintech

Millennials were born between 1982 and 1999, children of baby-boomers, or older Gen X. They’re generally highly educated, very tech savvy and happy to share their lives and opinions on social media. Millennials have a large earning capacity – household income is growing faster than any other demographic according to the 2017 Deloitte Millennial Surve[1]. They’re early adopters of technology and are showing an increasing propensity to park their money in technology driven investments.

A recent article published by Forbes[2] examined ways millennials are shaping the future of global investment and identified three key trends – peer-to-peer collaboration, entrepreneurial ventures and socially responsible impact investing.

Millennials are demonstrating an increasing propensity to band together and use a technology platform to invest in something meaningful to them – or, if going traditional, are increasingly likely to adopt low cost robo platforms, exchanging technology for human intervention. Using a fractional investment model can enable investment across a wide range of assets, including those that will make a positive impact to social or environmental infrastructure.

What is fractional investment?

Fractional investment provides an opportunity for investors to fund the purchase of a particular asset or series of assets. All that’s required is the appropriate technology platform (with the appropriate regulatory framework) and a real asset. It is an asset allocation solution for a variety of asset classes; it breaks investments into affordable segments, and enables investors to buy a portion of that investment.

Fractionalisation provides financial advisers with an opportunity to easily invest a portion of their clients’ investment portfolio in alternative investments and projects. Being able to offer this opportunity prevents clients from going ‘offsite’ to invest, and ensures you have oversight of their entire portfolio.

For example, a local community wish to raise funds for a solar installation that will power the town. There are two options:

  1. Traditional crowdsourcing, where the participants use a crowdsourcing platform to raise funds; in this case, money generally comes solely from the locals likely to benefit from the project.
  2. An investment platform that supports fractionalised investing. In this example, the project will be broken into units that can be purchased by interested parties, including investors outside of the town; these investors may be attracted by the diversification opportunity, investment returns, or the socially responsible impact of the project.

Using DomaCom’s fractional investment platform to illustrate how this works in practice, an investment such as the one described above would require a minimum of 30% contribution by the business promoter or developer to ensure sufficient skin in the game. This gives DomaCom, financial advisers and investors confidence that any risk is shared. Any project taken on by DomaCom is subject to a due diligence process that covers legal entitlement (conveyancing), inspection and a formal independent valuation. If a formal valuation is outside 10% of the asking price or expected needs, the fundraising does not proceed. In other words, it might be attractive on some metrics, but needs to be a viable investment with a measurable return on investment.

DomaCom’s platform includes a liquidity solution, which provides the ability for investors to sell their fraction of the investment, if required, to a willing buyer..

Benefits of fractional investment

The fractional model democratises investment and enables people to invest in asset classes they may otherwise have no access to, with as little as $2,500. It also enables investors to support socially responsible or impact investments. Other benefits include:

  • Scaled entry into the property market, which is particularly important for Gen Y and Millennial clients, who may otherwise have limited opportunities to buy residential property
  • Fractional investment allows a limited amount of funds to be spread across a range of assets, which provides diversification across geography and sector
  • The underlying investment is an asset of a registered managed investment scheme and relevant titles are held by a registered custodian; this provides security to buyers
  • It offers advisers the potential for enhanced advice fees by including a range of alternative investment opportunities in your offering to clients.

The right fractional investment model enables investors to access a variety of different investments to add to their portfolio in a way that does not compromise the balance of their risk/return profile.

For advisers and investors with an appetite for more interesting investments with higher return potential, DomaCom can provide a fractional structure that does not over-expose them to any single investment.

Fractional investment and alternatives

There are a range of fractional investment opportunities in the pipeline. Some are private ventures, while others will be accessible to investors. In the following examples, the fractional model enables acquisition of the land, and in some cases infrastructure, freeing up capital to build and market the business. DomaCom, and those who invest in one of its sub-funds, do not participate in the business.

Examples include:

Land and property developments

As is the case for all projects, investors do not hold operational ownership, only ‘hard’ assets such as land and buildings. Each investment involves the DomaCom sub-funds owning an asset that generates ongoing income (from rent) and/or future capital growth.

DHA housing

Defence Housing Australia (DHA) provides quality housing and related services to members of the defence forces and their families. While anyone can invest in DHA housing, it requires the purchase of an entire property which is then leased to defence personnel. It has quite a compelling business case – guaranteed rent, long-term leases and low-cost property maintenance.

Investing in DHA housing via a fractional model gives an attractive investment opportunity a makeover – not only do investors benefit as described above, when using a fractional model, they can diversify within the DHA sector across a range of geographies and property types.

Rural property funding

According to Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), the demand for Australian agricultural products is predicted to increase by 77 per cent by 2050, an increase of 1.3 per cent per year[3]. This will, in turn, increase the value of Australian agricultural land.

Fractional rural property investment breaks a rural property down into affordable segments, and enables investors to buy a portion of a property. It also enables farmers to raise capital for the operating business while retaining a significant portion of their landholding.

Fractionalisation provides financial advisers with an opportunity to easily invest a portion of their clients’ investment portfolio in rural property and take advantage of this emerging thematic. A liquidity facility allows investors to trade out when they are ready to do so, subject to the availability of a buyer.

Benefits to investors include:

  • Fractional investment allows a limited amount of funds to be spread across multiple rural property assets, providing diversification from different geographic locations and agricultural usage
  • It can be viewed as a socially responsible investment; investment in rural property can relieve farmers of bank debt and enable them to make capital investments that can ultimately improve productivity and in turn, reinvigorate rural communities
  • In many cases, it enables co-investment with the farmer; and in any situation where the person driving the investment has skin in the game, they will work hard for positive outcomes.

Fractional investment also provides benefits to farmers:

  • Selling a portion of equity enables expansion and investment, which in turn provides farm businesses with a mechanism to improve economies of scale
  • Small to medium family run operations have been under strain from increasing debt, which in turn limits borrowing capacity to purchase more land and grow the business.

There is a solid investment case for rural property. Research by the Rural Bank[4] found that in all states, the median price of agricultural land has trended higher over the past decade, with average annual growth exceeding 3% in most states. As inflation has run at 2.8% over the same period, this indicates real growth in farmland values.

Food processing plants

Beef production is big business in Australia. According to Meat and Livestock Australia (MLA), there are:

  • 71,659 businesses with cattle
  • 4 million head of cattle in Australia as of 2014-15, including 2.8 million head of dairy cattle
  • 5 million beef cows and heifers one year and over as of 2014-15.

The cattle industry involves 58% of all farms with agricultural activity; as a result, an investment in a beef processing plant with a solid business plan provides a compelling investment opportunity.

In this example, the investment is in the land and construction of a plant, which would sit in a sub-fund of the DomaCom Fund; investors would hold tradable units in the sub-fund. Rent is paid by a long term operating lessee.

Social and community housing

The housing affordability crisis has redirected focus on social housing. A fractional investment model may be the solution to the private sector helping to fund affordable housing for low income earners or specific demographic groups like seniors.

By utilising the DomaCom Fund, private investors could invest in social and community housing; the knowledge that a viable liquidity facility exists for the trading of units in specific properties in this sector provides a degree of comfort to those seeking to allocate a percentage of their investment portfolio to a socially responsible or positive impact investment.

Residential land lease developments are another form of affordable housing for those aged over fifty. In this scenario, the individual buys their home but not the land, which is owned by a sub-fund and investors therein. This gives the homeowner the benefit of escaping stamp duty and council rates, as they rent the land while owning the house. This frees up capital for a retirement lifestyle. Investors benefit from an income stream from the land rental, as well as potential capital growth. The recently launched Akuna Cobram Estate is a prime example of this.

Infrastructure and logistics projects

Australia’s population last week hit 24.5 million and with this growth comes increasing stress on existing infrastructure. Infrastructure offers investors the opportunity to own a stake in the facilities that provide essential services and help drive economic growth – roads, public transport facilities, hospitals, schools, recreation facilities. The fractional investment model provides ample opportunity to ‘crowdfund’ a piece of infrastructure important to a town, region or city. All projects must have engagement with relevant authorities and suppliers to ensure ongoing viability.

Fractional investment provides an opportunity for financial advisers to groom future clients from the younger generations looking for an entry level to a range of investments – property, farmland, socially responsible projects, infrastructure or…just about anything with a solid business case.

The children of Baby Boomers and the upper end of Gen X are the next generation of accumulators; any measures you can take to help them build an investment portfolio that resonates with them, that includes assets that they believe in – as well as ones that provide income and capital growth – will auger well for the future of your business.

 

 

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[1] http://www2.deloitte.com/global/en/pages/about-deloitte/articles/millennialsurvey.html
[2] Three ways millennials are changing investment – Forbes, 14 June 2017
[3] ABARES, 2013, Food Demand to 2050: Opportunities for Australian Agriculture
[4] Australian Farmland Values Report 2015 – Rural Bank of Australia

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