Changing and enhancing the property development process for SMSFs

CrowdProperty matches investors such as SMSFs, wholesale investors and institutional lending groups with developers of high-quality, small- to medium-sized residential property projects via its bespoke platform and in-house property development expertise.

The idea all started when current CrowdProperty CEO David Ingram and COO Tony Zulli worked together on a managed investment scheme that provided lending to SME property developers, but they constantly faced challenging aspects that were underlying in Australia’s SME property development and finance sector.

Seeing a space for innovation, Mr Ingram and Mr Zulli said they had been inspired by the CrowdProperty concept in the UK and sought to bring it to Australia and create a hybridised solution to address these challenges.

“It made a lot of sense in creating an efficient way and solution to providing property development,” Mr Ingram said.

“During our time at the managed investment scheme, we were looking to provide a solution in the loan to a property developer to develop a particular property.

“We bring investors in such as wholesale clients and most of them were investing across the tax structures in the SMSF such as discretionary trusts and potential investment companies.

“However, we faced several challenges across the development projects and we thought how can SME developers secure better access to SMSF investors keen to invest in property projects? Raising capital via wholesale investors is seen as an alternative to banks and other non-bank lenders.

“So we thought about setting up a solution so any of these entities could simply [go through] that investment process and from there CrowdProperty evolved.”

Mr Ingram noted that it was evident that combined with a continued love of property in Australia and the strong make-up across SMSFs, there was an opportunity to utilise efficient technological platforms to bridge that gap.

“The key is creating a process that can be made more efficient using platform technologies and an alternative that could be considered by SMSF trustees in regard to marketplace lending platforms targeting small to medium property development projects,” he said.

“We leveraged the technology as it is built as an automated marketplace to be able to fully automate the administration and management of that loan both from the borrower’s and investor’s perspective.

“It gives you that ability to diversify and at the same time scratch that property development itch and get involved with the process. At the same time, you only need to invest $10,000, you can invest so you don’t have to put all your super into it, and you can invest across multiple projects, and SMSFs are able to spread their risk while still potentially achieving similar target interest returns.”

Diversifying the investment strategy

Another reason for the formation of CrowdProperty and its target on SMSFs, Mr Zulli also noted, is that it stemmed from the ATO’s guidance on investment strategies.

In February 2020, the Australian Taxation Office (ATO) released new guidelines setting out what SMSF trustees must include in their investment strategy document.

“The new guidelines make it clear that the obligations of SMSF trustees are to document their investment strategy in greater detail, taking into account a number of influences that will impact the end retirement benefits, including investment risk, liquidity, diversification, and asset concentration,” Mr Zulli said.

Mr Zulli said that the main concern he had found was the concentration of real direct property in certain SMSFs. Trustees must now focus greater attention on a number of influences that will impact the end retirement benefits as it relates to the concentration of their SMSF in real direct property assets or other asset classes.

“The interesting aspect of that objective of these guidelines was to ensure that trustees not only consider that investment strategy on a regular basis, but when they did consider it that they looked at other issues other than just simply one investment and one type of investment return,” Mr Zulli said.

“For us, we found that if you’ve got all of your SMSF assets tied in direct real property, you don’t have a lot of liquidity, and when transitioning from the accumulation phase, it’s important to have that liquidity for the future of the SMSF.

“We factored this along with the importance of creating diversification, asset concentration and, therefore, risk management for the trustees.”

The opportunity for Mr Zulli was if it was possible for marketplace lending to be a solution to meet the challenges faced by trustees and meet the new ATO investment guidelines for SMSFs.

“A marketplace lending platform can effectively create a loan that is provided to a borrower, in our case, an SME property developer, which means you can actually have multiple investments in these project loans across a diverse range of different property projects,” Mr Zulli said.

“You’re also only investing for 12- to 18-month terms, so you’re starting to meet the liquidity requirements of your SMSF. You’re also helping to meet the diversification requirements, and the asset concentration requirements, or de-concentration in this case. And potentially through that diversification you’re minimising the investment risk to the SMSF.”

From an SMSF point of view and from broader superannuation, Mr Zulli said, at the moment, the product itself is only available to wholesale clients or professional investors but is looking to expand into retail investors in the future.

“We’ve done that deliberately to make sure the tech works well here, and to make sure we have the right product available in terms of the property developers and the loans,” he said.

“The biggest challenge for us is when we expand to retail, there are significant challenges to running a retail-based managed investment scheme from regulators.”

From an SMSF and super point of view, Mr Zulli said another goal is to increase the allocations in contributions, as they are only currently allowed to invest lump sums.

“Initially, SMSFs will be able to make lump-sum investments to project loans posted on the CrowdProperty platform. Ultimately, we also hope to offer a solution for their regular superannuation contributions,” Mr Zulli said.