Feb 7, 2022

Entering Canada’s real estate market is an uphill battle. Is fractional investing the way to go? Fractional real estate investing startups have been cropping up across the country, but the model is higher risk than a REIT, critics say. Mon., Feb. 7, 2022timer4 min. read JOIN THE CONVERSATION With an eye on setting himself up for his future, James Buffett had one goal: buy a second property. Already a homeowner and hoping to get into the red-hot investment market, the city of Hamilton employee did his research — before realizing his dream was “next to impossible.” Undeterred, he began searching online for ways to invest without all the required capital. That’s when he came across Willow, a real estate investing platform, launched on Jan. 31, that offers shares in property similar to buying and selling shares in a company. Willow co-founder and CEO Logan Yergens said its goal is to make it possible for all Canadians to invest in the ballooning real estate market. “As a priced-out millennial, the idea of breaking down the asset into smaller bite-sized ownership so people like myself can participate (in the market) made a lot of sense,” said Yergens. Using a model called PropSharing, Willow investors can buy and sell fractions of commercial and industrial properties and multiplexes as easily as they can buy shares on the stock market. On Willow, properties are split into 100,000 units. Investors can buy up to 10 per cent of a property. There is no limit on how many properties they can invest in. There is no membership fee. Each trade costs $5. Buffett had $1,000 to invest and sunk it into two properties on the site. He got 15 shares in a mixed-use Toronto building for $49.68 a share and 14 shares in an Ottawa building, with Scotiabank as the tenant, at $16.68 a share. Buffett likes that he can see the investment property and walk by the building when he visits Toronto. “You really feel like you’re part of the property acquisition,” he said. Yergens said Willow is aiming to have 25 to 50 properties on the platform by the end of year, roughly translating to $100 million in assets. The startup has secured almost $5 million in funding. Before it even launched, it had 10,000 investors on a wait-list ready to use the platform. Yergens said the company does its due diligence when searching for investment opportunities. “These properties have stable tenants and low-risk stable dividends while still being able to appreciate in value.” Fractional real estate investing startups have been cropping up across the country over the past few years, and the concept is gaining traction, especially among young self-starter investors. Willow is facing competition from B.C.-based Addy Invest, Ontario-based BuyProperly, NexusCrowd, RealtyShares, and Fundrise. The companies all offer variations on the same theme: buying ownership in property for a fraction of the cost. What makes Willow stand out, said Yergens is that it invests in the properties and manages them — as well as its low fees. Willow makes its revenue with a one-time acquisition fee from the investors of 2.5 per cent, an annual management fee of less than one per cent, and the $5 cost per trade. By comparision, Addy Invest has $25 membership fee with a maximum investment of $1,500. While, BuyProperly has a minimum investment of $2,500 and charges the annual 2.5 per cent on the initial investment. The concept is not new, said Jack Favilukis, a professor of finance at UBC’s Sauder School of Business. While these platforms offer a smaller hurdle for investors, they are similar to real estate investments trusts or REITs, he said. REITs are companies that manage a real estate portfolio and can be publicly traded. The equity portfolio they manage is typically well diversified across many properties — although not necessarily across many cities, Favilukis said. REITs pay regular dividends and have certain tax advantages. In return, by law, they are required to pay a significant amount of their income to investors. “To me, it seems that the fractional ownership companies do the same thing but on a smaller scale,” Favilukis said. “So, you could buy fractional ownership in a specific building, rather than own the shares of a REIT which owns a portfolio of buildings.” Favilukis said because a REIT diversifies the risk across an entire region, instead of individual properties, it is not as risky an investment as fractional real estate. Anson Ho, an assistant professor in the department of real estate management at Ryerson University, agrees that there is more risk involved with owning a portion of an individual building. If the storefront is vacant, or there is a fire, or the location is no longer trendy, the asset becomes less valuable, said Ho. Some companies may require investors to pay a portion of the costs. “If someone wants to invest in this platform, they shouldn’t invest everything they have,” said Ho. While they might get a higher return, because fractional real estate isn’t traded on the stock market, it comes at a higher risk. “Invest a smaller portion of your portfolio to see how it works,” he said. “It’s a developing market with a lot of uncertainty.” With files from Jacob Lorinc Clarrie Feinstein is a Toronto-based staff reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca SHARE: