Tim: Today we’re joined by Arthur Naoumidis, the CEO of DomaCom. Arthur, can you tell us a little bit about the company you’ve established and your background?
Arthur: My relevant background was I founded the company called Praemium. So it’s a portfolio management system very strong in equity. So I left there just nearly five years ago. And to come up with the idea for DomaCom was, you know, in October 2011, I look back at Praemium to see was there a problem that needed the solution? And the thing that really stood out to me was, we had 44,000 portfolios in Praemium with about $45 billion being reported, focusing just on the 18,000 self managed super funds, which is about 4% of the market. I noticed a problem, and the problem was 90% had 0 winding to property and 10% was nearly 100% winding to property. And they highlighted the problem with property, which is a large transaction size relative to most portfolios. And so that’s what we set out to solve, was this issue of trying to address the property asset location for investors.
Tim: Your company is focused on a new way of investing in property. Can you explain to us what is fractional property investing?
Arthur: It’s pretty similar to something that most investors are very familiar with. And that is taking the direct equities model and applying it to property. In other words, taking a large asset and break it up into bite-size chunks for investors. So that way you can go in and take your $100,000 and spread it across 10 properties as you would equities. At the moment, if you were to take that $100,000 and buy property, your only way would be to borrow $400,000 and buy a $500,000 apartment. Now the problem with that asset allocation, you’ve extended your asset allocation to probably very unreasonable levels. And, B, concentration risk and leverage. So here is that you can take your $100,000 and get diversified access to property by taking property and breaking it up into bite-sized chunks.
Tim: The DomaCom fund is a new way to invest in property. Can we now spend a little bit of time understanding the investment process and the mechanics behind how it works? Is it correct that financial advisors have to be accredited before they can advise clients on the fund?
Arthur: Well, yes and no. But firstly, we’re not like any fund that’s ever existed in Australia. So one of the conditions on our license from ASIC is that for advisors, before they’re given the keys to the car, they must undertake a special course and test to make sure they understand how a product works. So for most investors, that’s how you do it. Now recently, we’ve extended our platform to allow for very special crowdfunding campaigns. Investors can come direct through to those crowdfunding campaigns through DomaCom.
Tim: Can we understand how fractional property investing works in practice?
Arthur: Practically what we’ve done is we’ve created, I think, we’ve named it a segregated property trust. So it’s one big fund, the DomaCom fund. And we create a sub-fund for every property, be a $70,000 car park, right up to a $30 million supermarket. So we create a little sub-fund, and when you invest, you get units in that sub-fund. So that’s the legal structure. But DomaCom itself is the legal structure plus a technology platform. And their technology platform is effectively what is normally known as the crowdfunding. It’s the layer on the internet that enables people to pull together to say, “We wanna buy that,” and that is anything they like.
Now our process starts with the investors identifying, or with their advisor, the property, and we allow them to select any property. However, when they get to 30% of the target, for example, if it’s a million dollar property, when we get to $300,000, we begin fund manager due diligence. So at that point, we engage a conveyancing solicitor to check the contract and title. At 50% we go through to doing physical due diligence. So we do building inspections, pest inspections, if necessary., ad we do full valuations. So by the time we complete what we call the book build, which is our version of crowdfunding, is that we have all the due diligence completed, and we will only allow the book build to complete if we are happy that the property is as specified and is in good condition and the valuations within the target that we’re aiming for.
Tim: The fund is a managed investment scheme. So it works like any other managed fund where an investor buys units, except that we start with a cash investment. Is that correct?
Arthur: Yes. So we’re very similar to a normal… Yeah, we are a registered managed investment scheme. It did take us three years to get what’s called the reliefs from ASIC. And we were very relieved when we got them. And the reliefs were basically exemptions of the Corporations Act that make our fund work. And so the process is before you can bid in a book build, it’s a bid to acquire an interest in a property, you must have cash in our cash pool. And when you make a bid, the cash stays in your cash account. However, we quarantine it, so you can’t use that cash to make another bid unless you release the current bid. So that way we know when we’re making bids that they’re fully cash-backed.
Tim: Once an account has been established, how are the properties chosen? And is that in conjunction with the advisor discussing this with their client?
Arthur: Generally what happens is the advisors, just like they would do in any normal fund, they do some due diligence on whoever’s going to select the property, and usually that’s not the advisor. So the advisor would engage a buyer’s advocate, for example, and say, we’ve got a client base with an interest in income, producing property or growth or whatever they like. And what happens is that the property buyer’s advocate will go source the properties and explain why they’re good fit for the investors. The advisors do effectively asset allocation advice. So they set an advice, as you know, “Tim, you should have 20% in property, and for your portfolio, that means $200,000. We suggest that you diversify across a bit of Resi commercial, industrial, and within Resi, some Melbourne, Sydney and Brisbane.”
That’s the advice of the advisor, and then comes in the specific property selection and that’s done by the buyer’s advocate. So it’s a combination of the advisor giving you asset location advice and the property advisor selecting the actual property. And then at the end of the day, you as the investor make the ultimate decision to proceed or not based upon what we produce, which is a supplementary product disclosure statement for that property.
Tim: What sorts of properties are listed on the DomaCom platform and how many properties have been purchased on the platform?
Arthur: We’ve got thousands, in fact, 26,000 properties listed on the platform. But in reality, our platform allows investors to buy any property for sale in Australia. As we’ve pointed out to people in the past, we don’t need the vendor’s permission to be a buyer. So it’s whatever the investors want to buy. So far, we’ve acquired 20 properties, and we’ve got another 38 transactions going on as we speak. So we’re at that pivot point. And then we’ve got some of the bigger ones coming. So we expect over the next year to see our platform really ramp up.
Tim: From an asset allocation perspective, what sort of properties are we talking about?
Arthur: One of the key structures or theories behind DomaCom is that we’re not focusing on a specific property sub-type. In fact, our suggestion is that investors should diversify across all sub-types. So Resi commercial industrial rule, and so in DomaCom, at the moment, we have car park, student accommodation, we have residential properties. We’re about to have our first commercial properties and also a real property. So the reality is we’re expecting time to have the whole spectrum of properties in DomaCom.
Tim: Once the property is chosen, what are the next steps?
Arthur: So what happens is that the book build starts and the advisor on your behalf or the investors behalf would make a bid. And let’s use an example, we’re targeting a million dollar property. As we start, as the book starts being built, as we indicated before, we do due diligence at 100%, DomaCom issues a supplementary product disclosure statement, which is the formal offer for every investor to subscribe for units in the sub-fund that will exist if we are successful. If everyone says yes, then it’s binding. We then appoint a buyer’s advocate who tries to buy it for us. If we are successful we then create the sub-fund, take the cash out of your cash account, give your units in the sub-fund, we take the property, put it under the ownership of perpetual corporate trustee as custodian for the DomaCom sub-fund. We appoint a property manager. If one’s not already appointed, who finds a tenant, if one’s not already found. And then our business as usual model is we collect the rent or the rent is collected pass through us, and on the same day we receive it, we give you your share. So if you own 10% of the property, you get 10% of the rent.
Tim: What sort of investors have been attracted to this style of property investing?
Arthur: Really, it’s all investors, it’s investors who need a bit of property exposure. It’s young investors who want to get on the property ladder, because it’s, you know, if you’re trying to save for your deposit, and at the moment you’re saving in a bank account, it’s not tracking property, is it? So with that low minimum of $2,500, so it’s not just the investors, it could be their children as well. So it’s all investors who want exposure to property.
Tim: What are the fees associated with this type of property investment?
Arthur: The two sets of fees, one is the same fee that you would normally pay if you bought the property yourself. So there’s valuations. There’s inspections, there’s conveyance and checks, all of those are there and DomaCom makes nothing from that. DomaCom has no entry fee, no exit fee fees. It’s only the annual manage expense ratio, it’s 0.88, including GST, of the value of the asset every year. So we divide that into 12 if we’re collecting rent on a monthly basis, and that’s what we charge as the advisors will understand that it’s a wholesale right that we’ve used.
Tim: How does an investor exit their investment?
Arthur: I think DomaCom has several liquidity mechanism. The first is that every sub-fund has a defined period, and it’s normally five years. And so what happens at the end of the five years, all investors vote and to renew it for another five years, or to liquidate the sub-fund, which means sell the property. Now it must be 100% vote to renew. So that’s the first liquidity mechanism. Now we do have a method in which if 99% want to renew and 1% don’t, the people who want to renew have 30 days to buy them at the valuation that we have. So that’s the first liquidity mechanism. At any time investors can vote to wind up the sub-fund.
And if we receive 75%, wanting to wind it up, what we do is we sell the property, we then redeem everyone’s units and give them their share of the proceeds of the property and the sub-funds run down. But the real liquidity mechanism that’s unique to DomaCom is that, as part of our financial services license, we’ve obtained what’s called market maker permissions. So we’ve created a technology and legal process which is very similar to shares. So you there’s a bid and offer exactly like there would be shares. So the reality is if you wanna sell your, you know, if you buy 100,000 $1 units at, you know, one year and you wanna sell them next year, you think you can get $1.05 for them, you offer them for sale. And a prospective purchaser may agree and take them or may say “I’ll give you a $1.04.” So it’s just exactly like shares. We’ve registered the fund in Victoria, so there’s no stamp duty on the secondary trades. So that’s the real liquidity mechanism behind DomaCom.
Tim: What is the minimum time-frame for investment?
Arthur: The minimum is usually the five-year for the sub-fund. Having said that, you could buy, you know, invest in a property today and sell on the secondary market tomorrow, if you wish, but we do suggest property is a medium to long term investment and clearly investors coming into DomaCom should view their investments similarly.