The Business Times - The ins and outs of fractional property investing
REAL estate is often favoured by investors as a source of relatively stable returns over the mid- to long term.
SINGAPORE, Sep. 27 2023 / The Business Times / – REAL estate is often favoured by investors as a source of relatively stable returns over the mid- to long term.
Returns can be recurring from collecting rent on the property, or from a capital gain on price appreciation of the asset in a future sale. However, the barriers to entry for investors can be very high, as property purchases require large amounts of cash upfront.
Fractional real estate investment offers a different route to property investing.
Earlier this month, Straits Developments, a subsidiary of conglomerate Straits Trading Company, launched two new property investment products under its Fractionalised Investment Real Estate-Straits Trading – or FIR-ST – programme.
The products are linked to two physical property assets located in District 10: a freehold Good Class Bungalow (GCB) in Chatsworth Park, and a 999-year leasehold condominium unit in Duchess Residences in Bukit Timah.
The minimum investment amount for the condo is S$200,000, while the GCB requires a minimum of S$500,000. The holding period is for five years, up to a maximum of seven years. Both investments are not open to the public, and are offered to Straits Trading Shareholders’ Club members only.
On its website, Straits Trading illustrates an annualised return of 7.61 per cent on the GCB after five years, and an annualised return of 9.5 per cent on the condo unit by 2028.
Last May, the Chatsworth Park GCB was offered in a similar fractional investment deal with another residential property, located at Woollerton Park in Gallop Green. The minimum investment ranged from S$200,000 to S$500,000, with no lock-in period.
At least two other players offer similar fractionalised products tied to real estate. RealVantage holds a mall in Bukit Batok called Le Quest, valued at an estimated S$160 million and owned and operated by fund management company Firmus Capital. The minimum investment is S$50,000.
RealVantage has six other deals across locations in Australia, the US and UK generating returns of 7 per cent to 17 per cent under its fractional investing umbrella, said Keith Ong, co-founder of the real estate co-investment platform. These deals comprise office, industrial, residential and mixed-use projects.
Fraxtor, a blockchain-enabled real estate co-investment platform, also holds several projects in Singapore that have been fractionalised for investors: the 59-unit Hillshore condominium, the former 40-unit La Ville condominium at 6C Tanjong Rhu Road – which is being redeveloped into a 107-unit project – a landed development consisting of four terrace houses and two bungalows at 21 Mount Rosie Road, and a food factory at Mandai Estate.
The minimum investment on Fraxtor is S$25,000.
Its chief investment officer Samuel Lee said that an investment on a Haig Road residential property recently achieved a net internal rate of return (IRR) of 20 per cent per annum over a three-year period, when it was sold progressively from 2021 to May 2023.
Such high returns look attractive compared to traditional brick-and-mortar investments.
Structure and returns
In a fractional real estate investment model, investors hold shares in a special purpose vehicle (SPV) that is formed for the investment, RealVantage’s Ong explained.
As the minimum investment is lower than what is typically required to buy real estate, individual investors are able to diversify their holdings in different property assets – similar to buying shares of varied companies. This model also frees the investors from managing the properties on their own.
Returns are paid out in the form of dividends of the SPV after taxation and fees, with a targeted exit date for such investments, said Ong. These returns come from rental income for existing properties, or sales proceeds if it is a development project.
For Straits Trading’s two offerings, a dividend is payable every six months. At the end of the five-year holding period, investors can expect sharing in the capital movement of the underlying properties as a “special payout”.
Similarly for RealVantage investors, there may be a special payout at the end of the investment period – which can range from two to five years – if there is appreciation in the value of the properties.
The target net IRR can reach 13 per cent to 18 per cent, Ong said. During the investment period, the properties will continue to be owned by the existing owners and managed by professionals.
Differences from Reits and real estate funds
While fractional property ownership appears similar to options such as real estate investment trusts (Reits) and real estate funds, there are differences.
Reits provide access to a portfolio of properties, are publicly-traded investment vehicles that offer access to diverse sectors and geographies, and are professionally managed. The main drawback is that Reits tend to fluctuate with equity movements, based on market sentiment.
In a real estate fund, investors own units in a professionally-managed fund, which tends to offer more risk diversification. Such funds are not traded openly like stocks, and share prices are updated only once a day. Investors can buy a real estate fund directly from the company that created it, or through an online brokerage.
Fraxtor’s Lee noted that developers, too, may benefit from fractional investments as a source of funding, as they are able to access an underserved funding channel while building a track record for their fund management businesses.
Risks
As with other types of investments, payouts on fractional property investments – as attractive as they sound – are not guaranteed.
Because the investment offers a direct share in the ownership of a property, it also bears the same risks as owning any property – prices and rentals could fall if the market weakens.
Investors need to exercise due diligence and carry out sufficient market research to educate themselves on the potential risks of the specific opportunity, said Lee.
RealVantage’s Ong cautioned investors to opt for platforms that are regulated, as these pose less risk. Investors should ensure that their investment platform takes care of all taxation matters, especially when investing in overseas real estate.
He added that having a good understanding of the property’s ownership structure prior to investing is also important, as fractional investment involves shared ownership with other investors. This limits an individual’s control on decisions regarding the property, which may require consensus among the owners.
Exit options
Fractional property investment deals come with an estimated holding period. Investors exit at the end of this period, and may not be able to exit before the term ends.
The targeted exit could be the sale of all the units in a development, or the sale of a project to another party, said Ong.
For RealVantage investments, he said that investors are able to sell their shares in secondary trading. The platform can also help them look for other investors to buy over their shares.
At Fraxtor, there are mechanisms in place to allow for early redemption at the discretion of the property developer or private-equity fund manager, although such requests are not common, said Lee.
Upon exit, investors will get the net investment proceeds from the underlying project. This may include a profit, or could show a loss, he added.
In January this year, Straits Trading listed a tokenised note, known as a digital note, on the SDAX – a regulated investment and trading platform providing multi-asset securities and fund units – for a residential development at 13 Woollerton Park.
The SDAX listing allows the note to be traded in smaller denominations of S$1,000 per token among accredited investors, lower than the minimum S$200,000 required for direct investors.
This digital-note listing allows investors to receive 3 per cent annual interest payments, and up to 10 per cent special interest upon redemption of the note, subject to the sale price or valuation of the property.
With Straits Trading’s latest offerings, investors may sell their shares to other investors, but they will need approval. If stamp duty is payable, it is to be paid by the buyer of the shares.
If the underlying property is not sold by the end of the maturity period, the company will appoint an independent valuer to determine the asset’s value for payouts to investors, said Straits Trading.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.