Gen Y may be asking you if share property buying is the right choice to make. Zoe Fielding explains.
The youngest working generation is finding it tough to save a deposit and buy property. Really tough. And whether their parents are your clients or Millennials are coming to you themselves, advisers should be aware of emerging property ownership opportunities that Millennials may find accessible and affordable.
It’s well reported that in the past six years Sydney’s property market has risen a staggering 70 per cent and Melbourne’s 50 per cent. Over the past 20 years, property prices have doubled in real terms largely driven by low interest rates, demand outstripping supply, and immigration. Meanwhile, incomes have not kept pace, having risen about 20 per cent in the past decade.
A creative solution
Fractional property ownership is gaining attention as it allows buyers – using technology – to crowdsource a property purchase.
Buyers co-invest in a single residential property, sharing ownership costs, as well as income and capital gains. Co-owners may be friends or family members, or they might be like-minded strangers.
Many Millennials are familiar with the share economy through services such as Airbnb, Kickstarter and Uber. They may work out of a shared office space where they also hot desk, so they are already comfortable with the concept, are likely to see the sense in it and may be just as pragmatic in their approach to property ownership.
In fact, it has been estimated that fractional property ownership could account for 10 per cent to 20 per cent of Australia’s property market within the next decade, RP Data international chief technology officer Greg Dickason recently told business magazine INTHEBLACK.
Companies such as BrickX, Kohab, DomaCom and CoVesta, as well as BlochExchange, which will launch soon, are all options for those frustrated by the traditional path to property ownership. Each platform has its own characteristics:
- CoVesta and DomaCom are arranged as syndicates.
- Kohab acts as a one-stop-shop for people buying as tenants in common.
- BrickX buys properties through a unit trust and then sells shares of the home, known as “bricks” to investors.
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Pros and cons of fractional property investing
Fractional investing may be an option worth exploring if you are assisting a client whose goal it is to get their child into the property market, or assisting a Millennial with their goals. And crowdsourcing property has its advantages:
- Upfront investments are much smaller than for other real estate purchases. BrickX sells “bricks” for less than $100 each, for instance.
- Co-owners can live in the property, although they do have to pay rent to the group and there may be restrictions. CoVesta, for example, limits the guaranteed term of ownership to five years and the group may decide to sell at the end, forcing the tenant to move.
- BrickX is developing a rent-to-own model that would allow tenants who own “bricks” to gradually buy out their co-owners.
- Having an investment in a real home allows the buyer to track the local property market, which has historically delivered significant capital growth. The proptech start-ups claim this can help buyers to more quickly build a deposit for their own home.
- Investors more generally might consider fractional property ownership as a way to diversify an existing property portfolio instead of buying another single dwelling or investing in a real estate investment trust.
- Proptech platforms could also help friends or family members who were planning to buy property together to formalise the agreement.
As with any investment, there are drawbacks advisers must be aware of:
- Buyers are exposed to the typical risks of owning a single property, such as market fluctuations, maintenance costs and bad tenants.
- Residential property yields are typically quite low.
- Disagreements between co-owners could emerge, which could prove stressful. The proptech platforms do have legal protections in place for buyers but disputes might arise over when a jointly held property should be sold, or whether to conduct renovations and repairs, for example.
- Buying with others may also disqualify the purchaser from obtaining first-home-buyer grants. People considering co-ownership should investigate the eligibility criteria for such concessions.
Aspirations in Australia's tough market
Higher prices mean larger deposits. The Grattan Institute calculated the median deposit for first-home buyers rose from about $42,000 in 2008 to almost $70,000 in 2014. It's nearly doubled in those six years, and has risen much further since.
Meanwhile, rents have risen with tenants spending 20 per cent more in real terms on the same quality housing as two decades ago. It’s no wonder Millennials are struggling to get a foot in the door. Property prices are up and wages have stagnated making home ownership less attainable.
According to CoreLogic’s analysis, this disparity means buyers today can expect to spend seven times their annual income to purchase a home, while in the 1990s, buyers would spend about four times their income on a comparable property.
Adding to the burden, younger generations have higher outgoings than their predecessors, expenses such as mandatory superannuation contributions and larger student debts reduce take-home pay.
In this scenario, two-thirds see home ownership as a top financial priority, recent research by Telstra found. They will often turn to mum and dad, with around three-in-10 Australian parents helping their children to buy a home, Mozo’s research in June 2017 found.