SINGAPOREANS’ enduring love for real estate as a path to generate wealth is well known. Now they have additional avenues for exposure to prime residential locations – without the hassle of transaction costs including stamp duties and the need for financing. Best of all, access is possible for a fraction of the capital typically needed for a direct investment.
Straits Developments Pte Ltd (SDPL), a Straits Trading (ST) subsidiary, has launched two fractionalised investment products under its umbrella FIR-ST (Fractionalized Investment Real Estate – Straits Trading).
The two properties – a condominium unit in Duchess Residences at 108 Duchess Avenue and a freehold good class bungalow (GCB) at 8A Cable Road – are offered to registrants of the Straits Trading (ST) Shareholders Club. Shareholders who hold at least 100 ST shares can register.
Exposure to the two properties is via preference shares.
ST has been testing the waters for fractionalised investment options. In 2021 it offered two other properties to the shareholders’ club in the form of investment notes with a regular coupon.
The same GCB on 8A Cable Road was first offered to club registrants via an investment note. A second note – Straits Trading GG Note – offered exposure to a condominium (13 Woollerton Park) located in Gallop Green (GG) in District 10. A portion of the note was also listed on the SDAX Exchange on a pilot basis in January.
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Listing the note on SDAX opened up a liquidity avenue where the note can be traded in smaller denominations of S$1,000 per token among accredited investors. In contrast, direct investors in the note had to subscribe for a minimum S$200,000.
Eric Teng, SDPL chief executive and group chief operating officer, said the offerings in 2021 were a “trial run’’. “We wanted to make sure people participated and asked questions, how it works, why it works, and we took steps to make sure they didn’t lose money… We wanted people to understand the product and put money that they can afford to hold.’’
In fractionalised real estate, it appears Singapore investors, who typically must qualify as accredited investors (AI), have more than a handful of options.
Fraxtor, set up in 2017, has tokenised a number of properties to date, including a Hillshore condominium and a landed property at 21 Mount Rosie Road. There is also RealVantage, which offers co-investment opportunities. RealVantage has funded 23 deals across Britain, Australia, the US and Singapore since 2019.
For the new offerings, SDPL departed from the note structure in favour of preference shares. A dividend is payable every six months. At the end of the expected five-year holding period, preference shareholders will get a “special payout’’ which is a share in the potential appreciation value of the underlying properties.
In the Straits Trading GG Note, investors receive an annual interest rate of around 3 per cent, and a “special interest’’ at maturity of up to 10 per cent. SDPL also took pains to provide security for investors. It provided a deed of undertaking to repay the 3 per cent interest and principal, even if the property value falls at the end of the investment holding period.
The preference share avenue, says Teng, better mimics the actual experience of owning a property. There will be regular revaluation of the properties, so the value of the preference shares may vary to a degree.
“You buy a property for the upside, and that’s the fun part. In the notes, the upside was capped. But the preference share value can go up and down, just as the value of the real estate may go up or down.’’
The company is open to the idea of securitising properties owned by third parties, including residential units owned by individuals. This avenue could enable retirees, for example, to unlock the equity in their homes for a greater amount and at more attractive terms than banks are likely to offer under a reverse mortgage or a home equity loan. To be eligible, the properties typically must be unencumbered by a mortgage.
Teng believes there are societal benefits to the concept of fractionalising real estate. For one, it extends co-investment opportunities to shareholders. In addition, a broader profile of investors will gain access to a real estate investment at a fraction of the typical capital cost.
The payment of a dividend or coupon mimics a rental yield without the accompanying hassle of being a landlord. Retirees may also benefit with a yield instrument.
In the latest offering of preference shares for FIR-ST with 8A Cable Road as the underlying property, investors will have to subscribe for S$500,000. The illustrative preferred dividend payout is about 1.28 per cent a year.
For the preference shares with the Duchess Avenue condo as the underlying asset, the minimum investment is S$200,000, and the illustrative annual dividend rate is 4.6 per cent. Dividends are paid on a discretionary basis. There is no guarantee on the dividend or capital value at maturity.
Teng said of future issuances: “We know this is the tip of the iceberg. We can do much more.’’
Preference shares may be sold to other investors, subject to prior written approval. Stamp duty on the transfer may apply and is generally borne by the buyer of the preference share.
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