CPD: Thematic opportunities in fractional investment

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Thematic investment can be a solid alternative investment.

The increased appetite for alternative investments is a global phenomenon. A recent study by Willis Towers Watson[1] found that total global alternative assets under management now stand at US$6.5 trillion. Thematic investment can be a solid alternative investment that offers diversification and reasonable yields in strong business sectors. In this article, DomaCom explores some of these thematic opportunities.

There’s a lot of uncertainty in markets globally and domestically. Traditional asset classes are under pressure – Australia’s residential housing market may or may not be a bubble about to burst but there are signs of price weakness. Equity markets seem fully valued and rising rates will have ramifications for bond markets. With this backdrop, the increased appetite, globally, for alternative investments is not surprising.

‘Alternative investments’ is a term used to describe many types of assets and product structures that don’t fit the mould of mainstream investments. Alternatives that are garnering increased interest include; infrastructure, energy, local community projects, affordable housing, food production and processing, all of which may be considered thematic investments.

Some thematic investments have a strong socially responsible and environmental impact as well, adding to the interest of investors who want to feel they are contributing to a better world. This is of particular interest to millennials, the next generation of investors and, potentially, advice clients who are increasingly voting with their feet. A 2016 report by Toniic[2], found strong links between the values of young adults and their investment decisions. In fact, 79% of those surveyed described themselves as impact investors, seeking both financial and social impact returns. If you do not give them what they are looking they will go elsewhere, and probably without telling you why.

Impact investing can be defined as an investment made into a company or fund that generates a measurable social or environmental benefit, as well as a financial return. Thematic investments don’t only provide diversification benefits to a portfolio, many also have measurable positive social or environmental impacts.

Underlying many thematic investments is the property or land that the projects sit upon. In some cases, the investment may include infrastructure and the plant or buildings. In all cases where it is the fund manager of a thematic investment, DomaCom seeks the best possible yield and long-term leases.

Case study one: Energy

The project

Each year Australia produces enough sewage, agricultural and processing residuals to power more than one million homes. Utilitas Group, a biogas energy developer, builds regional bioHubs that create energy, jobs and value from a wide range of organic waste and wastewater; this includes sewage, animal manures, abattoir waste, food manufacturing, distillery and brewery waste, municipal green and food waste and agricultural crop waste.

At a time of rising energy costs across Australia, Utilitas is offering an environmentally sound service to rural Australia where its bioHubs use well proven, safe and reliable technology to convert organic waste and waste water into electricity, gas and fuel, create local fertiliser, clean water and other useful bioproducts. These plants can safely and reliably capture and utilise energy and nutrient from waste that otherwise would have to be disposed of at an economic and environmental cost.

The Federal Government’s Clean Energy Finance Corporation estimates the potential investment in this energy sector is between $3.5 billion and $5 billion by 2020, yet now it only provides 0.9 per cent of Australia’s electricity output compared with 2.4 per cent by OECD countries.

The investment opportunity

DomaCom has recently launched a biofuel project with Utilitas, a project that also heavily involves the town of Casino in the shire of Richmond Valley, northern NSW. This is an investment opportunity that merges a socially responsible energy investment in rural Australia with a projected eight percent yield for investors.

The project aims to raise capital for the land and the development costs, and the biohub will be leased to the operating business run by Utilitas. An ongoing leasing fee or income stream will be paid to the investors in the DomaCom Casino biohub sub-fund. Investors in this sub-fund are holding an interest in the land lease and the plant and are not investing in the operating business.

For a minimum investment of $2,500, investors can participate in a project that will service the energy needs of the local sewage wastewater treatment plant, industries and communities in one of Australia’s major beef centres.

Speaking about the project, Utilitas Chairman Hon Bernie Ripoll said “Utilitas exists to add value to regional communities, so we are excited that the DomaCom financing model allows people to invest in their own community”.

Case study two: affordable housing

The project

There’s been a significant amount of negative press of late about aged care facilities – poor standards of living, excessive costs to buy in, fees along the way, and high exit fees to get out. Despite this, many Australians still need cost effective solutions for retirement living. DomaCom has signed an Agreement with Akuna Lifestyle Estates to launch the first crowdfunded resort-style residential community land development in regional Victoria.

The Project is planned to be developed and sold in eight stages over three to four years starting this year and will follow a Residential Land Lease Community (RLLC) model, a more affordable and transparent option than the conventional retirement village model. Residents will purchase their homes for a modest price and rent the land it sits on. Under this model purchasers do not pay stamp duty.

With this scheme, there are no exit fees, with any future house sale only subject to the normal residential sales commission fee; there are no refurbishment fees or other costs imposed on the residents with residents getting all the proceeds from the sale of their houses.

The target market comprises those aged over 55, with a focus on those retirees with low superannuation balances and who qualify for Government Rental Assistance on the land lease. This market is growing at 30 per cent per year, with a third of Australians estimated to be over 55 within a generation. Akuna will develop the land and then sell the homes with 49-year land leases at an average price of $265,000 per house.

Residents will pay weekly rent that covers all the maintenance of the community’s common areas and full use of the clubhouse, bowling green, swimming pool and gym, as well as a share of council rates, sewerage and water rates. This is expected to be, on average, a gross rent of $175 a week; a number of residents may qualify for Federal Government Rental Assistance of up to $65 per week.

The investment opportunity

This Cobram housing community will give investors the opportunity to secure high yielding returns from the development and land-rental activities in a project that will deliver a real social objective – providing affordable housing to retirees.

DomaCom will use its fractional property investment platform to offer an attractive yield to investors for the acquisition and development of the land and common facilities, including a clubhouse, sports centre, pool and bowling green; it is targeting a 15% annualised return on the completed project with an estimated ongoing rental income of 8% pa.

Crowdfunding provides a sound funding model for affordable housing across Australia; with the right structure, it can also provide investors with new investment opportunities that have good yields and capital growth in socially responsible projects.

Case study three: community investment

The project

Deniliquin’s Federal Hotel opened on November 7, 1896 and is a typical Australian country pub; it’s a fine example of Federation architecture, with a grand structure of face brick with deep wrap-around verandas. Sadly however, it’s been closed for eight years and has become dilapidated and an eyesore.

A businessman with property and agricultural interests in the local area purchased the Federal Hotel in late 2015 and, together with a media and entertainment company, a plan has been prepared to renovate the property with hopes for it to become a focal part of Deniliquin, offering food and beverages, an in-house cinema, and bed & breakfast style accommodation and function rooms.

The investment opportunity

This community investment provides investors with the opportunity to own units in a sub-fund that will acquire the Federal Hotel, with the aim to provide investors with high yielding returns and improved capital value from the development of the new entertainment complex.

DomaCom’s fractional model simulates the experience of investing in real property without the need to purchase an entire property. This model brings together like-minded investors to purchase a property through an investment structure that meets their needs. Investors will share in the net income and capital value of the asset, in proportion to the amount they invest.

As well as providing a key community asset to a rural town, an investment in such a community project provides a range of positive impacts; it enhances the community, adds to the town’s business centre, and importantly, leads to employment opportunities and encourages population growth.

Benefits of fractional investment

Projects with a social conscious are important to many investors. Crowdfunding, or fractionalised investment, facilitates this. Investors may choose to support one or several developments; with small minimum investment amounts, investors can diversify their ‘impact’ investments across a range of themes and projects. In short, the fractional model democratises investment and enables people to invest in asset classes they may otherwise have no access to. Other benefits include:

  • 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.

Like all investments, the business case needs to stack up; as well as feeling good about the projects their money supports, investors can reap the financial rewards from a sound investment.

The millennials may not be as cashed up as their parents, but they are the next generation of accumulators – and they do support impact investing. Any measures financial advisers 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 both provide for a better future and support the future of your business.

 

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[1] Global Alternatives Survey 2017, Willis Towers Watson
[2] Millennials and Impact Investment, 2016, Toniic
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This article provides general information only and has been prepared without taking account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of DomaCom Australia Limited ABN: 33 153 951 770, AFSL 444365 (DomaCom) and sources believed by DomaCom to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. © 2017 DomaCom Australia Limited.

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