An alternative which may be on the radar of younger members is the ‘shared equity’ or ‘equity finance mortgage’, as exemplified by Rismark International via the loans it distributes through Bendigo Bank and Adelaide Bank. The $50 million invested with Rismark so far (by those same two regional bank distributors) has been spent on around 500 different homes in metropolitan areas around Australia. Eschewing the traditional direct ownership model, Rismark loans are for up to 20 per cent of a house’s purchase price. Buyers never pay interest on the loan, rather they repay the original principal when they either sell the home or 25 years elapse, plus 40 per cent of the home’s total capital appreciation. If the home’s price has happened to fall, the amount repayable on the original loan will reduce by the same proportion. Rather than the potentially adversarial situation outlined above, “our investors only do well when our borrowers do well”, according to Rismark’s managing director, Christopher Joye.
Based on the cash-flows realised by the repayment of over 60 shared equity assets since its March 2007 inception, Rismark’s portfolio has generated an internal rate of return of around 7 per cent per annum, and reports that its “mature portfolio” mark-to-market value is 21.3 per cent higher than its starting value. “This was despite 2008 being the worst year on record for residential property returns,” Joye says, adding that under the Rismark model, the hurdle of high transaction costs is overcome by the fact that the owner-occupiers meet all of the outgoings, including the stamp duty liability. The ultimate gesture of approval for the shared equity concept has been given by the head of asset consulting at MLC Implemented Consulting, Gareth Abley.
When he bought his last house, he went to Adelaide Bank and took out one of the Rismark-backed loans himself. From the homebuyer’s point of view, Abley says shared equity appealed to him as a hedge against the possibility property prices might fall, because the lender will ‘participate’ in any loss by reducing the amount of their original loan by the same amount as the capital depreciation. As to why his institutional clients have so far not taken the other side of the trade, Abley suspects that “duplication of exposure” is a sticking point, as is also the case with direct ownership opportunities like the NRAS. Not only do the statistics suggest that 70 per cent of any given fund’s membership will already own or be paying off a house, Abley says residential housing is “questionable” as a diversifier because it entails a “broad exposure to the Australian economy already reflected in the Australian equity exposure… you risk exacerbating the home country bias”.