Another way to get a foot on the property ladder

South Africans who find the traditional rite of passage of buying property as a home unaffordable are exploring alternative ways of getting a foot on the property ladder – from buying shares in real estate investment trusts (REITs) to fractional ownership in properties.

In South Africa, property is often a key early investment but as demand and prices continue to soar, many are unable to afford a property that they would like to live in. Fortunately, there are other ways to access real estate investments, especially for the tech- and investment-savvy. Listed property provides the simplest and most transparent exposure to real estate, but a relatively new option is fractional ownership, with EasyProperties having attracted more than 110 000 active investors out of a base of 350 000 registered users after four years in business. Also, EasyProperties has paid R20.4m in dividends in those four years.

Like the Listed Property sector, EasyProperties offers exposure to property without the headaches of direct ownership, such as a lack of liquidity and managing tenants. Also, with EasyProperties, which is 100% owned by EasyEquities, there are very low barriers to entry. Rupert Finnemore, EasyProperties Chief Executive Officer, explains there is no minimum investment, and many people make investments of less than R100. “Literally, your minimum investment is R1.” For that, investors get access to state-of- the-art properties. Finnemore says the platform has recently bought several units in Cape Town at R55 000 a square metre, which “99.9% of the country” wouldn’t normally have access to.

EasyProperties combines fractional ownership and crowdfunding “to solve a lot of the friction points people normally encounter when investing in property, such as a lack of access to capital and opportunity, as well as the risks associated with having a single asset”, says Finnemore. For example: “You have a tenant who doesn’t pay, and it takes a year to get rid of them and you have to fund this extra bond for a year.” The investment platform enables fractional ownership in properties via Special Purpose Vehicles, a service regulated under the Financial Advisory and Intermediary Services Act.

There are between 8 000 and 15 000 investors in each deal, and the business negotiates a bulk deal for units in a development that ordinary investors wouldn’t have access to. “In some instances, we are buying at 12% less than the market value,” says Finnemore.

In the past, one of the reasons property syndications caused South Africans to lose money was the complex structures that didn’t give investors direct ownership in the underlying properties. EasyProperties creates a shelf company or an SPV. Money is raised in an initial public offering process into this unlisted company, a process regulated in terms of the Companies Act.

The investment offered by each SPV constitutes a public property syndication scheme, which is governed by the Consumer Protection Act. A prospectus for each scheme discloses the important information. “If we are looking to raise R8m to pay for these units, we will issue 8 million shares at R1 each and EasyProperties investors can apply for the shares,” says Finnemore.

After the SPV buys the property, it’s managed by the EasyProperties rental management team. Rental is collected and profit is returned to investors in the form of a dividend every quarter. “Some of our properties paid a 9% dividend this last quarter, but dividends vary based on market conditions,” says Finnemore. “We remind investors not to forget about capital growth, to stay in for the investment term to benefit from that.”

EasyProperties has each property valued by independent professional valuation companies every year. The reports are made available on the EasyProperties platform for investors to review. Each investment has a term of between five and seven years, but should an investor need to exit earlier, they can sell their shares in quarterly auctions.

Finnemore cautions that EasyProperties wasn’t set up for people to trade in property shares and they shouldn’t invest cash they might need in the short term. “We are not a REIT, where guys are buying and selling every day. We are trying to create solid, stable normal property investments.”
The quarterly auctions are just a marketplace, and the liquidity for any particular property depends on supply and demand. There is often a price to pay for the liquidity, Finnemore says. “Buyers in the auction aren’t necessarily coming to the auction to pay market value. They are looking for deals.” Still, he says, around 10% of the shares in each of the properties trade every auction.

“At the end of five years, we exit that entire investment. The full value of your investment is going to be delivered to you,” he adds. Finnemore points out that, like other investments, property ownership through fractional shares is not without risks. “There is no guarantee that you are going to do well.” He points to the interest rate increases over the period since EasyProperties launched as an example of risk. “EasyProperties generally does a 70:30 equity raise so there is a 30% loan-to-value on all properties, which is fortunately quite conservative. But still the base rate then was, I think, 7.25%; now it is 11.75%. So there’s obviously interest rate risk.” There are also other “normal risks” of property investing, but your exposure is shared.

EasyProperties has yet to officially exit an investment. This will happen next year when it will be put to a vote among shareholders. EasyProperties holds 10 000 A+ shares in each of the SPVs, which means they can make management decisions. When it comes to exiting an investment, the process is governed by company law, so EasyProperties will make the case for exit and put it to a shareholder vote. 2025 will be EasyProperties’ fifth year in business – an interesting one to watch.