As Australian’s we are taught from a young age that “property prices always go up”.
This mantra has led many to believe that buying property is the only investment worth our time and hard-earned money.
This has been further hammered home by the fact that historically there were only really 3 places for us to invest our money – a bank account, take a punt on some shares or an investment property.
So…What Has Changed?
Firstly – property prices are showing their first signs of weakness with both the Melbourne and Sydney markets going backwards for the first time in more than 5 years.
Secondly – there are now multiple ways to make smart investments in alternate assets classes that didn’t exist 5 years ago.
Thirdly – getting an investment property is getting harder and harder – both saving for a deposit and securing a loan are harder then ever before.
These alternative investments don’t require a lot of capital and can be accessed without paying thousands of dollars to a financial adviser.
In this article we will look at the following features of these investment options:
- What they are and how they work
- How can you access them
- Potential returns and;
- Risks (with 1 being equivalent to a bank deposit and 10 being investing in Akon’s ICO).
1. P2P Lending
What is it?
P2P lenders are platforms that match investors (you) with borrowers. They give investors the opportunity to lend money out to (hopefully) creditworthy borrowers and the investors keep the interest. They are a great innovation as they give investors access to returns that were historically only available to banks. P2P lenders make money by taking a percentage of the interest charged to the borrower.
How can you access it?
While Australia is well behind other developed economies with P2P lending, we still have over 10 P2P platforms servicing different markets from individuals to businesses to farmers – two of the better-known ones are SocietyOne and RateSetter. The minimum investment amount varies from platform to platform – with RateSetter you can start investing with as little as $10 while the minimum investment with SocietyOne is $100,000.
Returns with P2P lenders are made via the interest paid by borrowers. Unlike other investment options discussed in this article, returns with P2P lenders are usually known ahead of time as the rate the borrower paid is fixed. These returns typically range from 3% – 15% per annum and are based on:
- Term of your investment – the longer you invest the higher the return
- Riskiness of the borrowers – some P2P lenders give you the ability to select to lend to “higher risk” borrowers (i.e lower credit score, small businesses etc.) with the option of earning higher returns.
For example – RateSetter’s annual returns are set out as follows:
|1 Month||1 Year||3 Year||5 Year|
|Rate Setter Returns||3.4%||4%||7.7%||8.7%|
While SocietyOne’s are as follows:
|Tier 1||Tier 2||Tier 3||Tier 4|
|Lower Rate 2&3 Year Loans||5.25%||8.30%||9.25%||11.71%|
|Upper Rate 2 & 3 Year Loans||8.30%||9.25%||11.71%||16.74%|
|5 Year Term Premium||0.85%||0.95%||1.05%||1.30%|
While returns with P2P lenders are generally fixed, the risk is that the borrowers don’t pay the loan and you don’t receive your money – however there are a couple things mitigating this:
- Credit Checks – the platforms do their best to ensure that the borrowers can repay the loans
- Provision funds – a number of the platforms have set aside funds to compensate investors in the event the borrowers default.
Overall the risk level is lower than other asset classes but will depend on the loan and the platform you invest with – we give it 3 rating from a risk perspective.
2. Fractional Property Investing
What is it?
Fractional property investment does exactly as promised – it allows you to own a fraction of a property. While owning a property isn’t a new way to invest – being able to access the Australian property market for as little as $100 certainly is. These investment options allow you to gain exposure to property without having to invest your entire life savings.
How can you access it?
Fractional property investing is typically done via a “platform” that acts as a fund – unlike P2P lenders you are effectively buying a share of the platform when you invest. At present, Brickx is the platform with the lowest entry point – by investing in the platform you can own a fraction (or a “brick”) for as little as a $100. There are others in the space – Domacom, Kohab – they are operationally different to Brickx and the minimum investment is also higher than Brickx.
Returns are generated by a combination of rental income and capital growth (i.e increasing property prices). The average historical 20 year return off all the properties bought through Brickx is 7.20% while the estimated rental yield has been 2.14%. That is not to say these will be the returns going forward.
Despite what your parents probably tell you, there are certainly some very real risks with investing in property. There are many factors that can impact the price of property and often it’s unpredictable – the recent effects of the royal commission is an example. Overall, we give it a 6 rating for risk.
3. Exchange Traded Funds (ETF’s)
What are they?
ETF, or “Exchange Traded Fund”, is an investment fund that mimics the returns of an asset class like Australian or Global shares. They have been around in Australia since 2001 but their popularity in recent times have exploded with $38bn invested in them today compared to just $8bn in 2013. ETFs are a cost-efficient way to get exposure to a diverse range of assets.
How can you access them?
ETFs trade on the Australian Stock Exchange and there are now more than 150 listed in Australia. You can buy and sell them through a broker (Commsec, E*trade etc.) like any other listed security. Over the past few years a new breed of advisers called “Robo-advisers” have cropped up. These advisers invest your assets digitally in a combination of ETFs – the advantage of them is they select the best ETFs to match your risk profile. Below is a table which summarises the robo-advisers currently operating in Australia and the fees they charge:
|<$10,000||$10,000 - $49,999||$50,000 - $99,999||$100,00-$199,999||$200,000 - $499,999|
The expected return of any given ETF is based on the asset class it invests in – the lower risk ETFs that invest in fixed income will have a potential return of, say, 4% while the highest risk ETF that invest in emerging economies might end up returning 10%-20%. Remember – the higher the expected return the higher the likely risk.
Like returns – the risk really depends on the ETF you invest in – below is a breakdown of the ETFs in Australia by asset class – we haven’t given a risk rating as even within each sector of ETFs the risk can vary greatly (i.e gold is less volatile/risky then oil but both are commodity ETFs):
|Sector||Number of Products|
|Fixed Income & Cash||25|
|Sectors - Global Shares||19|
|Sectors - Australian Shares||9|
4. Equity Crowfunding
What is it?
Equity crowdfunding, which has been allowed in Australia since Sept-2017, gives the average Australian the ability own shares in companies that are not listed on the ASX.
How can you access it?
The investments are done through equity crowdfunding platforms which allow you to buy shares in early stage businesses for as little as $250. Below is a list of the equity crowdfunding platforms currently in operation in Australia:
|Platform||No of Live Deals||Differentiator|
|Equitise||2||Equitise completed the first Aus based crowdfunded deal. Has been operating equity crowdfunding in NZ since 2015. Have got "Syndicates" which will allow you to follow famous investors.|
|OnMarket||1||Have raised $60m in non-crowsourced funding over past 10 years.|
|Enable Funding (Formerly ASSOB)||0||Have raised ~$148m in non-crowdsourced funding over past 10 years.|
|Billfolda||0||Billfolda takes a share in the company alongside you.|
|Capital Labs||0||Crowfunding specifically for "biotech & life science" companies.|
|Birchal||1||Best looking crowdfunding platform launched.|
|Big Start||Big Start were given a license however there is very little information out there on them.|
Prior to equity crowdfunding, getting access to these early stage deals was almost impossible and even if you did the minimum investment would have been substantially higher.
The sky really is the limit with equity crowdfunding – the businesses that raise money from these platforms are usually early on in their life cycle so their potential for growth is huge.
With possible huge returns come possible big risks – of all the investments listed in this article equity crowdfunding is (by far) the riskiest. While equity crowdfunding isn’t quite as risky as Akoin, we still rate them an 9/10 on the risk scale.
5. Listed Investment Companies (LICs)
What are they?
LICs give you easy access to professionally managed portfolios. A good way to think of them are like ETFs as they often (but not always) invest in an asset class – i.e Australia equity, global equity etc. A key difference is that instead of trying to copy the returns of an asset class/index, there is a professional manager who is behind the LIC that is trying to beat an index. The fees for LICs can range from 0.15% – 3% per annum, much higher than ETFs, as you are paying for the management of the fund. Some of the pros and cons of LICs are as follows:
|Much more tax effective than traditional managed investments||Fees can be high|
|Easy to access||Difficult to track historical performance|
|Low minimum investment vs traditional managed funds||Can be difficult to buy and sell|
|Pricing can be confusing|
|What the fund actually holds is hard to determine.|
How can you access them?
LICs trade on the Australian Stock Exchange – there are more than 108 listed in Australia. You can buy and sell them through a broker (Commsec, E*trade etc.) like any other listed security. Choosing the right LIC is difficult – effectively you are putting your faith in the manager of the LIC and this is often based on historical performance; calculating historical returns of LICs is challenging and even if you do historical returns are not a predictor of future returns. This is one of the advantages of ETFs – it’s very clear what you are buying and why you are buying it.
The higher risk LICs (i.e Australia/global equities, emerging economies etc) can have returns anywhere from 5-30% while the lower risk LICs (bonds, income funds etc) might be closer to 3-7%.
With higher returns usually comes higher risk – as is the case with LICs. The riskier assets classes have a much higher chance of losing you money while the safer ones are less likely to do so. Like ETF each individual LIC will have a different risk rating.
That’s A Wrap
That’s it folks – we hope you have learnt about some great alternative investment options you can access quickly and easily.
Plenty can help assess your current financial position and tell you both how much and where you should invest your hard-earned cash – find out how we do out investment advice.
The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.