Invest in American commercial property online with new platform from Blackstar Property

As I’ve discussed before, the secret to successful investing is to build a balanced, diversified portfolio that includes both domestic and offshore equities, property, bonds, and cash. However, for South Africans, investing in offshore property has historically been tricky. One could buy a home in the US, or invest in listed property, but the opportunities for getting exposure to commercial property were rather slim. But that is about to change with the introduction of a new online trading platform from Blackstar Property that will allow South Africans to invest in commercial property in the US. The investments will be denominated in dollars, so the investment will also serve as a rand hedge for those who put money in, and investors will essentially be buying a share of a long-term commercial lease. It’s an interesting proposition, and certainly something worth checking out if you’re looking for a way to diversify your portfolio. – FD 

ALEC HOGG:  Blackstar Property, the promoters of the Zebra Real Estate Fund, a Delaware-based private opportunity fund for American and South African investors, has developed an online investment platform and marketplace for the Commercial Real Estate and Net Lease industry.  That’s a bit of a mouthful for you.  Don’t worry.  We will unpack it.  Bryan Smith is out from Blackstar Property.  From your accent Brian, you’re South African.

BRYAN SMITH:  Yes.

ALEC HOGG:  You’ve been doing time in America lately, though.

BRYAN SMITH:  Yes Alec, and thank you for having me here.  I’ve been there for the last 18 months, looking at various commercial real estate initiatives.  There have been some significant changes in terms of the rules and regulations, Securities and Exchange Commission, and rules around the sale of securities.  One of them is the Jobs Act that came into being in 2012.  It was signed in by President Obama and it was essentially to promote small business through the easing of selling of securities, so venture capital etcetera.  The second one was the repeal of general solicitation to accredited investors, so essentially being allowed to advertise through social media – advertising of securities – but to accredited investors.  The third part to that is crowdfunding, which has come about in the last year.  There are rules, which have been proposed but not accepted yet.

ALEC HOGG:  What is crowdfunding?

BRYAN SMITH:  It’s essentially pooling funding.  It’s peer-to-peer funding, approaching people in your local community to fund various projects.

ALEC HOGG:  So we could walk through the CNBC Africa newsroom now and say to people there ‘if you would all like to have a stake in a business proposition that Bryan’s telling us about, you could put your money forward’.  Where do you start?  How much money do begin with in crowdfunding?

BRYAN SMITH:  It could be anything.

ALEC HOGG:  Ten dollars?

BRYAN SMITH:  They have various online websites, which they’re doing it through, in the U.S.  I’m not talking about the commercial real estate side, but for smaller venture capital-type products…  There’s a very good one called Kickstarter, who was probably one of the main initiatives behind crowdfunding, but there you can raise…  The guys have raised from fifteen-thousand Dollars through to a couple of million Dollars for various initiatives.

ALEC HOGG:  So you’ve taken that process and you’ve applied it to real estate.

BRYAN SMITH:  Well, we’ve applied it to commercial real estate.  Typically, commercial real estate has in the past, been all institutional investors.

ALEC HOGG:  Commercial, meaning offices?

BRYAN SMITH:  Well, commercial meaning retail, offices, industrial and general.  In fact, in the U.S. it also applies to your multi-family type of investments and your residential type of investments.  Commercial real estate in the U.S. has typically been expensive.  We focused on Net Lease property, which I’ll explain a little bit later.  Your cheapest Net Lease property in the U.S. is probably $1m.  The banks will probably lend you up to 50 or 60 percent of that in terms of debt, so for the average small investor to come up with the balance/equity portion of that is almost impossible.

ALEC HOGG:  So you’re breaking up that $1m for many people.

BRYAN SMITH:  Essentially, that’s what we’ve done.  We’ve created an online investment platform and marketplace where we use proprietary crowdfunding technology.  It was developed for the Net Lease industry, but it essentially makes commercial real estate investing accessible and affordable to the smaller investors.

ALEC HOGG:  What’s the difference between Net Lease and just normal commercial investments?

BRYAN SMITH:  Net Lease properties are typically long-term leases.  They’re credit-rated tenants.  The Net Lease portion refers to the tenant’s responsibilities in terms of the lease.  They are responsible for all the expenses, the maintenance, any insurance related to that, so hence, and the Net Lease portion.

ALEC HOGG:  So what you get is net of all costs.  When you say long-term leases…what period?

BRYAN SMITH:  They’re normally 20 years, but depending on where you are in the lease and whether the seller has actually sold, it can be anything from eight to 20 years.  It obviously affects the cap rate as well – the longer the lease, the lower the cap rate – so you’ll get cap rates of four or five percent on longer term leases, whereas if it’s shorter, there’s obviously more risk involved.  You can also get cap rates of up to eight-and-a-half or nine percent.

ALEC HOGG:  I was looking through your presentation and saw things like Pizza Hut in there.  Do you look at big brand names to put together for investors?

BRYAN SMITH:  There are many out there, but the ones Let Lease typically focuses on, are credit-rated tenants.

ALEC HOGG:  What is that?

BRYAN SMITH:  Like McDonalds…just to give you an example.  A Net Lease property is a standalone property.  It has a long-term lease in place.  A good example would be in the quick service or the fast-food restaurants – McDonalds or Burger King – the drive-through’s you would see around here, but applied to the U.S.  The pharmaceutical and drug stores in the U.S (Walgreens and CVS), banks have many drive-through’s (Chase Manhattan and Wells Fargo for example).  Those are the typical types of Net Lease properties, which we focus on.

ALEC HOGG:  So if it were in a South African context, McDonalds in Jan Smuts Avenue – on the corner of Glen Hove Road, which I think many people would know – would own that.  You, or someone, would provide the capital to build it in the first instance, and they would sign a lease of about 20 years.  They take care of all the insurance and everything else, but they would pay to crowd-sourced investors, a rental return every month.  What kind of return do you get?

BRYAN SMITH:  As I said, we’re not focused on the Blue-Chip asset with the 20-year type of leases.  We prefer to look at opportunities where we can get involved and create some opportunity, so we focus on the leases with eight to ten years remaining on the lease.  We can get a higher return.  We can get cap rates of typically, around seven-and-a-half to eight-and-a-half percent.

ALEC HOGG:  U.S. Dollars?

BRYAN SMITH:  U.S. Dollars.

ALEC HOGG:  So it’s a Rand hedge as well as being fairly safe.  What’s the risk though, in this?

BRYAN SMITH:  Well, I think there’s risk in any commercial real estate investing.  What we’ve done is take some of the risk out in terms of the fact that Net Lease properties have long-term stable income returns and predictable income returns.  Typically, at the end of the month or the end of the quarter, you would know the money you’re going to get out or the return you’re going to get out of it.

ALEC HOGG:  And you can go online and do your investment that way.  You don’t have to go through brokers.

BRYAN SMITH:  What we’ve essentially done is we’ve created this online investment platform.  We’ll source the properties.  We’ll pre-vet them.  We provide extensive information on our website.  On the properties, we do a lot of the heavy lifting for the investor.  We provide offering memoranda on the properties so you can see extensive due diligence and videos we’ve done on the properties.  You can see all that information online.

ALEC HOGG:  So, bringing property investment in America to private investors.  That was Bryan Smith from Blackstar Property, so you know what to Google.