Just when you think you’ve hit upon something new and exciting, along comes a savvy business that thought of it first. How annoying.
So it was when, after raising the issue of how to make better use of the capital locked up in home equity, Business Spectator got a call from Arthur Naoumidis, chief executive of Domacom – a small start-up that plans to float next year, and which is offering a new investment platform that could radically reshape the way Australians invest (Unleash the property wealth beast, December 23).
To recap on the basic problem raised in November, a mish-mash of tax and superannuation law legislated by Canberra encourages a huge misallocation of resources.
For instance, an individual who chooses to rent homes throughout their lives and puts all their savings into traditional super – like the majority of citizens in many developed countries – is penalised at retirement for being ‘too wealthy’. Meanwhile, an individual who puts all their spare money into buying the biggest house they can afford, and who therefore retires with less income, is not.
Importantly, most super funds hold productive assets, whereas holding a house – particularly an ‘empty nest’ – means the capital locked up doesn’t ‘produce’ anything much.
And yet, rightly, retirees often want to stay in the homes their families grew up in.
Various schemes exist to free up some of that capital – reverse mortgages and other equity release products – but in the past, particularly in countries such as the United Kingdom, many householders lost too much of the asset they wanted to leave to their children. Cowboy operators gave equity release products a bad name.
But what if you could ‘float’ your house in the way a company is sold, in a unitised way, to investors? If you didn’t want to move out, you’d only have to retain a 51 per cent stake.
This, in part, is what Domacom’s new investment platform does.
Naoumidis and a handful of colleagues have spent the past couple of years developing a trading system that allows a home to be bought and sold in a unitised way. It works very much the way a ‘bookbuild’ works when a company needs investors to get an IPO off the ground.
Most importantly, Domacom has spent 13 months working with the Australian Securities and Investments Commission so that their product is registered, regulated and attracts the necessary ASIC ‘reliefs’ to make it legal.
A mum-and-dad investor wishing to use it must go through a financial planner or accountant – that is, it can’t be mis-used by investors who don’t know what they’re doing.
To see how it works, imagine an investor thinks there are three big growth suburbs in Australia, but they are in different cities. If they were rich, they might buy a house in each – but most investors don’t have that kind of money.
Instead, the investor will build a book on each house through the Domacom platform. For instance, they will see a house in Footscray, Melbourne, offered for sale at $500,000. They might think it’s really worth $600,000, and expect the auction to rise to around this level when it is sold. So they will list the property on the Domacom system, saying they wish to buy, say $100,000 of a $600,000 house.
Other investors can then make offers. The second, for instance, might say they want a $200,000 stake, but think it’s only worth $550,000.
As with any bookbuild, a fairly simple algorithm matches the best bids and optimises the amount to bid at the auction. When various levels of capital are committed, Domacom pays for building inspections, pest inspections and the like – as you would to buy any property.
If it all checks out, a buyer’s advocate bids up to the agreed price on the day. If successful, perhaps a dozen investors will now own the home, and an agent will manage and rent out the property.
That’s all good news for investors. They don’t have to pick any single location to invest in – using unitised properties, they can spread their risk across several cities.
But it’s also good news for Granny Smith, who owns a million dollar house but has too little retirement income. She can now build a book on her own property, but retain the controlling stake. She then rents the other half-stake from the anonymous investors, and when she dies, her descendants will inherit a unitised stake that can be sold down to realise the cash.
In the meantime, Granny Smith drives an Aston Martin.
Okay, it’s not a highly productive asset – but it’s Granny’s money, right?
The political challenge is to begin to address the last-century logic that we must all own our own homes, and that the primary residence is not counted as an asset for super/pension purposes.
The tax/super changes required to effect that would require real political guts, but freeing up so much inaccessible capital is, in the long run, an opportunity Australia can't afford to ignore.
In the next in this series, I will look at other uses for this revolutionary trading platform.
