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Australian startups have a huge opportunity to satisfy the country’s insatiable appetite for real estate, according to a Silicon Valley fintech expert.
Ron Suber, who has been an executive at Wells Fargo and Bear Sterns and is now involved with US fintechs Prosper Marketplace and Credible, says alternative financing for property purchases is a yawning gap in the Australian market begging to be filled.
“Alternative financing for real estate is a big and growing industry in the United States. It came on in leaps and bounds after the global financial crisis, which severely disrupted the ability of banks to support real estate investing,” he told Business Insider.
“The benefits of alternative real estate financing is that it can generally provide finance at a major lower cost compared to the banks, and also that it lets smaller investors into the market who ordinarily would struggle to buy an entire property.”
In the Asia-Pacific, Australia overtook Japan this year to become the second biggest market for alternative lending, behind China, according to last month’s Asia-Pacific Alternative Finance Industry Report.
But the report found property transactions made up a very small part of that alternative financing industry, making up just $49 million, or 8%, of the $609 million dealt out in 2016.
“Given Australia’s strong appetite for, and interest in, property investment, I can see it has massive potential there,” said Suber, nicknamed the “godfather of fintech” in the US.
Australia lags behind the Asia-Pacific average (excluding China) of 17% of alternative financing going towards real estate. The popularity of peer-to-peer property financing in South Korea is a big contributor to the high average.
The $49 million alternative lending spent on real estate in Australia is made up of $36 million in peer-to-peer lending and $13 million in crowdfunding. In the US, peer-to-peer is worth $1 billion and crowdfunding $800 million.
“Of course, alternative financing for real estate comes with its risks — like any form of investment — but it in the right circumstances it has significant advantages for both the investor and borrower. It is also a potential important element of a healthy fintech industry,” said Suber.
In May, treasurer Scott Morrison directed the Australian Competition and Consumer Commission (ACCC), to start an inquiry into residential mortgage products. He asked the consumer watchdog to especially look whether the big banks would pass on the Major bank Levy to mortgage customers.
But even before those findings are handed down, here are three Australian fintech startups that are already pioneering alternative financing for real estate:
Perth outfit CrowdfundUP started in 2015 as the country’s first real estate crowdfunding platform. The system allows both retail and sophisticated investors to register and choose from a market of property projects.
The company performs some due diligence before projects are allowed to be on-boarded onto the platform, while properties that are only suitable for sophisticated investors are filtered out of view for retail investors.
The startup has so far allowed 2,000 people invest in 17 projects, with individual investments typically ranging from $5,000 to $2 million.
CrowdfundUP offers different transaction types including peer-to-peer and non-bank financing. The loans typically range between $1 million and $10 million. The fintech has completed several successful equity raises with its property developers, including a $5 million round for a mix-zone shopping centre.
The bricks can then be liquidated in a second-hand market on BrickX, where the current median sale time is 13 hours 35 minutes.
BrickX, which calls itself “fractionalised property investing” rather than “crowdfunding” as its properties are fully funded at time of purchase by an underwriter, has built up to 30,000 users in just a year of operation, with more than 7,000 actively buying and selling bricks.
“Platforms such as BrickX are particularly appealing to those who feel locked out of the Australian property market,” said BrickX chief executive Anthony Millet.
According to the company, after initially putting in about $600, most investors continue to add to their account so the average portfolio size is now just a tad over $2,000. The company now offers apartments and houses in Sydney, Melbourne and Adelaide.
Sydney startup Covesta, due to launch later this year, is targeting mum-and-dad investors with syndicate memberships to buy properties — much like a lotto ticket bought collectively by work colleagues.
But the difference, compared to other fractional investment providers like BrickX, is that you can live in the property.
The real estate on offer includes residential, commercial and even agricultural properties, with investors requiring to contribute at least 5% of the purchase price if they wish to be a tenant in the property. For passive ownership, just 1% ownership is required.
Ron Suber will be delivering an international keynote on “the golden era of fintech” at the Collab/Collide Summit, held as part of the Intersekt fintech festival backed by the Victorian government, on 2 November 2017 in Melbourne. Book your tickets at intersektfestival.com.
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