BRICKX: PROPERTY YOU CAN AFFORD
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.