Even when property is facing headwinds, there are ways for investors to benefit from it.
Warren Buffet’s famous piece of investment advice is to “be fearful when others are greedy and greedy when others are fearful”.
This is true of any asset class, not just equities. And while there are some headwinds for the real estate sector, it does not follow that there are no investment opportunities.
In fact, real estate debt is a burgeoning asset class in Australia, with local and offshore investors increasingly turning their attention to it.
Real estate investment firms have long recognised that in an environment of high asset prices, ownership is not always the most effective investment strategy. Instead, financing the purchase or construction of assets by third parties may provide strong and predictable returns while avoiding the scramble to buy properties at high prices and low yields.
Qualitas has been a key player in the commercial real estate debt space for the past decade, forging a strong track record of returns for investors by responding to the opportunities that the market cycle presents.
A changing debt landscape
Qualitas invests across the capital structure, from senior and mezzanine debt through to equity, depending on the specifics of each deal.
Senior debt has traditionally been the province of the large banks, who are attracted to the security provided by first-ranking mortgages on the underlying assets. If the borrower defaults, the bank is first in line to claim the assets provided as security.
However, in recent years, alternative lenders such as Qualitas have increased their share of senior debt in the CRE market. This is a result of the banks reducing their appetite for such debt, as they grapple with the regulator’s demand for higher capital buffers and to rebalance their loan portfolio exposure to certain sectors.
This has not only increased opportunities for alternative lenders, it has adjusted the pricing of such loans and made it a more attractive option for private and institutional investors.
Rethinking mezzanine debt
Mezzanine debt is an important source of capital for real estate developers, who use the funding alongside senior debt. Mezzanine loans are often used earlier in the development process to finance construction activities. They have a fixed term, typically around two years, to match the lifecycle of a project.
This type of loan is usually subject to a second-ranking mortgage, so it is still secured, but any senior debt claims would take priority in the case of a default. The risk is therefore higher, as are the rates charged to borrowers, and the returns to investors.
Risk management and capital protection
In a period when house prices are moderating, or even falling in some areas, it’s easy for investors to get nervous. However, secured debt investments have a buffer created by the fact that we only lend up to a certain percentage of the property value.
For example, a loan made at 70% LVR means the asset value would need to fall more than 30% before the lender stands to make a loss.
With all of these facts in mind, in our view, investors who take a more nuanced look at the property market have the potential to achieve strong, risk-adjusted returns by working with the right investment manager.
Disclaimer: This article has been prepared by Qualitas Securities Pty Ltd (ACN 136 451 128) (Qualitas Securities), holder of Australian Financial Services Licence number 342242. Qualitas Securities and its related bodies corporate and affiliates constitute the Qualitas group (Qualitas).
The information contained herein is for informational purposes only and does not constitute an offer to issue or arrange to issue financial products. The information contained herein is not financial product advice. This document has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should read the publicly available information carefully and consider, with or without the assistance of a financial adviser, whether an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Past performance is not an indicator of future performance.
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