An Australian real estate income fund targeting an 8 per cent return through commercial mortgages has raised more than $230 million for its public offering.
The Qualitas Real Estate Income Fund (QRI) offer received strong support from cornerstone investors and, in particular, the wealth advisory network. Qualitas said investors have been attracted to the proposed income and portfolio diversification benefits.
“The feedback from investors is that they are looking to generate income beyond traditional, dividend-focused equities or lower-yielding bonds and term deposits. QRI was established with the aim of providing diversification through exposure via an alternative asset class, being the commercial real estate finance market,” Qualitas’ group managing director Andrew Schwartz said.
The trust will invest in a portfolio of loans, secured by predominantly first, and on occasion second, real property mortgages as the primary source of security.
“QRI aims to provide predictable income with a focus on capital preservation, which is especially sought after by investors such as self-funded retirees, and explains the strong interest we received. We are pleased to have raised above $230m – well ahead of the minimum we were seeking – even in the face of recent market volatility,” Mr Schwartz said.
Funds that invest only in commercial real estate loans are an established listed investment product on stock exchanges internationally, but not available in Australia until now.
“The trust offers exposure to the commercial real estate finance market in a listed format, which has been largely inaccessible to direct and SMSF investors to date. While markets overseas are familiar with this type of product, it is quite a differentiated offering on the ASX,” Mr Schwartz said.
Scott Favaloro, senior corporate adviser for Evans Dixon, the lead arranger and manager of the offer, said a diverse group of advisers and clients had been very responsive to the investment opportunity.
“This transaction stands out in the busy listed investment entity market because it offers differentiation, in terms of target return and asset class. We’ve been very pleased by the response from investors and their advisers who see the role QRI can play in diversifying client portfolios and adding additional income.”
The general offer closed at 5.00pm (AEDT) on 13 November 2018 and the trust is expected to be listed on the ASX on 27 November 2018.
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.
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.