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BrickX wants to offer access to Australian property for small amounts -- we looked at the numbers

Picture: Getty Images

Fintech company BrickX now has nine properties in Sydney and two in Melbourne, and pre-orders are currently available for bricks in a third Melbourne house.

That will bring the total to 12 properties under management for the startup, which aims to let people get returns from the property market without having to own a whole property.

With more than 5,450 active members, the company has created a niche by offering people access to the property market via the purchase of “bricks”.

That fractional ownership model — they sell 10,000 “bricks” (or investment parcels) in each property — has gained plenty of publicity.

One of the latest buys is a townhouse at 2/120-124 Commonwealth Street, in Sydney’s Surry Hills. It’s a two-bedroom home with a car park, currently rented at $860 per week.

The “bricks” at Commonwealth Street were priced at $95 each, so at 10,000 bricks, the total investor equity is $950,000 — the property actually cost $1.3 million — and was fully subscribed just a week after its release.

Since the BrickX market opened for the property on May 30, bricks have changed hands and the number of brick owners has increased.

It demonstrates that the market does have some liquidity, and according to BrickX CEO Anthoney Millet, the median time for bricks to change hands on the market is currently less than six hours.

“We’ve done a lot of research on which suburbs will outperform over the longer term,” Millet told Business Insider.

“What you tend to tend to find is that those more blue-chip, popular suburbs that have low vacancy rates with minimum opportunity for oversupply through new developments tend to perform over the longer term.

“Then in the more challenging years, because they’re more desirable places to live in, you generally find that they’re more defensive and resilient in a downturn.”

BrickX’s pitch is that it gives people simple access to the property market, either for those without the capital to buy a home or perhaps those looking for exposure to property as part of a diversified portfolio.

So Business Insider thought this might be a good time to run some numbers and try to calculate what you might stand to earn from an investment in a BrickX property.

We’ve done a calculation of how an investment would play out based on the average annual return that BrickX puts forward on its website based on past performance of the property market.

BrickX applies some (fully valid) accounting principles which mean the actual returns on a year by year basis would vary somewhat.

So, for clarity, we’ll refer to two calculations here:

  • Our simple calculation based on the average annual return, and
  • The BrickX results which the company has shared with us and involve capitalisation of costs when the property is initially bought.

Let’s go.

Meet Vesta, the BrickX investor

We’ve taken the Surry Hills townhouse as the example, imagining a young investor — let’s call her Vesta — who pays $1,900 for 20 bricks in the property.

Based on BrickX’s calculations, we’ve estimated the return Vesta can expect to make on her bricks after 12 months. For longer-term investors, we’ve also included a 5-year projection for both our simple calculation and BrickX’s numbers.

The property was purchased for $1.3 million. There was an additional $79,690 of acquisition costs (most of which is stamp duty of $56,990), and BrickX includes a further $25,310 of cash for unexpected expenses.

That brings the total outlay to $1.405 million, but only $950,000 is financed by brick purchasers. For the remaining $455,000, BrickX has taken out a 5-year interest-only loan with a variable rate of 3.97%.

That’s the background, and now to the fun part: investment returns.

BrickX’s website provides some numbers for potential investors to estimate future returns. The projections can be used as a guide, but the numbers are a little simplified. The detailed number crunch comes later.

The gross rental income on the property has been calculated at 4.71%. However, each brick owner will be liable to pay their share of the interest payments on the debt amount, and cover associated property expenses.

Those costs reduce the annual rent income from $44,720 to $17,351. When the brick market went live, BrickX calculated the net rental yield as follows:

Source: BrickX

BrickX in effect uses a constant rental yield as part of its estimation of future returns. Of course, rental yields could change in future.

For Vesta with 20 bricks, the resulting net rental income amounts to $2.90 per month.

Business Insider

Every purchase of bricks includes a transaction fee of 1.75%. So with a net rental yield of 1.83%, the first year of rental gains on a 20-brick investment are pretty much wiped out by associated costs.

On the assumption that the property is always rented out, net rental income is distributed monthly. BrickX says it distributes the funds to each brick holder within 10 business days of month-end.

For the capital gain estimate, BrickX uses data from CoreLogic to obtain the rolling average of annual appreciation over the last five years. CoreLogic’s data — taking into account Sydney’s red hot property market over recent years – gives Surry Hills projected annual growth of 10.42%.

The BrickX website notes that past performance is not indicative of future returns. This is crucial, as the published estimates from BrickX rely on past performance modelling.

So it’s only a result that would be realised if past returns continued into the future — and there are many signs that the Sydney property market is cooling right now.

Anyway, by BrickX’s calculations using the past performance, it arrives at a modelled annual gain of $146,401, which is 10.42% of the total purchase price of $1,405,000.

In using $1,405,000 as the asset base, BrickX has capitalised the $105,000 in acquisition costs on top of the $1.3 million purchase price (stamp duty, legal fees, incidental costs and the cash reserve). Those acquisition costs will be amortised over five years and subsequently written off. (We cover that a little further down).

In addition to capital appreciation, BrickX adds in a sweetener for investors — an extra potential gain by being exposed to the portion of the property financed by debt.

They take the projected capital return of $146,401 and divide it by the $950,000 in equity held by brick holders.

That makes the total return 15.41%, which is higher than the 10.42% return from the property’s total value. The resulting difference of 4.99% is the extra gain that investors stand to make from the use of debt in the purchase.

What BrickX is saying is that, as a brick holder, your equity interest gives you exposure to returns on the entire asset which is financed partly by debt.

A critical decision after 5 years for the brick owners

Here’s where it gets interesting. There will have to be a reckoning on that roughly 30% in outstanding debt. BrickX’s plan is that after five years, Vesta and her fellow brick-holders will vote on whether to continue with an interest only loan or start to pay down the capital.

In the meantime, they say any capital gain on the portion of the property financed by the loan is an added benefit to Vesta.

It’s worth re-stating this is all based on the assumption that property prices in Surry Hills will continue to climb at the same double-digit rate, as they have in the last five years.

So, looking at this simplified example, if the property’s value grows at 10.42%, the initial $1,900 investment stands to make a total 12-month gain of $294.31.

That means that the value of each brick would theoretically increase from $95 to $109.72.

This table shows the projected value of Vesta’s bricks in our simple calculation, across both a 1-year and 5-year time frame:

Business Insider, BrickX

Looks like a tidy return, reliant of course on Sydney property prices maintaining current growth rates.

BrickX’s treatment of costs

In fact, though, a more detailed number crunch paints a slightly different picture. In speaking with BrickX while researching this article, we determined that projected returns will in effect start lower than our simplified calculation of 15.41% per year (including the 4.99% from the debt exposure) but climb higher later on.

The key driver in the projections is still for the property to increase by more than 10% year-on-year. If that happens, brick-holders can expect the return on their bricks to grow exponentially as the asset base continues to climb.

Remember those acquisition costs? BrickX passes them onto brick holders by capitalising those as part of the total property value and then depreciating them over five years. The effect is that it reduces a brickholder’s initial share of the overall value of the asset.

The total asset with capitalised costs is valued at $1.405 million. That makes the underlying purchase price of $1.3 million equivalent to 93% of the total value.

The stamp duty and legal fees will be written off in a straight line over five years. As those costs are reduced, Vesta will benefit from the price growth while also having exposure to a larger share of the total asset.

For those still here, this table breaks it down. It shows how the value of Vesta’s equity interest in her bricks may increase if the value of the property climbs higher than the acquisition costs being depreciated:

Business Insider, BrickX

So, with a more detailed number crunch we can see that the 1st year returns are a bit lower than using the headline figures from the website, but they climb higher by the end of the five years.

Millet said that depreciating the acquisition costs over five years provides a fairer distribution for investors.

“Whether you come in at month 2 or month 25, you’re contributing to your share of those costs of a proportional basis,” he said.

The acquisition costs depreciate over time, but Vesta’s portion of the cash reserve stays constant because it represents a notional value to her in the event that the property is wound up.

“The cash reserve is always going to be part of the asset value, it’s just not going to grow because it’s not linked to the performance of the property,” Millet said.

Cashing in

Let’s have a look at the end game if Vesta decides to sell her bricks. She’ll incur the same 1.75% fee based on the value of bricks sold.

If she decides to sell her bricks after one year, the transactions costs will reduce her net gain to 10.6%, once you factor in selling fees in addition to the purchase costs.

That brings the projected gain in line with underlying property returns, but less than the headline figure of 15.41% annual return associated with the property on BrickX’s website:

Business Insider, BrickX

As you can see, the accumulated gain is reduced slightly by the effect of the selling fees.

The results show that there’s a strong incentive for people to hold on to their bricks beyond the initial 12-month period. They’ll benefit from increased exposure to the asset, and the accumulated annual return will grow towards 20% based off of the original cost base.

Over time — and yet again, to repeat, as long as Surry Hills property climbs in line with past returns — the expected accumulated return in the 5th year for a brickholder who purchased their bricks at the starting price is estimated to be around 80%.

State of the market

Recent data suggests that Australia’s property market may be starting to cool as regulators take measures to control systemic housing risk.

That’s been evidenced by slowing Auction clearance rates. The booming Sydney and Melbourne markets went backwards in May. That being said, they look to have recovered in June.

This chart shows the latest movements in prices, as measured by CoreLogic weekly:

Trading bricks

Since the bricks began trading for the Surry Hills property on May 30, there’s been a lot of activity.

The BrickX website shows there were 932 subsequent brick transactions over the first 8 days — a turnover of nearly 10% in the first week. There’s been more than 1,500 transactions over the first 3 weeks.

That’s good news for BrickX, which clips the ticket on every trade. Our rough calculation is that the company made $1,500 on those trades in the first week they went on the market.

At one point in that first week, the minimum price per brick listed on the BrickX website was $102. Assuming completed sales at that price, it means that some brick-owners made a gain at around the mid-point of our simplified annual forecast within seven days. Tidy.

Since then, prices set by sellers steadily fallen and in fact at one point the lowest price on offer was $94. That’s beneath the $95 offer price, which suggests that someone is keen to sell their interest.

For buyers at prices above $95 so soon after the launch date, the higher cost base would no doubt reduce any expected returns. Anyone who buys bricks at, say, $97 would have to reduce their expected gains.

BrickX commissions an external valuation for all of its properties every six months. For a property to be sold in its entirety, 75% of brick-holders at a given time must vote to approve it.

Comparative investments

For comparison’s sake, we compiled a list of alternatives in which a young investor could put $2,000.

Publicly traded Real Estate Investement Trusts (REITs) can also provide exposure to real estate for those without the up-front capital to buy a property. To give a broad gauge of the market, we included past returns from the benchmark S&P/ASX 300 A-REIT Index.

The table below also includes what returns investors can expect from Australian superannuation funds, or simply holding cash in the bank:

Source: BrickX, S&P Global, Super Ratings, RBA

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