The new fund looking to simplify property investing

Property investing is an enduring mainstay of the landscape for Australian investors. While returns have often been exceptional, it's still an asset class with its own unique set of challenges, whether that’s high barriers to entry, liquidity concerns, ongoing costs or concentration risk.

Now, an Aussie fund is looking to flip the script on how investors can access the Australian residential property market. The Brickfloor SMART Australian Housing Fund, launching in H1 this year, is set to offer investors low friction exposure to the domestic property market.

It is advised by some well-known Australian figures including Matthew Quinn, the former CEO of Stockland, and economist Saul Eslake.

The fund is targeting residential property returns plus 2% p.a., implying total returns of 9-14% p.a. (post fees, pre tax), whilst offering stronger diversification, better liquidity and less hassle than an investment property.

To learn more about the fund and get Brickfloor's outlook on the property market, I spoke to founder and CEO Dean Fraser. 

Addressing two core problems

There are two key issues Brickfloor is looking to solve.

One is the difficulty of the home-selling journey itself. Through its Market Price Guarantee (MPG) product, which locks in an agreed price for vendors looking to sell their home in return for a 2% fee on the sale, Brickfloor can offer 100% selling certainty, better selling outcomes and the ability to safely buy before selling.

And this product leads into the second problem Brickfloor is looking to solve: simplifying property investment for those looking to access the market.

The answer there is the Brickfloor SMART Australian Housing Fund, an unlisted fund that buys a diversified portfolio of Australian residential properties via its MPG product and offers high-quality, responsibly-geared property exposure without many of the drawbacks of direct property investment.

“There's a lot of friction in terms of gaining exposure to the property market in Australia, whether that be finding a deposit, servicing a loan, identifying the right type of property to maximise capital growth and dealing with the typical landlord headaches,” says Fraser.

“Through providing simple exposure to a diversified portfolio of high-quality residential properties, the high barriers to entry are removed, providing a strong solution for wealth creation via the fund.”

What it offers investors

“The fund offers simple exposure to a portfolio of high-quality Australian residential properties, meeting pre-defined investment criteria, with a focus on established houses rather than apartments or new builds,” says Fraser.

He cites three key strategies for using the fund that he sees as powerful for investors.

“Firstly, the fund provides an investment property alternative, so rather than directly buying a single investment property, you can invest into a diversified portfolio of blue chip residential properties,” says Fraser.

“Secondly, the fund provides an innovative way for parents and grandparents to better plan for the future home deposit liability. Around 60% of parents help their children onto the property ladder and yet there is no structured way to plan for this major future event. The fund provides a market hedge allowing you to better plan for your child’s or grandchild’s home ownership aspirations.”

“And thirdly the fund provides general portfolio diversification, significantly reducing the volatility of a typical growth portfolio.”

For investors concentrated in equities, accessible exposure to property can add much-needed diversification.

“A diversified portfolio of residential property has a very low correlation to the share market at around 10%, and around 60-70% less volatility,” says Fraser.

“As an example, if you add 20% of residential property into a growth portfolio, you reduce your standard deviation of returns or risk by about 18% without compromising your returns. Introducing residential property into a portfolio adds real benefit in terms of volatility reduction and ultimately improves risk-adjusted returns.”

The beta offered by the property market could also prove valuable in the event of a stock market correction, says Fraser.

“There is a low correlation between the equities market and the residential property market,” he says. “Things like population growth, housing supply and interest rates, which impact housing prices, are not the same factors that drive the share market.”

A material pullback in the share market should not of itself feed through to a softening of the residential property sector, says Fraser.

“What would more likely occur is that investors would look to safer asset classes with strong asset-backing, less volatility and low correlation to equities, which would be supportive for alternative asset classes such as Brickfloor’s fund.”

How they generate an edge

The Brickfloor SMART Australian Housing Fund is targeting a 2% p.a. return above the average residential property return, implying total returns of 9-14% p.a. (post fees, pre tax) and looks to do so through a number of alpha-generating strategies.

Being selective

One is being appropriately selective and diversified in the properties that actually make it into the portfolio.

“Asset selection is critical to generating capital growth alpha. We’ve analysed over 2 million data points to guide our asset selection process. We’ve also proven up our investment criteria via our first fund, which delivered on average 2.4% per annum of capital growth alpha compared to the general property market.”

“As a residential property fund, you are exposed to the market, but there’s no single property market in Australia and when one market is struggling, other markets can be performing well,” says Fraser. “You need to have a diversified portfolio of homes to reduce risk and avoid being reliant on any one particular market.”

“As an example, if you put money into the Melbourne property market over the last three years, you would've seen capital growth of 0-5% per annum, ungeared. Whereas if you had put your money into the Queensland market, you would've seen capital growth of 10-15% per annum, ungeared. So having strong asset selection capability is extremely important to drive alpha, just like it is in the equities market.”

Adding income

Another is using its Market Price Guarantee product to buy quality houses at conservative prices, and to generate fee-based income on those property sales.

“We typically generate around 6% and potentially up to 12% of fee income per property purchase, with the vast majority of this flowing into the fund. This materially enhances our fund’s returns.” says Fraser.

Unique levers

“We also have alpha-enhancing levers inherent in our model – we're able to be more conservative with our MPG offer prices and to increase the 2% fee we charge to the home seller, particularly in weaker market conditions, to enhance fund returns," he says. 

“We also have a counter-cyclical home buying model in that we tend to buy more homes into our fund in weaker market conditions – which is typically precisely the time we should be accumulating homes.”

What they’re seeing in the property market

One fundamental thing investors get wrong in the property market is buying the wrong profile of property, says Fraser.

“We think that most people who have bought an investment property in Australia have acquired what we call less desirable or sub-investment grade properties. And that’s really a function of what they're able to afford."

"Typically this might be an apartment, or a house in the outer ring challenged by new incoming supply, valued at $600,000 to $700,000.”

“Whereas what we've seen through leveraging large data sets and the learnings of our first fund is that higher-quality properties, with greater land content, in better locations, and even with specific property attributes and price points have typically generated much stronger rates of capital growth.”

“Australians have bought a lot of investment properties, around $2.2 billion of them, but without a higher budget and careful asset selection they are often not buying the right types of properties.”

But the asset class remains a highly-compelling opportunity for investors, and why even the wealthiest Australians still allocate so much to the sector despite a surfeit of options.

“Residential property has proven over a very long period to be a safe way to preserve and to grow wealth. It is seen as a store of value for many high net worth investors,” says Fraser.

“The power of compounding capital growth from the residential property market over a long period of time is clear - approximately $600 billion of capital growth from the residential property market is generated each year on average."

"That's about three times more than the capital growth of all ASX-listed companies, equivalent to the market cap of two CBAs and about the size of the entire Australian federal budget.”

“It has been a very powerful driver of wealth for many individuals and for many will likely deliver more wealth on retirement than their super, enabling a dignified retirement post downsizing.”

“This is really the raison d’etre for Brickfloor’s fund – to provide simple exposure to Australia’s greatest and most stable wealth generator."