From GFC to almost $9 billion: How Qualitas is helping shape real estate investment

Andrew Schwartz has been involved in markets for 40 years and started Qualitas (ASX: QAL) in 2008 – right in the middle of the GFC. From that crucible emerged one of Australia’s leading real estate investment managers, with committed capital of $8.9 billion (as at 27 June 2024).

What has been one of Schwartz’s biggest learnings over the journey?

“There are cycles”, says Schwartz, “and one of the really important parts of what we do is picking the right time of the cycle to really get involved”.

In the following Views from the Top, Schwartz shares his insights on where he believes we are in the cycle now, his views on the property market, the incredible growth in the space, what the future could look like, and how Qualitas is unpacking all those elements to pursue the opportunities available.

Below is a summary of some of the key discussion points in the interview but, for the full experience, I strongly suggest watching the video. Please note the interview was recorded Monday 24 June, 2024.

Incredible growth

Both private credit generally, and Qualitas specifically, have enjoyed incredible growth recently. With regards to the latter, Qualitas IPO’d in 2021 and, at the time, had $4.1 billion of committed funds under management. As noted above, that number is now $8.9 billion (as at 27 June 2024).

Schwartz puts the growth more broadly down to “greater awareness of the asset class and for a lot of investment managers and asset allocators, it's really on the radar now”. He adds that we shouldn’t really be surprised by that given we’ve gone through a period of rising interest rates, and “with that is a lot of volatility in equity values”.

“A lot of participants in the real estate market have been left wondering about asset prices, the possibility that within a rising interest rate environment, you might find equity values actually come down.

So they’re looking for alternative ways to have exposure to property but not necessarily be exposed into the equity side of property”.

Is this growth sustainable?

When things grow quickly, often the growth can be bumpy and, inevitably, questions start to arise about sustainability of growth – a question which Schwartz has been fielding from Qualitas’ investors.

Schwartz believes real estate private credit is a “very deep market” and he’s got the numbers to back it up. He cites a study from CBRE conducted recently, highlighting that between FY25 to FY28, Australia will need 300,000 high density dwellings (i.e. apartments and terraces), excluding house and land.

Meanwhile, another study from Charter Keck Kramer highlighted 79,000 projects “that you could actually point to them and say they've got their planning permit, they're likely to get finance and that'll be a development over the next three years”, says Schwartz.

As Schwartz goes on to point out, simple mathematics leaves a shortfall of 221,000 dwellings. So how much could that be worth in terms of debt financing?

“That's over $200 billion of private credit”, says Schwartz, adding that number “happens to be three times the size of the entire Australian banking system in CRE credit”.

"So, I think that really does demonstrate this is a deep market. It has a very strong need for debt capital and I don't think investors should be too worried about the runway being too short for a firm like Qualitas", says Schwartz.

The Qualitas difference

It’s one thing to talk about the size of an opportunity. It’s another altogether to talk about how to access it and capitalise on it – though for Schwartz and Qualitas, this isn’t breaking new ground.

Schwarts has been espousing the virtues of private credit “literally for 40 years, but particularly for the last 16 years since we started Qualitas”, and whilst it seems like a new discovery to some, that’s simply not the case.

What Schwartz is mindful of, however, is that people see the space as a homogenous commodity, where all private credit is created equal. This could not be further from the truth.

“Like all markets, there are markets within markets, there are different types of first mortgages, different borrowers, different regions.

“I think that investors haven't yet really developed to a point where they're able to be discerning about various mortgages. So I think the risk that they run is they look at one manager who might be earning 8, 9 and 10% returns and they compare that to another manager who maybe is earning 11, 12, 13% returns and they say, well, surely the one who can earn more is outperforming the one who earns less without really understanding that there is actually no free lunch when it comes to lending”.

With all this in mind, Schwartz is keen for investors to understand that Qualitas is not trying to “push the leverage”, as he puts it. Rather, Qualitas is looking to “work within highly densified areas of the major east coast cities of Australia with lower leverage, better borrowers, but offering more flexible solutions”, says Schwartz.

In practice, this means that Schwartz passes on 95% of the deals that land on his desk, and he and his team are keenly focused on understanding the participants in the construction industry – lending to which comprises around 50% of Qualitas’ activity.

It has been a challenging time for some builders, and whilst Qualitas has little exposure to the volume builders that seemed to have had the most trouble, Schwartz is proud of the due diligence his team conducts, noting that “our track record is particularly strong in this area”.

That track record is predicated on understanding how the tier one and tier two, high density residential construction builders that Qualitas deals with offset their costs in the subtrades, and how much of the contracts are let before getting involved.

As Schwartz tells it, “there are quite significant contingencies from the builder side in respect to pricing the contracts. We get bank bonds that also protect us in respect of the contracts”.

“It is a really forensic analysis of who the builder is, what their track record is, what financial support are they giving to the project, and it's really core to our business”.

Specialists at creating real opportunities

Qualitas is a leading ASX-listed Australian alternative real estate investment manager specialising in real estate private credit and private equity. Qualitas helps their partners bring their projects to life and aims to deliver attractive risk-adjusted returns to their investors.

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