Explainer: Fractional property investments – how to buy real estate in bite-size chunks

Starting from as little as R1, anyone can now access real estate investment opportunities usually only available to wealthy people through fractional property investments.

EasyProperties launched online investment platform in July

Fractional property investing is an affordable way to build wealth as a collective. Through this platform, capital to purchase multi-unit property investment opportunities is raised through crowdfunding.

EasyProperties launched an accessible online platform that enables property investments to be treated like listed stock portfolios. Focus is on asset allocation, without property management hassles as in traditional buy-to-let investments,” says Rupert Finnemore, EasyProperties CEO.

The growing investment product was launched in July 2020, and already is fast gaining traction with investors.

It has attracted nearly 10,000 people, with the oldest investor being 90 years old. He says 69% of investors are predominantly male and young investors aged between 21 and 36 years.

Finnemore notes that Lightstone recently reported that single women are the largest group of property buyers in the market. EasyProperties hopes to attract more female investors into its community.

Gap in the market

Lack of access to property investment opportunities and funding remains a hindrance to property investing, says Finnemore.

Property is a good investment asset for a discerning investor looking for income and diversification.

EasyProperties saw a gap in the market, and through tech, created an accessible platform for investors from all walks of life. It has facilitated the investment, and purchase of 48 units valued over R50m. Located in Foreshore Cape Town, Sandton and Boksburg in Gauteng, these sectional title properties offer the live-work-play lifestyle.

How to invest

South Africa citizens and registered companies can buy shares in fractional property investments. Once-off investments into a new property collection can start from as little as R1. However, there are additional opportunities to invest through the buying and selling of shares, says Finnemore.

“Diversification across multiple units and investment opportunities means you end up owning a fraction of many properties.”

Interested investors can set up an EasyProperties account via the EasyEquities platform. EasyEquities is a financial services provider, and subsidiary of JSE-listed, Purple Group.

Read also: Alec Hogg: An SA investment proposition: the phenomenon called Easy Equities.

Once registered, an investor then funds the EasyProperties wallet, either directly or through an inter-account transfer.

Investors have the opportunity to purchase shares in a shelf company through the Initial Public Offering (IPO). Standard costs for shares within the scheme is R1, and the capital raised is used to buy the investment properties.

Additional costs include 1% charge for IPO fee and 0.6% for the platform fee per annum. Each investment opportunity provides detailed information about costs as they differ slightly.

Management and rental income payments

Independent property service providers have been contracted to place tenants, manage properties and collect monthly rentals.  Investors get their share of rental income (less expenses) paid into their EasyProperties accounts. This income in the form of dividends is paid quarterly.

“We hold back 15% of rental income for rainy days, and our costs are tightly managed,” says Finnemore. This 15%, if not utilised, is also paid across to investors as a dividend, he notes.

Benefits of investing through this platform

Investors will have access to cash when needed through the buying and selling of their shares on auction every quarter.

For any property investor, key to understand is that property is a long-term investment, according to Finnemore.

Apart from the rental income, capital growth is another important aspect of investing long-term. The exit period is between 4-7 years.

Pros Cons
Access to a larger pool of property investment opportunities with no minimum investmentsBeing public companies that own the properties, there can be additional costs which can have a negative effect on the returns. EasyProperties has tried to mitigate these costs through negotiating bulk discounts

 

Diversification
EasyProperties has the ability to purchase properties at discounted prices through the power of bulk purchases
Rental income is taxed as dividends and not as income
Outsourcing of property managementPotential for illiquidity if you need the money.

 

Risks

Like most investments, there are risks, however there are few when compared to investing in traditional buy-to-let. Vacant units and not meeting bond payments are the biggest risks. However, this risk is shared by all investors.

To mitigate this risk, we have taken very small bonds (30% LTV. In addition, we are withholding 15% of the rental income received for periods when there may be vacant units. This portion, if unused, still accrues to the investor, says Finnemore. He adds that this risk is further mitigated by having multiple units within each investment opportunity.

What about fractional property ownership?

Fractional property ownership is the joint ownership of a property asset by more than one individual or legal entity, says Buyisile Maseko, Growth Head: FNB Home Finance.

Buyisile Maseko

Globally, the most frequent form of fractional ownership is when a group of shareholders purchase luxury leisure property. Asset usage is allocated to the shareholders by means of a roster, and running costs are divided among the shareholders.

She explains that much of the appeal of fractional ownership involves the hedging and distribution of risk and downside. Nowadays people can use what they need at certain times without true ownership thanks to the sharing economy.

As this idea becomes more prevalent, and available across more asset classes, our approach to sharing economy remains to be seen.

Maseko says in fractional ownership investors can enjoy usage benefits, and the buyer owns part of the title (as opposed to units of time).

“If the property appreciates in value, then so do the shares. As with whole ownership, fractional owners can sell anytime thus releasing the capital growth from their bricks-and-mortar investment.”

As with timeshare and vacation rental predecessors, there are downsides to fractional ownership.  According to LawForAll, these include owners battling to get a booking at a time that’s suitable, complicated and lifetime contracts.

Increases in the value of the property accrue to the shareholders. This is the major differentiating factor between fractional ownership and timeshare, says Maseko. Below are the pros and cons of fractional property ownership.

Pros Cons
Affordable ownership in exclusive destinationsConsensus can be tough with consultations for everything

 

Ability to rent out unused weeks
Better value for money – only pay for usage
Maintenance costs are low

 

Selling can be a cumbersome task, and this depends on the structure, and restrictions may apply when selling shares.
Properties in exclusive locations normally increase in value faster than other residential areas.

 

Top estate security and high occupancy ratesFractional ownership is tied to one property and this can be limiting.

 

Furthermore, investors should also consider the following:

Levies Request a breakdown of the monthly levies for the first year

Since levy structures are different, it is important to request a breakdown of monthly levies for the year. Maseko says this levy should typically comprise of the management fee, housekeeping, insurances, DSTV, check-in procedures, and possibly a maintenance fund.

Deposits 

Be sure that the account is a legitimate account and held in a trust.

For more on fractional property investments, see this webinar discussion:

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