How to invest in property through alternative methods

• Retail REITs: These invest in shopping centres, malls, and other retail properties, i.e.: Vicinity Centres, Scentre Group
• Office REITs: They invest in office buildings and business parks, i.e. Dexus, Charter Hall
• Industrial REITs: These focus on warehouses, distribution centres and other industrial properties, i.e. Goodman group, Australia’s largest REIT
• Residential REITs: They invest in apartment buildings and other multi-family housing, i.e. Mirvac
• Diversified REITs: These invest in a mix of property types to provide broader exposure to the real estate market. Most of the above REITs are diversified in some way, as we have seen larger declines in sector specific areas that have been subject to attacks from market forces such as online shopping; Others have diversified from ownership into development to diversify income streams.

Like most things, there are Pros and Cons of Investing in REITs.

REITs provide diversification by owning a variety of properties, reducing the risk associated with investing in a single property. They offer much greater liquidity than direct property ownership because they are traded on the stock exchange, making it easy to buy and sell shares. Generally, REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, providing a steady income stream, and they are professionally managed by sector experts. They can have downsides, however, because they are subject to stock market fluctuations and may be affected by general economic conditions; Management fees may also be high, reducing returns; and changes in interest rates can have a significant impact on REITs, as they rely on borrowed capital to finance property acquisitions.

2. Crowdfunding

Property crowdfunding platforms connect investors with property developers or projects seeking funding. If the investing entity holds a Retail Australian Financial Services Licence (AFSL) then investors can contribute as little or as much as they want, and their returns are proportional to their investment. If the investing entity holds a wholesale licence, then they can accept investments only from people who hold the requisite financial minimums of assets and/or income. These are regarded as sophisticated investors. Sometimes both classes may be in a particular property product. This method allows investors to participate in property development without the need for significant capital.

There are two main types of property crowdfunding. Equity crowdfunding allows the purchase of shares or units (the “product”) in a property development project, receiving returns based on project profits. There are hybrid versions of this – where investors may invest in a ‘product’ that provides a fixed return, commensurate with the level of equity risk they are taking and some may offer a little of both – a fixed return and a share in profit.

Investors may also lend money to developments on a first mortgage basis in exchange for interest payments (similar to the equity style fixed return product above, with the exception that the equity return does not have the security of a first mortgage, although it may have a lower ranking security). First mortgage investments are usually first in line for repayment from any return in capital, namely, from sales.

Property Crowdfunding allows access to development projects that may otherwise be inaccessible to investors. They will usually have a lower minimum investment and investing in multiple projects can help spread risk.

Being development projects rather than income producing properties, many of these projects are higher risk. Potential delays, cost overruns and market risk are usually less controllable than buying an income producing investment. These investments are therefore higher risk but also should forecast higher returns than income producing assets.

3. Property Syndicates

Property Syndicates involve a group of investors pooling their resources to purchase a property, usually commercial or industrial. This is a form of Direct Property Investment.  Each investor owns a share of the property and receives a proportionate share of the rental income and potential capital gains. Syndicates can be managed by professional property investment firms or set up informally among friends and family.

A property Syndicate operates through a legal structure, typically a unit trust or a company, which holds the property on behalf of the investors. Investors purchase units or shares in the trust or company, and the trust or company acquires and manages the property. The rental income generated by the property is distributed to the investors, and any capital gains are realised when the property is sold.