BRICKX: PROP­ERTY YOU CAN AF­FORD

Money Magazine Australia - - COVER STORY - Pam Walk­ley

What is it?

BrickX is a prop­erty in­vest­ment plat­form that al­lows in­vestors to ac­quire frac­tional in­ter­ests in res­i­den­tial prop­er­ties.

How does it work?

BrickX is a man­aged in­vest­ment scheme. It buys prop­er­ties and splits each as­set into 10,000 units (or “bricks”), which it sells to in­vestors. Each prop­erty is held in its own unit trust, sep­a­rate from the BrickX busi­ness. The price of each brick is based on the ini­tial pur­chase price plus ac­qui­si­tion costs and a cash re­serve. At the time of writ­ing there were 14 prop­er­ties avail­able and for nine of th­ese the price of a brick was less than $100.

What are the pros?

En­ables those with very low funds to en­joy the ben­e­fits of in­vest­ing in res­i­den­tial prop­erty, one of the best per­form­ing as­set classes in Aus­tralia. Th­ese ben­e­fits in­clude reg­u­lar rental in­come dis­tri­bu­tions and cap­i­tal growth.

Al­lows you to choose the spe­cific prop­erty/ prop­er­ties you want to in­vest in from those avail­able through BrickX, which en­lists pro­fes­sional help to choose them.

Gives in­vestors, in­clud­ing self-man­aged su­per funds, the op­por­tu­nity to di­ver­sify their prop­erty portfolio at a very low en­try cost. Cur­rently the prop­er­ties avail­able are spread be­tween sub­ur­ban Syd­ney, Mel­bourne and Ade­laide.

In­vestors can have ex­po­sure to res­i­den­tial prop­erty with none of the usual has­sles of be­ing a land­lord.

Mem­bers can ben­e­fit from pro­fes­sional man­age­ment in­clud­ing mea­sures to mit­i­gate risks, such as land­lord in­sur­ance and a cash re­serve to cover about three months of ex­penses for each prop­erty.

The trans­par­ent web­site pro­vides a lot of in­for­ma­tion on each prop­erty in an easy-to-ac­cess for­mat.

The fee struc­ture is sim­ple (see “What are the fees in­volved?”).

What are the cons?

Prop­erty mar­ket risk, in­clud­ing the po­ten­tial for in­ter­est rate rises and over­sup­ply in some sec­tors, could see val­ues in some mar­kets fall, which may cause the value of some spe­cific BrickX prop­er­ties to fall.

The dan­ger that some of the BrickX prop­er­ties have been bought in very hot mar­kets and cap­i­tal growth may be quite slow, non-ex­is­tent or in­deed neg­a­tive. Some val­u­a­tions have not changed in the past six months; for ex­am­ple, a two-bed­room, two-bath­room unit in the lower north shore sub­urb of Mos­man

in Syd­ney was val­ued at the same amount ($1.4 mil­lion) in both De­cem­ber 2016 and June 2017. The up­dated brick val­u­a­tion is $143.43, rep­re­sent­ing a 0.51% de­crease from the De­cem­ber 2016 brick val­u­a­tion of $144.17. Bricks were avail­able at a slight dis­count, $142, at the time of writ­ing. The down­ward move­ment in the brick val­u­a­tion is in line with the con­tin­ued amor­ti­sa­tion of the ac­qui­si­tion costs for the prop­erty, ac­cord­ing to BrickX.

Po­ten­tial in­vestors must re­alise that hy­po­thet­i­cal cap­i­tal growth il­lus­trated on the web­site is based on past growth, which is in no way guar­an­teed to con­tinue in the fu­ture. For ex­am­ple, Syd­ney house prices stalled for the first time in 17 months in Septem­ber, fall­ing 0.1%, ac­cord­ing to CoreLogic fig­ures. An­nual growth fell from 13% in Au­gust to 10.5%.

Net rental re­turns are very low, as is nor­mal for res­i­den­tial prop­erty in Aus­tralia, rang­ing in Syd­ney from 1.14% for a Bal­main home to 2.69% for a Mos­man apart­ment. In­deed, in most in­stances the first-year rental re­turn is al­most en­tirely wiped out (or more than wiped out) by the 1.75% trans­ac­tion fee.

All rental prop­er­ties run the risk of not be­ing ten­anted for a length of time (known as “ten­ancy risk”). If this hap­pens in­vestors will not re­ceive monthly rental dis­tri­bu­tions. Ten­ancy risk in BrickX prop­er­ties is mit­i­gated by land­lord in­sur­ance and cash re­serves.

Ten­ant de­fault risk, which would ad­versely im­pact rental dis­tri­bu­tions.

No con­trol over the prop­erty, in­clud­ing de­ci­sions about ten­ants and ren­o­va­tions.

What are the fees in­volved?

There’s a one- off ap­pli­ca­tion fee of $10, which is cred­ited back to your dig­i­tal wal­let and can be used to­wards your first brick pur­chase.

A 1.75% trans­ac­tion fee on any sale or pur­chase of bricks.

A 6% (plus GST) prop­erty man­age­ment fee of gross rental re­ceived and de­ducted from the rental.

A prop­erty fi­nan­cial and val­u­a­tion fee of 9¢ per brick per month de­ducted from gross rental in­come.

How has it per­formed?

There is not a long track record as it has been open to re­tail in­vestors only since Septem­ber 2016. The June 17 val­u­a­tion of six of BrickX’s then 12 prop­er­ties showed four had in­creased in value, from 1.3% for an apart­ment in the Mel­bourne sub­urb of Prahran to 7.4% for a house in the Syd­ney sub­urb of An­nan­dale. Two sub­ur­ban Syd­ney apart­ments recorded no change.

BrickX was awarded a su­pe­rior rat­ing from re­search house SQM Re­search, scor­ing four out of five stars ear­lier this year. SQM iden­ti­fied the strengths as “the depth and qual­ity of se­nior man­age­ment ap­pears to be very strong” and “the liq­uid­ity mech­a­nism for bricks ap­pears to be a proven way to ac­cess liq­uid­ity”.

There is also an in­de­pen­dent ad­viser panel in­clud­ing Nerida Con­is­bee, chief econ­o­mist of REA Group, and Tim Law­less, head of re­search at CoreLogic.

How safe is it?

Each BrickX prop­erty is held by Theta As­set Man­age­ment, an ex­ter­nal trustee and re­spon­si­ble en­tity for the scheme, in a sep­a­rate trust. This quar­an­tines is­sues with one prop­erty from af­fect­ing oth­ers.

If the BrickX busi­ness failed or ceased (for ex­am­ple, if its fi­nan­cial ser­vices li­cence was re­voked) Theta would seek to ap­point an­other man­ager or wind it up. Wind­ing up would re­sult in the in­di­vid­ual prop­er­ties be­ing sold and the pro­ceeds, less costs, dis­trib­uted pro-rata to in­vestors.

How do I get started?

Go to the brickx.com web­site and reg­is­ter. This is free but be­fore you can buy any bricks you need to de­posit funds into your dig­i­tal “wal­let”. You can do this as a di­rect trans­fer from your bank ac­count or via BPay. The min­i­mum de­posit is $75, in­clud­ing a $10 ap­pli­ca­tion fee, which is cred­ited to your wal­let to go to­wards pur­chases.

You can add funds to your dig­i­tal wal­let and when you have enough you can buy bricks us­ing the “or­der book” ac­ces­si­ble on each in­di­vid­ual prop­erty page of the web­site. You can buy and re­serve avail­able bricks at any time pro­vided the funds are avail­able in your dig­i­tal wal­let and bricks are avail­able for pur­chase.

When BrickX launches a new prop­erty mem­bers can re­serve bricks at the pre-or­der phase and ac­quire them on set­tle­ment. Mem­bers can sell bricks on the rel­e­vant prop­erty or­der book. The price is set by the seller but must not be more than 20% below the lat­est in­de­pen­dent val­u­a­tion, con­ducted twice a year. A trans­ac­tion oc­curs when there is a buyer will­ing to pay the price set by the seller.

Mem­bers can only own up to 5%, or 500 bricks, in any one prop­erty. There is no set in­vest­ment pe­riod. Brick hold­ers may at any time col­lec­tively agree (with a 75% ma­jor­ity) to sell a prop­erty and after a prop­erty has been held for five years BrickX will fa­cil­i­tate a meet­ing of the rel­e­vant brick hold­ers to de­ter­mine if they wish to sell or con­tinue to hold the prop­erty.

BrickX man­ages each prop­erty and cur­rently em­ploys prop­erty man­agers for all prop­er­ties. Mem­bers can earn monthly dis­tri­bu­tions if their prop­erty is ten­anted. Th­ese re­flect the rent paid less any rel­e­vant fees and ex­penses and are paid into your dig­i­tal wal­let. Mem­bers can with­draw funds from their dig­i­tal wal­let to their nom­i­nated bank ac­count at any time. Cap­i­tal growth is the other way that mem­bers can re­ceive a re­turn on their in­vest­ment.

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