How investors can optimise their property portfolios with fragmented property
Published 13-FEB-2020 13:47 P.M.
5 minute read
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Property investment has been the bedrock of investment strategies for years and ownership has long been seen as a stable investment vehicle, offering tax benefits, rental income and capital gains.
Whilst traditional property investment will continue to be a central strategy for investors, new, digitally empowered asset classes are providing alternative ways to invest in property. Ways that are more affordable and more diverse that could potentially lead to greater wealth accumulation by creating highly optimised property portfolios.
Introducing fragmented property.
What is fragmented property?
Fragmented property is a new real estate asset class, whereby property is broken down into fragments for investors to purchase. For example, a residential property is divided into 20 fragments, with each of those fragments valued at one twentieth of the total cost of the property. Each fragment is purchased by an investor, with that fragment registered to the investor on the title deed.
Fragmented property offers investors direct access to holding property in their investment portfolio, without needing to purchase an entire property outright. The added benefit of fragmented property investments is that they are passive, liberating the investor from having to manage the actual property.
For investors looking to optimise their property portfolios, whether it be for wealth accumulation or within their SMSF, fragmented property may open doors to new opportunities. Here are three strategies on how investors can maximise their investments in fragmented property.
Fragmented property gives investors the choice of where and which type of property to invest in. It's not a fund, nor is it a trust. It is an investor deciding on purchasing a fragment of the exact property they want. This means you can utilise your property market expertise and knowledge to purchase fragments in areas where you think the market may boom.
Savvy fragmented property investors are identifying development opportunities that have the potential for significant gains. These opportunities wouldn't traditionally be open to investors unless you knew a developer and could cut a deal.
Essentially, fragmented property enables developers to fund property developments. Developers purchase the land, which is then divided into fragments, with the majority being sold to investors to raise capital for the build – much like a company does when they IPO.
Once the development is built, the value of the land and the fragments could increase substantially.
For those looking into fragmented property as an investment vehicle, getting in on early-stage developments has the potential to realise strong capital gains, which would have traditionally been out of reach for most investors.
Just like traditional property investments, fragmented property is a long game. It's not a one-year play. It's a three to five-year investment. This is to ensure you maximise capital growth and capture rental yield generated through the fragment.
Where fragmented property differs to more traditional methods of property investment is that it gives investors control, as well as greater flexibility.
This is significantly different from fractional property investments and Real Estate Investment Trusts (REITs) of the past.
With fractional property and REITs, investors do not have complete control of their investment. If the majority decides to sell a fractional property, then all have to sell. And, the same with REITs. If the trustee decides to hold a position, you are also stuck holding that position no matter what your better judgement may tell you. The added worry with both is if they crash and burn and cease to exist, your investment will go with them as you do not 'own' the fragment – you aren’t on the title. You just own a portion of their trust or fund.
So, to optimise your investment, get on the title and go long. Play the property game like it’s supposed to be played and ensure you can take control of optimising your property portfolio.
The other benefit of fragmented property is the ability to spread your investment over different properties, diversifying your exposure across varying geographies and property types. Diversification is a central tenet of a strong investment strategy. The accessibility of fragmented property allows investors to create a diverse portfolio without spending millions of dollars.
Whether it’s different locations or property types, the diversification opportunities of fragmented property are unparalleled, enabling investors to optimise their property portfolio better than ever before. All while minimising the risk of house price volatility thanks to a better property spread.
Furthermore, as the market matures, we will see a greater variety of property assets become fragmented, offering never seen before opportunities for investors.
Overall, fragmented property investment has the potential to help investors optimise their property portfolios, reduce risk and gain access to yields and capital gains that would typically be out of reach. It changes the way we treat property, whilst helping SMSFs meet ATO requirements when it comes to diversifying their property holdings in their portfolios.
This emerging asset class should be watched with great interest, as it may transform the accessibility, control and diversification of property investments within Australia.
Greg Dixon, Managing Director and Licensee at FUTUREALTY.com.au
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