Alan: Hi, I’m Alan Kohler. And I’m talking to Arthur Naoumidis, who’s the founder and CEO of DomaCom Limited. Now, Arthur has designed a fractional investing platform that allows investors to get exposure to property without having to borrow to buy the whole property. Hey, Arthur.
Arthur: Good. Hey, Alan. How are you?
Alan: Very well. Now, as a shareholder of DomaCom, I’m obviously keenly interested in your business. Why don’t we start with what is fractional investing?
Arthur: Basically it is a process of breaking up properties into bite-sized chunks for investors, but doing so in a legal structure that protects them.
Alan: And what do you mean by legal structure? You mean it’s a trust that protects them? It’s in what?
Alan: So how does the system work?
Arthur: Like-minded investors are pulled together to participate in what we call a bookbuild, otherwise known as syndication, so that they can raise the funds to acquire a property. At the end of the process, DomaCom on successful purchasing the property, takes the title of the property and puts it under the ownership of perpetual corporate trustees as custodian for the fund. And then we proceed to manage the property.
Alan: So, in effect, each property is a managed fund in itself?
Arthur: Yes, it’s a very special legal structure which is unique in Australia and, as far as we’re aware, in the world and this legal structure effectively creates a little sub-fund for every property.
Alan: Is the property then rented out?
Arthur: Yes. We appoint a commercial property manager who finds a tenant, if one is not already there. And we collect the rent exactly as would normally happen. And the only difference is that on collecting the rent, we then stream it to investors in proportion to their ownership.
Alan: So who chooses the properties?
Arthur: Well, investors do, either directly in terms of via the system or via the media or, more than likely, they also may hire a buyer’s advocate to select a suitable property that would meet their investment objectives.
Alan: But if I’m driving down the street and I see a house for sale, and I think I’d like to have a piece of that house, can I then propose that house that I’ve seen as part of a bookbuild?
Arthur: Yes, Alan, exactly. And in fact, one of the objectives of DomaCom is to simulate the process of investing in property in almost every way. In particular, if I like that property, I can then go into DomaCom through my advisor or directly and initiate a bookbuild to acquire that property, any property in Australia.
Alan: And have you at DomaCom also been choosing houses to put up as bookbuilds?
Arthur: We’ve been facilitating the process, but we don’t choose the properties per se. We already have 20,000 properties listed on the platform through LJ Hooker, but also every property in Australia is available.
Arthur: So in a sense, it’s like a syndicate, is it?
Arthur: Yes, yes. It’s a modern form of syndication, except it comes with obviously additional corporate governance and legal protections but, in particular, comes with very advanced liquidity functions as a lot of people who’ve participated in syndicates know, once you’re in, you’re stuck. In our model, we have several methods of getting out.
Alan: So it’s not like owning a horse or part of a horse.
Arthur: Well, No, no, this is a real investment.
Alan: And how long does the sub-fund go for?
Arthur: Well, the actual liquidity that you mentioned this relates to two aspects. One is every sub-fund has a five-year term. At the end of five years, all investors vote to either renew it or not. So there’s a point, so five years we’ve determined from feedback from investors is a good timeframe to revisit the decision whether you want to continue or not. But, in addition to that, we have what we believe is a very unique permission as an Australian fund manager, is that we’ve created a secondary market. Just like you can buy and sell shares on a stock market, you can buy and sell your interest online anytime.
Alan: So you don’t really need to wind the fund up at the end of five years. You can just sell them whenever you like?
Arthur: Yeah. In reality, we expect most funds will never be wound up and that investors, when they want to exit, will actually just simply sell their units to other investors such as the Gen X, Gen Ys who want to get on a property larder. And having registered the fund in Victoria, there’s no stamp duty on the secondary trades.
Alan: So tell me how DomaCom makes money out of this.
Arthur: We’re a fund manager and as a fund manager there’s what’s called a management expense ratio, really it’s our fee. You know, at the end of the day we’re a business and our fee is 0.8% plus GST, so it’s 0.88. Now, in the world of managed funds, that is very low.
Alan: Well, as a shareholder, I’m saying it’s not high enough. Arthur, come on, you can do a little bit better than 0.8%?
Arthur: Oh, no but it’s a competitive world and, you know, our view is that we’re after volume and at volume you’ll do very well, Alan.
Alan: Is there a limit to the number of people who can come in?
Arthur: No, no, basically in the bookbuild, as many people as required… The minimum to participate in the DomaCom Fund is $20,000 (UPDATE: you can get started fractionally investing in property from as little as $2,500), but at a particular bookbuild or syndication process, it’s $2,000. So, say it’s a $400,000 property, you know, you can have quite a lot of people in that. But once the bookbuild is complete, we then freeze the investors and they’re the ones who own the property when we acquire it. But, as I said before, on the secondary market, you can buy and sell.
Alan: So I don’t understand the difference between the $20,000 and the $2,000. It’s $20,000 to go on the managed fund, $2,000 to go on the book-build. What’s the difference?
Arthur: Okay. The difference is that the DomaCom Fund has many sub-funds, as we talked about before. So it’s 20,000 to become a participant in the fund. Having put your 20,000 into the fund, you can then choose to put $2,000 in 10 individual sub-funds, if you wish. That way, you get diversification with as little as $20,000 in property.
Alan: So with $20,000, I can spread my risk even further. So if I can put as little as $20,000 into residential property and then I can spread that among, you know, at least, you know, 10 others?
Arthur: Yes. And that’s one of the whole, you know, the vision behind DomaCom is to create a solution for investors. Now, in any other investment class, you would never put all your investments into one investment. You’d never put it all into one stock, like BHP. You’d spread it. Well, why don’t people do the same thing for property?
Alan: Well, they should. But they will say they can’t because you have to buy the whole thing, right? And if you’ve only got half a million to spend, you’re stuck with buying the whole property wherever it might be.
Arthur: That’s exactly why we’re here. So, using DomaCom, investors can do both things. They can choose the properties they wish to invest to, but also they can diversify. So, for example, if you had a $100,000, Alan, and you spread it across five properties or $20,000 each, what’s the chance of all five of them being untenanted at once? Very, very slim.
Alan: But I presume also I can spread that among five properties all around Australia?
Arthur: Yes. Yes. Yes. In fact, that’s the whole idea. When you use diversification, it’s not just diversification across assets, it’s about geography, but also diversifying across subclasses, like industrial, commercial, and residential. DomaCom is not just residential.
Alan: So you’re investing in industrial and commercial property as well?
Arthur: Yes. Imagine being able to invest a little bit in a flagship investment like a KFC building being the landlord. Well, you can choose not just any KFC, the one that you use.
Alan: So how do we get started, Arthur?
Arthur: Well, you go see your advisor. (UPDATE: you can get started immediately by signing up for a DomaCom account.)
Alan: You have to go to an advisor?
Arthur: You do because, as you can appreciate, this is a very, very new type of managed fund structure. In fact, it’s unique in the world and one of the restrictions that we have is that investors must go through an advisor to ensure that this is appropriate for them.
Alan: Thanks, Arthur. Now, there you go. DomaCom is worth a look if you want to expose yourself and your clients to property investing.