Can you benefit from property investment without buying a property?
The answer is YES.
There are more ways to gain exposure to property than simply buying into it.
Debt-based real estate investments have grown in popularity and availability in recent years due to a number of factors, outlined below.
In the past, investors seeking exposure to Australian real estate investments were mostly only able to do so through direct or indirect equity investments. Direct property investment is especially popular among retail ‘mum and dad’ investors: data from the Australian Taxation Office (ATO) shows that over 20% of Australia’s 11.4 million taxpayers owned an investment property in 2019-20, and collectively they own 3.25 million investment properties1.
However, approximately 70% of those owners own just one property, meaning they have significant concentration risk: with a large amount of wealth tied up in one asset, it is heavily dependent on asset selection – in other words, putting all their eggs in one basket. In addition, there can be significant and often unpredictable maintenance costs, plus sensitivity to rising interest rate costs.
Another way to ‘own’ real estate is through Real Estate Investment Trusts (REITs), but these are particularly sensitive to valuation fluctuations. For example, the S&P/ASX 300 A-REIT, which tracks Australian REIT performance, is yet to recover from the significant drop it experienced at the start of the pandemic2.
Against this background, debt-based real estate investments have grown in popularity and availability in recent years. Just as corporate bonds provide an alternative to buying shares in companies, CRED provides exposure to the property market without needing to own the assets.
In a period of rising inflation and interest rates, CRED has a number of attributes that may make it attractive to investors.
- Secured: Loans are secured by real assets (e.g. development site), with investors taking precedence among creditors in the event of the loan defaulting (see Figure 1). This helps to manage risk.
- Predictable Income: Borrowers agree to pay interest over the life of the loan, and this is the basis of ongoing ‘coupon’ payments to investors. This is unlike dividends for equities, which are discretionary and dependent on the company’s cashflows.
- Pricing Power: Loans are negotiated on a deal-by-deal basis. This means loans can be priced according to market conditions, even if interest rates rise. Most new loans to do incorporate some form of variable rate pricing mechanism.
Zagga’s latest white paper, 'Remarkably Resilient: Australian Real Estate in an Age of Inflation', outlines the market dynamics driving the popularity of such investments.
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking groups in South Africa, CEO of South Africa’s third largest private client wealth manager, Director of a Superannuation Risk and Operations consultancy, a consultant to Westpac, and as MD of a ‘home loan over the phone’ business established for Real Insurance and Macquarie Bank. He has consulted widely to owner-managed businesses across strategy, technology and operations and co-founded Zagga in 2016, where he is a Member of the Zagga Investment Risk Committee, Zagga Credit Oversight Committee, and Zagga Compliance Committee, and a Responsible Manager (AFSL / ACL).
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[1] https://data.gov.au/data/dataset/taxation-statistics-2019-20
[2] S&P/ASX 300 A-REIT | S&P Dow Jones Indices (spglobal.com)
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
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Alan has more than 30 years’ experience in banking and finance, following a short stint as a legal practitioner, with work experience in the UK, South Africa and Australia. His many and diverse roles include C-suite positions in two-listed banking...
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No areas of expertise
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