Ky: We are now joined in our Sydney studio by Arthur Naoumidis. He is from DomaCom. Now, Arthur, I was going to try to explain to the viewers exactly what you guys do, allowing people to fractionally invest in property, but perhaps you can better explain what it is and how it’s different, for example, in investing in a real estate property fund or a trust, for example.
Arthur: Okay, the key difference between DomaCom and real estate property fund is choice. Our platform allows advisers and investors to select the property of their choice and then to syndicate, using an online process, the investment. So they’ll syndicate investment and then DomaCom acquires the asset using a fund structure. So you’ll end up owning a share of the underlying sub-fund that owns the particular fund. So basically it’s another form of crowdfunding, it’s another word for it, but it’s really modern syndication using an internet-enabled platform.
Ky: Okay. And how many people tend to invest?
Arthur: It varies. The smallest is about five or six people in one property or one property sub-fund. The largest is 93 people have syndicated together to acquire a cattle farm in the western district of Victoria. It’s really whatever suits. Normally though, for an adviser-backed campaign, they would syndicate 8 to 20 investors together for a normal residential property.
Ky: Okay. Now, I’ve got to ask. Everyone in Sydney, everyone in this country really fancies themselves as a bit of a property expert, and everyone knows we’re in the middle of a bit of a downturn to put it mildly. So they must think, “Well, geez, you really picked your timing poorly here,” but you don’t think so at all, do you?
Arthur: No. Actually, it’s a good time. Basically all we really do in DomaCom is take equity concepts and apply them to property. Similarly, in an equities market, when you’re a year and a half into a downturn, another way of looking at it is that you’re a year and a half closer to the end. In the property world, the rent hasn’t gone down by 14%, 15% as the property has as a capital price. So therefore what’s happened, the yield has gone up. If you’re ever looking to invest in residential property, it’s a lot more attractive now than it was a year and a half ago.
As a business, what we suggest to investors…in fact, we don’t need to because the advisers do it themselves. They use dollar cost averaging. Exactly what you do in the equity market, you’re never going to pick the bottom except through the rear-vision mirror. So, what you do, the advisor will syndicate property this quarter with 20 clients, another property in the next quarter and so on. Now, sometime in the next year or two, the downturn would finish. Meanwhile, the adviser and the investors have got on the property ladder at a reasonably low price. With the yields being this attractive, at some point, it will turn.
The other thing I’d like to say is that, unlike equities, property has a demographic driver. Every year there’s another 100,000 people that need a home. It’s not discretionary. We need somewhere to live. This will fix itself in time, and it won’t be that long, I don’t think. But anyway it’s better now than a year and a half ago.
Ky: Because I suppose that’s the thing. I mean, you say people shouldn’t try to pick the bottom. Of course, that’s what people always try to do and so I can see that this concept of dollar cost averaging, as you said, probably makes quite a bit more sense there.
Now, I also want to know a little bit about how things have been traveling. Obviously this is a concept that’s not all that common. How have the investors been receiving and understanding it?
Arthur: Look, it’s been a bit of a journey. It’s taken us seven and a bit years to get to here. We’re 7 years towards a 10-year overnight success, but I’m pleased to say the last 6 months, we really kicked some goals, had some nice milestones. So, started with last year, we won a Federal Court appeal against the Australian Tax Office for what’s called a Sole Purpose Test. Investors will see that later where you can use your superannuation fund to invest in a sub-fund and have a relative live in it, which is not normally available. In certain circumstances using the DomaCom fund, that will be available.
The other is that we’ve got another product we’ve been working on for six and a half years with ASIC, the regulator, which enables people to sell a fraction of the house. This is a product for the retirees which is to fund the retirement lifestyle. We got that approved by ASIC in November so we’re a couple of weeks away from launch of that product, and it’s a very, very compelling product.
Ky: Is that like a partial reverse mortgage or a fraction of it?
Arthur: It’s a competing product to reverse mortgage. So instead of using debt, use equity. So I sell a bit of my house. If I sell all my house and wanted to live in it, I’d have to pay rent. So if I sell a quarter of my house, I have to pay rent on that quarter. That’s the business model.
And so what we do is enable SMSFs, self-managed super funds, to invest in the equity. So it provides a very good long-term investment for the superannuation including income of 4% plus capital growth. For the vendor, it provides a very easy-to-understand equity release so they can fund their retirement lifestyle. In fact, they’re the two big things at DomaCom. One is housing affordability which is fractional investing. You don’t have to buy the whole house. A lot of people can’t buy the whole house. A lot of people can’t buy. So DomaCom allows you to get into the property market as little as $2,000. In reality, you want to be in $20,000 or $30,000. The other one is housing affordability. So two big demographic drivers not just in Australia globally and so DomaCom has a product. Now, sure, we’re an Australian-regulated product but we work anywhere in the world where mutual fund or collective law or managed funds work, which is pretty much anywhere in the Western world.
Ky: And so obviously it’s more liquid investment as well, right?
Arthur: Well, it’s more liquid. Rather than selling a whole house, you can sell a bit of the house, etc. But the other advantage is that, as far as I’m aware, we’re the only platform with these permissions. As part of our financial services license here in Australia, we’ve got what’s called market maker permission. So we can make a market in their instrument, and the way we’ve done that for all you equity people is that it’s a market depth screen. Bids on the left, offers on the right. And if the bid and offer price matches, we buy off the vendor and sell to the purchaser instantaneously, and it settles immediately. It’s a very attractive feature and we’ve already had several dozen transactions. Property is not a trading asset, but lifestyle events occur, “I lose my job,” “I get sick,” or whatever it is, and people will need to liquidate. And, here, they only liquidate that small portion they need. You don’t have to sell the whole house, and that’s the alternative. You put $100,000, you borrow $900,000, you take concentration risk. Here, you would never do it in equity, so why are you doing it in property?
Ky: Absolutely. There’s such a gulf, isn’t there, between the liquidity people normally think they have between. Well, it’s either going to be shares and cash or a property that I’m going to struggle to ever sell or move. I want to talk about the royal commission because you do get a lot of your business from financial advisers. What have you seen in the wake of the banking royal commission?
Arthur: Well, the royal commission really doesn’t have much impact on the advisers that use us because they, by definition, have to be what’s called fee-based advisers. So these are advisers who already have a business model where they charge a fee for their service, and what we’ve done for these advisers is enable them to deliver that service to include residential because the reality is, as a financial adviser, you enter into service contract with a client. I’m going to look after your retirement future, your finances, and make sure that you’ve got enough to live on and everything else. Up until DomaCom came along, the advisers couldn’t advise on the residential asset class. I’m ignoring the biggest asset you’re going to do and leaving you at the risk of being solved by property spruikers. So DomaCom allows the financial planner now to, for the first time, include residential property within their fee-for-service model.
So basically the royal commission doesn’t affect us because there is no trailing commission in DomaCom and it’s not part of the financial planning market that uses us. We don’t have any institutional planners using DomaCom. They’re all independent financial planners.
Ky: So tell me what is next. What kind of news flow can investors look out for? I know you’ve had a lot of milestones recently.
Arthur: Well, I think you can take from some of the recent news particularly on the announcement a couple of weeks ago where we’ve got our lender. It’s taken five years to get any financial services organization to lend to us and we’ve got a firm called La Trobe which is owned by Blackstone in the U.S. So they’ve agreed to do an initial $50 million funding line to us. Now, what this enabled us to do is $100 million worth of properties. So, for the next little while, you’ll see our funds in our management grow, and that was the next announcement which is about a week and a half ago is that we’ve reached $50 million. I know it’s not big bucks. For those who are…you know, our business model, we charge 0.88%. We’re a fund manager, so we charge 0.88% of the gross value of the property, and so basically it’s our farm that really drives their revenue. We’ve hit a reasonable milestone, which is $50 million. The next year we’re going to see that accelerate.
In addition to that, we’ve got two big things coming. We’re in the middle of a pilot by a Big Four bank and our business model is that we’re not a B2C plan. We are B2B so we’re the intel inside for financial planning services, and our strategy for the consumer part of the market is that we will get a big organization with a large consumer footprint to basically take fractional investing to the masses. And I’m pleased to say we’ve got a Big Four bank in the middle of a trial. Now, we don’t know what’s going to happen. The probability could be anything, but I know what it’s not—it’s not zero. They’re in the middle of doing this. At the moment, I don’t think anything has been affected into our price if the bank were to proceed after the pilot, so that’s excitement number one.
And obviously here, in a month’s time, we’ve got an election and one of the two major parties, the Labor party is proposing to ban what’s called limited recourse borrowing from self-managed super funds. If they do, DomaCom will be one of the very, very few ways that self-managed super funds will be able to access leverage for the purposes of properties, the residential, commercial, or industrial, and we’re talking a market that’s a $40 to $50 billion mark right now. So, yeah, we’ll see what happens.
Ky: Yeah, absolutely. It sounds like there’s a lot for investors to keep an eye on, especially, as you mentioned, in the middle of a very high-profile election year. Okay, Arthur, thank you so much for your time.
Arthur: Thank you, Ky.