A Canadian startup, Willow, is live with a new fractional investment platform that allows anyone to buy and sell shares in commercial real estate properties.
Willow calls this mechanism “PropSharing,” and the idea is that commercial properties in its portfolio split into 100,000 shares (or “units”), so that investors can get into the market when they don’t have the massive capital otherwise necessary. The focus is solely on commercial and industrial real estate, not anything residential.
The Toronto-based startup registered as an Exempt Market Dealer in every province and territory, and is regulated by the Ontario Securities Commission (OSC). It caps its own ownership in each property at no more than 10%, and no less than 2.5%. It also manages what the property may need, be it repairs, renovations, as well as arranging for insurance coverage, though Willow says it will inform shareholders of any such changes.
Willow uses PropSharing as its preferred terminology, but the gist is that you are buying into a property at a fractional level. You’re buying a small, or even tiny, piece of real estate. Your shares can accrue based on that property’s market value, which you can trade on anytime you want.
It’s a different from crowdfunded real estate, like Addy, PeerStreet or FundRise, where multiple investors pool resources into a platform to either acquire properties or loan money to real estate borrowers. It also differs from REITs (Real Estate Investment Trusts), which are real estate portfolios lumped into one asset you can buy shares in, mostly in the stock market.
Willow claims it takes that guesswork out by allowing investors to only buy shares in the properties they like. Capping each property at 100,000 shares also clarifies equity for each investor, regardless of how many they’ve purchased. Anytime Willow adds other properties, it doesn’t affect the property value of existing ones because each one is treated individually.
The company keeps all clients’ cash and investments in in-trust accounts at Canadian financial institutions. This separates them from Willow’s operations and affords all investors creditor protection in case the company goes under. As an investor, you can also cash out anytime, rather than waiting for specific windows to access those funds.
From an operational standpoint, Willow manages a limited partnership for each property, acting as the general partner. That means it assumes the risk and returns for each property under its umbrella, plus all expenses and liabilities. “Investors cannot lose more money than they invest,” says Willow’s FAQ page, though that remains to be seen.
Willow runs its PropSharing platform through its website and mobile apps. You can access them on a Windows PC, Mac, Chromebook, iOS or Android device. Upon signup, it gives you an onboarding questionnaire to build a financial profile. It has to do this under current regulations, and as a way to determine an ideal amount you can spend to invest in real estate. Regulatory requirements also necessitate details like, employment, identity, tax information and any potential conflict of interest for those rare cases where there might be something amiss.
Clients generally fall into one of three categories. There’s the accredited investor, who is not subject to a recommended limit. Eligible investors earning over $75,000 per year can invest up to $100,000 on the platform. Non-eligible investors can invest up to $10,000 every 12 months. These are regulatory caps, rather than ceilings Willow implements, but either way, you must be a Canadian resident to invest.
Applications go to a compliance team for review, and once approved, clients can then fund their Willow accounts and start investing. Your Willow account ties directly to whichever bank account you choose, which also makes it easier to sell shares and deposit the cash.
As I write this, Willow’s portfolio is miniscule at only two properties — one in Toronto, another in Ottawa. But it is a startup, and it says it had 10,000 people on its waitlist to sign up. Moreover, it reportedly has $100 million in funding to spend on acquiring more real estate, so options should expand as the year goes on. However, it will also need people to invest in the existing properties in its platform to realize that expansion.
Willow pre-funds its acquisitions. There is a purchase and sale agreement, tying it up with a term of 75, 90 or 120 days, where the property owner agrees to sell it to Willow. This is partly why it says there is a “backlog” of properties in its purview.
Buying up shares looks fairly transparent and easy to understand. You see the value of the property, plus detailed information about its location (i.e. neighbourhood) and who the commercial tenants are. The share price is clear, and you know how much it will cost you based on how many shares you want to purchase. It doesn’t matter where you live in Canada. If you’re in Vancouver and want to pick up shares in a property in Ottawa, Willow won’t bat an eye.
It does feel like a self-directed trading platform, not unlike TD Direct Investing, Wealthsimple or Questrade. The key difference is you’re buying shares in real estate, not stocks. Willow’s own equity caps apply to investors as well, so no one can own more than 10% of shares. The website and mobile app make these things clear, and you can transact there pretty freely.
The company says it has “the lowest fees in the real estate industry.” Each transaction incurs a $4.99 fee. There’s a 0.75% management fee, and a 2.5% one-time property acquisition fee for each new property on the platform. There are no performance fees, keeping your own appreciated asset value away from Willow’s coffers.
Currently, there is no way to tie your Willow investment to a TFSA or RRSP, though executives there say that will come later. Mutual fund trusts are also apparently coming “in several months,” though it’s not clear what that will look like. Any way you look at it, you won’t be able to shield yourself from capital gains taxes for the time being when you sell.
Granted, this type of investing isn’t really for a quick “in-and-out” money grab. Willow indicates that by noting how many years it recommends for getting bigger returns. You can buy shares and sit on them for years, or buy more later to increase your equity.
The long-term question is Willow’s own liquidity, which will need additional properties in different cities and locations to stay viable. It’s early days, but time will tell if this unique form of real estate investment will work for the little guy.