There’s mortar brick-by-brick investment than meets the eye

BRICKX, Australia’s first “stock exchange” for residential property, launched this week.

Markus Kahlbetzer launched BRICKX this week.

As new investment models emerge from internet technology and crowd-funding techniques, one significant attempt to allow investors into the residential housing market has captured wide attention

BRICKX, Australia’s first “stock exchange” for residential property, launched earlier this week by Markus Kahlbetzer, the son of one of the country’s richest men, targets younger investors with the opportunity to buy fractions, or “bricks”, of a property for less than $100 a parcel.

But people familiar with the business model have questioned the company’ pricing structure. Mr Kahlbetzer, the son of $800 million agribusiness mogul John Dieter Kahlbetzer, has plunged $3.5m into getting BRICKX up and running.

It works like this: the company buys a house, splits it up into 10,000 “bricks” and offers investors the ability to buy a stake in the property without having to see the house or attend an auction.

No single investor may buy more than 5 per cent, meaning that each house will have a minimum of 20 part-owners.

Who is responsible for the house? Each property is underwritten by BridgeLane but owned and managed by the trustee, Theta Asset Management, which distributes the net income on properties to investors monthly.

While the business has approval from the Australian Securities & Investments Commission, the development is likely to be unsettling the Australian Prudential Regulation Authority, which is already confronted by the possibility of a price crunch in apartment prices as an oversupply looms.

BRICKX, which advertises the level of gearing of its properties, told The Weekend Australian house valuations were conducted twice a year, but the market value of the house was detached from the prices or trading conditions of the “bricks”.

The valuation, which is advertised, is meant to be a guide for investors, who can chose to list their bricks at a higher or lower price than the market value.

A BRICKX spokesman said if the prices of bricks dropped dramatically, or if the valuation on the house was written down, it didn’t necessarily mean people would lose money. “If people choose not to sell at that price, they may not potentially lose money,” the spokesman said.

The BRICKX product it is largely ungeared at the moment, meaning the investors may not be saddled with debt attached to the house.

The company also does not want to negatively gear properties, due to the bureaucratic nightmare that would present.

However, despite BRICKX being hailed as an innovative way for investors to avoid large upfront payments on property, the fee structure is worth examining more closely:

• BRICKX makes a 1.75 per cent commission for every brick transaction. Buying a 5 per cent stake in a $500,000 house would attract fees of $437.50. To sell out at the same price would then add a further $437.50, assuming prices were steady.

• One seasoned investor who examined the business model told The Weekend Australian that it wasn’t so simple. “There’s a secondary market, but it doesn’t appear to be that liquid,” the investor said. There’s a market price decided by the number of bricks available to be bought or sold at any time. If there’s no market and an investor wants to sell into an unreceptive market, prices could fall sharply.

Bricks were usually selling at a 2-3 per cent discount to the market price of the property, the investor said.

The BRICKX spokesman said: “Liquidity is an inherent risk. Obviously we don’t have as much liquidity as we would like at the moment but the idea is we grow our investor base and liquidity grows with that.”

BRICKX said it now had thousands of members and more investors were approaching the company every day.

• There is a 6 per cent management fee, not including GST, deducted from the gross rental income of each BRICKX trust before distributions are send out to brick holders, along with a flat monthly fee of $75 per property per month.

• At the end of every five years, all the investors in the property vote to decide whether to continue, or discontinue, with the investments and at any time, 50 per cent of each property’s investors can vote to wind up the investment.

Only time will tell if a new product can deliver on its promises. For the moment though, some models raise as many questions as answers.