As the major banks step back from commercial real estate debt financing and real estate values begin to slide, property debt is making more sense for Australian investors, says Qualitas.
Alternative debt financier Qualitas is hoping property credit finds its way into more institutional and retail portfolios as the banks move out of the sector.
Qualitas, which has around $2 billion of committed funds under management (FUM), launched a $500 million construction finance fund in May 2017 and is looking to launch a listed investment trust in the coming months.
Speaking to InvestorDaily, Qualitas chief investment officer Andrew Schwartz said Australia’s banks typically account for 85 per cent of the commercial debt market (compared to 45-65 per cent in the UK and US markets).
Mortgage real estate investment trusts (REITs) and listed residential mortgage-backed securities (RMBS) are well-understood overseas but tend to be thin on the ground in Australia, Mr Schwartz said.
However, that could change as Australia’s major banks begin retreating from the commercial real estate debt market as APRA turns the screws on its lending criteria.
“There is a shortage of property debt capital in Australia if you look at other parts of the world,” Mr Schwartz said.
“You are getting a premium on providing debt capital relative to other asset classes and relative to other global markets as well. It's a supply and demand of capital that enables you to get that premium,” he said.
The Australian property market is moving from an ‘equity zone’, where it makes sense to own property, to a ‘debt zone’ where the best risk-adjusted returns are likely to come from property credit, he said.
“In a ‘debt zone’ the banks are not really competing with each other – in fact, they want to reduce their volumes,” Mr Schwartz said.
“And the value of property is not going up but it's probably going sideways. If that's what presenting itself, just do the debt. It makes a lot more sense in that environment,” he said.
Of Qualitas’ $2 billion in FUM, about two-thirds is institutional money, with the remainder taken up by high-net-worth investors.
The “vast majority” of the institutional investors are foreign entities that are attracted to the relatively uncorrelated nature of Australian property credit, Mr Schwartz said.