As prices wobble, alternative ways into the property market that won’t break the bank

The Australian housing market remains a popular choice with investors.

Darwin auctioneer Ross Tsounis , New CoreLogic data shows that 65.3 per cent of homes sell at auction as volumes rise across the combined capital cities. An increasing number of Top End vendors are choosing to sell their properties through an auction rather than a private treaty. Pic Katrina Bridgeford.

Despite valuations that are still widely seen as inflated, the Australian housing market remains a popular choice with investors convinced that booming population growth will sustain yields and capital growth over the longer term.

To the relief of first home buyers, the market appears to be on the verge of a correction as banks curtail their lending. According to the Australian Bureau of Statistics, owner occupier lending fell 2.2 per cent in March, the sixth fall in seven months.

Independent property analysis group SQM Research estimates Sydney and Melbourne housing prices have fallen by 1.8 per cent and 0.5 per cent respectively so far this year — and predicts falls of up to 4 per cent for the full year.

Still, the reality is that buying a single property in a desired location requires a chunky outlay.

Happily for investors keen on property exposure, there’s more than one way of skinning the cat than direct purchase.

Alternative avenues are emerging on both the equity side — such as fractional investment vehicles — and also on the debt side.

In terms of the latter an emerging theme is the resurgence of the mortgage trust sector, which in effect match retail investors and borrowers through a collective vehicle.

Mortgage trust products appeal to retirement-phase investors seeking more than bank deposit returns without taking on excessive extra risk.

While investors don’t share in the capital growth, they are not ex- posed to capital losses at a time when the property cycle appears to have peaked. La Trobe Financial chief investment officer Chris Andrews likens the strategy to buying a bond issued by BHP, rather than BHP shares.

“A credit investment secured by property is an attractive way to invest in the property market,” he says. “Investing on the debt side is a strategy a lot of investors are adopting.”

La Trobe Financial, for example, offers a 12-month term account at a variable rate of 5.2 per cent, paid monthly. The underlying account contains $1.175 billion of mortgages across 2767 separate loans, with an average loan to valuation ratio of 62 per cent.

Crucially, all the properties are secured by first mortgage, which means the investors get first dibs in the event of a default.

Further up the risk curve, La Trobe Financial offers a peer-to-peer product for direct exposure to a particular loan (currently returning from 6 per cent) and a four-year account for sophisticated investors (7 per cent).

“Peer-to-peer lending has been a little bit flavour of the month and has attracted a fair few headlines, but we have been doing it for 25 years,” Andrews says.

Alternatively the ASX-listed Domacom is a platform for investors to invest in specific residential and commercial property, via fractional acquisition of units in a trust.

More recently, Domacom has identified strong demand for debt exposures from advisers to yield-chasing retirees.

“Ten years ago, a lot of these retirees went to financial planners who projected returns of 5 per cent,” CEO Arthur Naoumidis says. “These retirees are now eating up their capital.”

Recently Domacom completed a crowd funding campaign to fund its first mortgage-backed loan, a $1.6 million Melbourne residential property. Such is the structure, SMSFs can leverage property exposure without breaching the $1.6m balance transfer cap.

Younger investors with a higher risk appetite and longer investment profile are likely to favour equity ownership of property. Backed by National Australia Bank’s and Westpac’s venture capital arms, BrickX buys proper- ties and then converts them into 10,000 ‘bricks’. Purchasers receive a pro-rata monthly share of rental returns and a share of capital gains on sale of the units.

In its short life, BrickX has acquired $17m of properties on be- half of 10,850 investors. Another more recent offering called CoVESTA works in a similar way, while a new-age play called CastleCoin uses a blockchain-enabled platform to assign the value of a property asset to a cryptocurrency.

In the listed sector, real estate income trusts (REITS) remain a traditional alternative for investors seeking both yield (currently averaging around 5 per cent) and capital growth. The REITs range from large diversified operations such as Stockland and Mirvac, to specialist plays such as BWP Group (Bunnings Warehouses) and the National Storage REIT (self storage facilities).

But beware rising bond yields: REITs generally carry considerable debt and face loan servicing pressure if interest rates increase, while at the same time the income return on the asset class looks less attractive relative to risk-free bank deposits or government paper.

As always, investors should do their homework when assessing the alternatives.

“In the mortgage trust market there are various different products with different underlying risks,” SQM’s Louis Christopher says.

“Some invest in construction loans and they are high risk, high return vehicles.

“Some mortgage trusts just invest in first secured residential mortgages and are on the lower risk spectrum.”

He says peer-to-peer investments are a fast growing category, albeit not as quickly as mortgage trusts.

“They are very different in nature in terms of underlying assets, the quality of the manager, liquidity mechanisms and fees.”

In the case of the debt vehicles, they’re only as good as the quality of the underlying loans and La Trobe Financial’s Andrews stresses an old-fashioned approach to credit assessment.

“There’s a lot of hype about using algorithms to credit assess loans but all our credit assessment is manual,” he says.

“Investors sometimes need to be reminded they are investing in an asset manager and not a tech company.”

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This content was produced in association with La Trobe Financial. Read our policy on commercial content here.