This asset class is growing fast and Qualitas has your entry ticket

Qualitas IPO’d its listed fund – the Qualitas Real Estate Income Fund (ASX: QRI) – in 2018. A lot has changed since then. But as far as Managing Director and Co-Founder Andrew Schwartz is concerned, private credit has never been more compelling.

Schwartz and his team had some specific goals when listing the fund. First and foremost, they wanted to democratise a previously inaccessible market for retail investors. Beyond that, the goal was (and still is):

To deliver to investors a vehicle where they could earn predictable and reliable income, but also have potential for capital preservation.

This last comment about capital preservation is a point of pride for Schwartz, who adds that the fund has not had an impairment in the entire time it has been listed – a period that has seen some volatile market conditions.

The other benefit for investors is that as interest rates have risen, so have the returns for investors in QRI.

It’s mainly variable rate loans… where interest rates increase, we pass those rises onto the borrowers. So our investors are enjoying the benefits of uplifts in interest rates.

In this Expert Insights interview, Schwartz gives his take on the risks and opportunities for QRI now and into the future, and why he thinks a narrow but deep focus is the right formula for the fund.

Please note: this interview took place on Monday 6 March 2023.

Edited Transcript

The Qualitas Real Estate Income Fund (ASX: QRI) listed in 2018, does listed credit still resonate in 2023?

Andrew Schwartz: 

I think listed credit definitely resonates in 2023 and if anything, it's just become more compelling since the actual IPO itself.

If we go back to the IPO and the reasons why we decided to IPO QRI, which is our listed investment trust for real estate receivables, it was to really deliver to investors a vehicle where they could earn predictable and reliable income, but also have the potential for capital preservation.

We brought that to the market at a time when interest rates were coming down. Investors were finding it difficult to earn reasonable amounts of income given the interest rate environment.

QRI was designed to give those investors enhanced returns, predictable and reliable with the potential to preserve capital.

I think if you look at the vehicle since the time of the IPO, one area that we're particularly proud of is the fact that we've not had an impairment since that period of time. We listed that particular vehicle at $1.60 of NTA. It has sat solidly on $1.60 of NTA through that entire period, meaning we've had no impairments in the portfolio.

As interest rates increase, so do the returns of QRI.

It's mainly variable rate loans, it's mainly pitched to where interest rates increase we pass those risers onto the borrowers. So our investors are enjoying the benefits of uplifts in interest rates and also risk margins, which is the margin one charges over and above the bank bill swap rate, which is the cost of capital rate, has also been widening in this particular time of the cycle as liquidity has been a little bit less than what has been over the past couple of years.

Why did Qualitas choose to IPO QRI and make available for investment via the ASX?

Because it felt there was an absolute gap in the market for that listed credit product that an ordinary investor could actually access.

That it was the domain of the large institutional investors who were very much enjoying this private credit market to themselves and it was almost impossible, other than family offices that might have been looking at some bilateral direct transactions in the market.

For most investors, it was impossible to access this as an asset class. And we felt a listed vehicle democratises the way in which the smaller investor can actually gain that access.

We're really excited to bring it to the market. I think we remain very excited about the vehicle and the ability to grow and have more investors participate in a pure real estate credit, listed investment trust.

What were the risks and opportunities then, and what do they look like now and in the future?

The risk is always the risk of impairments and also the non-payment of interest. It's designed to be capital stable and to provide predictable and reliable income.

So anything that runs counter to those two objectives would be a risk.

I think the main opportunity we have is to enjoy the upward movement of interest rates.

I say that a bit sadly, in one way, because obviously interest rates going up is hurting certain sectors of the economy. But in terms of whether one's on the right side of that equation or not, I think better to be the lender enjoying the upside of interest rates. And I feel that that's one of the key opportunities that QRI can bring to investors, unlike say, an equity investment.

The other opportunity is just to grow in size, have more liquidity for the vehicle, more people participate, and an appreciation for the fact that it's a pure vehicle on real estate. Again, we're not trying to be everything to everybody doing all sorts, whether they be infrastructure, corporate finance, or renewables.

It's a pure real estate investment vehicle and a lot of investors out there choose to participate in a vehicle that has a more narrow focus.

I really feel being narrow but deep is the real opportunity for QRI going forward.

Are you looking to expand QRI to consider other assets? Why or why not?

In the medium term, the answer is, there's a lot of room in the Australian real estate market for us to substantially grow.

I think one of the positives of our type of business is just staying focused on an area that you know extremely well. Not glide over the top of the analysis. Because if you've got too many asset classes, I don't know that you can be an expert in every single last asset class that you deal with.

When you deal in real estate, it's a specialised area. There's lots of real estate out there. There's residential, commercial, industrial, and retail. There are many different areas where one can participate, and it's enough, you need to have a deep understanding of each of those before you rush off and start to tackle entirely different asset classes that have nothing to do with real estate. 

I feel happy that we've got an area in which we can really deep dive and grow substantially before we have to start looking at other asset classes.

Do you seek equity-like returns with debt-style security?

If you’re looking for a new kind of opportunity beyond shares, fixed income and traditional property investments, the Qualitas Real Estate Income Fund (ASX:QRI) could help you diversify your portfolio and meet more of your goals by investing in the growing opportunities of the commercial real estate (CRE) debt market. Learn more about the fund here.

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