Property Investing: Enabling fractional ownership of institutional-grade real estate assets

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 13, 2020 - July 19, 2020.
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Institutional-grade real estate assets, which are stable and profitable in nature, were previously inaccessible to retail investors. However, recent technological and regulatory advancements have lowered the barriers to entry. 

Using blockchain technology to tokenise property investments, Singapore-based investment platform Shareable Asset (SA) allows investors to fractionally own institutional-grade real estate assets. Of the five financial technology-driven securities companies utilising blockchain technology that have been approved in the city state, SA is the first to provide such assets to retail investors, says its co-founder and executive chairman Will Lee. 

“Previously, owning a portion of or a minor stake in these types of real estate investments was almost impossible. These assets — which may be corporate properties in prime locations in major cities around the world — were only made available to institutional or high-net-worth investors,” he points out. 

“Retail investors typically did not get to enjoy the benefits of owning such assets. This is the problem that we want to solve. On our platform, people can invest as little as S$100 (RM307.66) to own a piece of high-quality real estate.”

According to PwC’s Real Estate 2020 report, the value of institutional-grade properties is projected to expand to US$45.3 trillion (RM194.19 trillion) this year and to US$69 trillion by 2030. This expansion will lead to a greater range of opportunities for the real estate investment community, says the report.

SA aims to tokenise assets worth between US$50 million and US$100 million this year and provide investors with returns similar to or better than what they can get from real estate investment trusts (REITs). SA CEO Wong Kook Fei highlights that there are several major differences between its platform and REITs. For instance, REITs issue shares that are traded on the stock market, which has been very volatile over the past few months. 

“If investors had panicked and sold their REIT shares about three months ago, they would be regretting their decision now because the rebound has been quite sharp. There is no turning back once they sell,” says Wong. 

“There is no such volatility on our platform because we are dealing with physical assets. And since our investors buy in fractional amounts, the volatility will not be high, even in a crisis. In fact, short-lived crises may not affect the prices at all.”

The management fees and other costs of REITs are relatively high compared with SA’s platform, he adds. Their initial public offering costs and expenses are usually between 1.5% and 2% of their portfolio value. 

Most REITs allocate profit to pay annual management fees of 0.25% to 0.5%, on top of the portfolio acquisition and divestment fees. In addition, its dividend yield is expected to be lower in the future as some countries have recently lowered the mandatory dividend ratio from 90% to 50%, says Wong. 

“REIT managers deserve the high fee charged because the value of their portfolios are high — it can even go as high as US$5 billion. At SA, we charge investors a nominal investment fee of 0.3% to 0.5%. 

“While investors only own a fraction of the property — perhaps 1% to 15% of it — they are the legal owners of the asset. This means they have better control over what happens to it such as refurbishments and renovations, compared with ownership via a REIT.” 

Investing via a platform such as SA is not the same as pooling money to buy a property with friends and families, says Wong. The value of SA’s assets ranges from US$50 million to more than US$100 million, so one would need to find hundreds, if not thousands, of partners to make it work. 

“There are a lot of investment clubs in the region which see the participation of friends and families, but I don’t think they are able to manage projects as large as the ones we are issuing on our platform,” he points out. 

 

A focus on defensive asset classes

Before an asset can be tokenised and listed on the platform, it must go through a process that includes legal, financial and operational due diligence as well as related verifications. All the information and documents relevant to the investment are made available to SA’s investors. 

Wong says that despite the due diligence performed by the platform, such investments do carry some risks. Hence, investors are required to do their own analysis before making an investment. 

“We do not have a licence to provide financial advice. However, we do hold events such as webinars to answer all the questions investors may have about the platform or our issuances,” he says.

SA’s first issuance, which was launched last month, is a student housing building in the UK. Having recently completed renovations, Horizon is a 10-storey development with 154 deluxe and superior studios in the heart of Sunderland city centre. It is located near the University of Sunderland’s Sir Tom Cowie Campus and City Campus. 

Wong says the platform is starting with the student housing development as it is a very defensive asset class. “Of course, now that we are in the middle of a pandemic, all lectures are done online. Having said that, we still decided to proceed because we managed to negotiate a three-year rental guarantee from the developer. We are quite confident that the situation will return to normal after three years.”

Based on data gathered from various sources, the SA team has found that there is a huge shortage of private student accommodation, he adds. This strengthens its position as a defensive asset class. 

“The university has almost 20,000 students. Most university campuses are quite old and do not have enough capital expenditure to expand or renew their buildings [to fulfil the demand for student housing]. This opportunity is the reason institutional players such as private equity firms and sovereign wealth funds are investing in private student housing developments,” says Wong. 

According to a December report by real estate firm JLL, construction volumes of purpose-built student accommodation have fallen 25% in the last three years. Meanwhile, an additional 500,000 full-time students will be attending university in the UK by 2030, pointing to a potential 75% increase in demand over the next decade. 

Wong says its first listing will provide investors with a 9% yield per annum, guaranteed for the first three years. This is a good opportunity for investors, given that it is hard to find such yield anywhere in the world, especially in markets like the UK, he adds. 

The SA team is working on a few deals in the pipeline. Apart from student housing developments, it is also looking at aged care homes in the UK. These homes provide accommodation and personal care for senior citizens who need extra support in their daily lives, which includes helping them to eat, wash, dress, go to the toilet or take their medication.

“This is a fantastic asset class with growing demand. There is low to no payment risk because the UK government pays for the care of elderly people who cannot afford it. This is a very defensive asset class that can provide investors about 10% yield per annum on a broad basis,” says Wong. 

In the UK, the government foots the aged care bill for a person with less than £23,250 worth of personal assets. Its Office for National Statistics projects that more than 24% of people living in the UK will be aged 65 or older by 2042, up from 18% in 2016.

“We have decided to focus more on the UK as it is a developed and tested market, where there are a lot of real estate investors. We think it is a market where investors can get a decent return — not only dividends but also capital gains over the long term,” says Wong. 

He adds that SA was recently appointed a sub-distributor of a real estate fund in Singapore, which will be launching a portfolio of 4-star and 5-star hotels in Australia. “For example, let’s say they want to raise S$50 million and have allocated S$10 million for us to raise. We will accumulate this amount from our investors and then feed it into their fund. This [sub-distribution] is another model we are actively looking at.”

Currently, SA’s investors can only exit their investments by a majority vote to sell the asset, says Wong. Investors can only trigger a sale on their own if they own more than 51% of the asset. “We do understand that some investors need liquidity, so we intend to allow them to exit on an annual basis, providing a chance for new investors to take over.”

In the fourth quarter of this year, the SA team will apply for a Registered Market Operator licence. This will allow the platform to run an exchange and its investors to buy or sell their tokens. The company currently holds a Capital Markets Services licence from the Monetary Authority of Singapore.

Any individual who has completed and passed the onboarding process can invest directly in projects listed on the SA platform, except investors based in the US. Since its launch on May 19, the platform has registered more than 500 users, mostly from Singapore and South Korea.

Apart from real estate, SA can also tokenise other assets such as commodities. But in the short term, it is looking at debt investment products. 

“For example, a real estate owner wants to raise 70% of the property value. It can issue the debt on our platform, making our investors its lenders. This is very similar to products issued on peer-to-peer lending platforms. In the long run, we are definitely planning to look at the whole spectrum of capital market products, not just real estate,” says Wong.