A reliable income opportunity whose time has come

Low-interest rates, uncertainty around inflation, a market that doesn't know whether it’s coming or going ... now more than ever investors are hunting for reliable and robust returns, and one such opportunity resides in a diversified commercial property portfolio.

The commercial real estate debt market in Australia is worth about $380 billion, of which banks occupy around 93%. The remaining 7% is occupied by alternative lenders, such as Qualitas, which contributes about $25 billion of commercial real estate loans.

When you compare this to the more mature US and Europe markets, where alternative lenders occupy around 45 or even 50% of the market, you can see the opportunity to grow is significant.

In addition, commercial real estate debt is growing globally at around 2% to 4% per annum, whereas the alternative lending market is growing at around 10% per annum based on last year's results.

Finally, as Government oversight and regulations tighten, senior banks’ appetite for commercial debt has weakened, creating a capital gap for alternative lenders and with it an opportunity to add value. How? Borrowers are prepared to pay a premium to access the wider range of flexible and more swiftly delivered loans that alternative lenders can provide across residential and industrial properties. 

Commercial real estate debt is a highly specialised asset class. As Nick Bullick, Portfolio Manager for the Qualitas Real Estate Income Fund’s explains in the video below, strong performance history makes it especially well placed to provide income at attractive risk-adjusted returns with capital preservation and portfolio diversification. 

Looking for regular income and diversification?

The Qualitas Real Estate Income Fund (ASX:QRI) aims to deliver investors a regular stream of income with the added benefit of diversification beyond shares and traditional property investments. For more information, hit the 'CONTACT' button below.

Edited transcript

My name is Nick Bullick and I'm the portfolio manager for QRI. Over the next 10 minutes, I'd like to give everyone an insight as to what QRI is, and how investors can seek a regular reliable income from a diversified commercial property portfolio. We'll talk a little bit about the size of the commercial real estate debt market, and the opportunity for alternative lenders, such as Qualitas. We'll introduce the portfolio and the characteristics of commercial real estate debt, and then go into why you should invest in the fund.

Qualitas was established in 2008 during the GFC, and since then has established itself as one of Australia's leading institutional alternative real estate investment management firms. And we specialise in either investing in real estate equity or providing commercial real estate loans to borrowers. We've invested over $4 billion worth of investor capital into real estate assets worth over $13 billion.

At Qualitas, we've made over 200 investments, which goes to our very strong, discipline in our investment approach. So what is the commercial real estate market, what is the size of it, and what is the opportunity here? We think the commercial real estate debt market is worth about $380 billion, of which banks occupy around 93% of that, which means the other 7% is occupied by alternative lenders, such as Qualitas. Alternative lenders contribute about $25 billion of commercial real estate loans. If we look at more mature markets like the US and Europe, alternative lenders, such as Qualitas occupy around 45 or even 50% of the market. So the opportunity to grow is significant, but it also shows the importance of alternative lending in the overall global financial system. It's also growing at quite a significant rate. Commercial real estate debt is growing at around 2 to 4% per annum, but the alternative lending market is also growing at around 10% per annum, based on previous years' results.

There's been also a structural shift over the last 10 years with significant government oversight and APRA regulation on the senior banks, which has caused them to withdraw their appetite for commercial real estate debt. And that provides a capital gap that needs to be provided or filled from somewhere. And it's alternative lenders such as Qualitas that are now filling that gap. Why is that an opportunity for investors? Because borrowers are prepared to pay a premium to access more flexible loan terms, but also the speed at which those loans can be provided as well, and the nimbleness in terms of what Qualitas can offer.

We lend right across all property sectors. And you'll see there, we've got our current property outlook, being residential and industrial performing very well. A little bit of uncertainty with office, however, we're neutral on that at the moment, given our long-term views. But retail and hospitality are going through a little bit of repositioning and maybe some of those assets are getting repurposed or being repositioned into other sources.

We'll now talk about just the resilience of commercial real estate debt and where it sits in the capital structure. When a commercial property is owned, secure debt is always repaid first, which gives its capital preservation characteristic. It's also quite resilient in times of uncertainty, and even during the GFC, you can see there that the banks only had an impairment rate of under 6% to CRE debt. And through the last period of uncertainty, being COVID-19, impairment rates for commercial real estate debt have remained very low.

So I'll just go into a bit of a summary on QRI itself and how important it is for investors. The fund itself is liquid, pays regular income, has capital preservation characteristics, and each loan is secured by a property mortgage. And that's important because QRI only invests in commercial real estate loans, which are distinct from equities, high yield fixed income bonds and unsecured corporate loans. It seeks to provide a target return of the RBA cash rate, plus a margin of 5 to 6.5%. And over the past 12 months, we've returned investors 6.15% per annum. The portfolio's diversified with 32 loans, which are predominantly first mortgage. We've had no impairments since the IPO, and we've remained at a stable NAV of $1.60.

The portfolio itself is very simple. It's 32 loans. We know each borrower individually. We know each property intimately and each borrower and property is reviewed usually on a monthly basis. The portfolio consists of property loans that fall into four distinct categories:

• Investment loans,
• Construction loans,
• Land loans, or
• Mezzanine construction loans.

We typically will have a high proportion of investment loans in the portfolio and a lower proportion of construction loans and mezzanine loans. Right now, the portfolio is quite heavily weighted towards residential, which we're okay with, given how strongly the residential sector is performing. Also at the moment we're quite heavily weighted towards Victoria. However, we believe this is a cross-section in time, and typically this will even out between Sydney and Melbourne. 94% of the loans we have in the portfolio are in our core markets of Sydney and Melbourne. And the remaining 6% are in areas like Canberra or Newcastle.

So where does QRI sit in an investment portfolio? We believe it can sit in three different asset allocations:

• Fixed Income, because it pays a monthly income every month;
• Property, given their commercial real estate loan’
• Alternatives, which gives the flexibility when designing your portfolio.

In wrapping up, what are the key benefits in QRI and why invest?

1. Commercial real estate debt is a highly specialised asset class and Qualitas is a specialist commercial real estate debt manager.

2. QRI aims to provide income at attractive risk-adjusted returns with capital preservation and portfolio diversification.

3. QRI has a strong performance history with consistent returns, no impairments, stable NAV, and currently trading at a premium to NAV.

Thank you for your time, and if you'd like some more information, please visit our website at (VIEW LINK) or please click on the ‘CONTACT’ button below. Thank you.