Where CRE debt fits in a defensive portfolio with an income focus
The problem with bonds
Times are tough for investors or advisers looking to add value through a defensive portfolio.
Defensive, or income assets, aim to provide income rather than capital growth. They generally carry a lower investment risk than shares or property, with more stable returns in the short term but lower returns over the longer term.
For most investors, this means bonds. But the problem with investing in bonds is not just the lack of income from the all-time low (even negative) yields on offer. It’s that bonds no longer react positively to falling share markets – traditionally a major benefit of the asset class.
Take last year’s pandemic sell-off. Bond values didn’t rise, they fell. They’re simply not playing the defensive role they’ve played so well in the past.
Investors are left to either accept this unsatisfactory scenario or take on more risk. Or, consider a third option.
An alternative source of income
If you’re running a defensive portfolio, a steady and reliable income is critical.
Alternative assets can provide that elusive income you’ve been searching for.
Commercial Real Estate (CRE) Debt is an asset class that offers compelling benefits for those seeking income. A CRE debt investment seeks to generate monthly income by providing loans to commercial borrowers who require funding for real estate purposes. Its income stream is predictable because the loan interest and fees are agreed upfront, so this “fixed income” is known for the duration of the loan.
The investment also provides capital preservation and portfolio diversification; its loan value does not fluctuate – unlike equities – and it ranks ahead of equity in the capital structure.
A growing opportunity
Within the Australian commercial real estate sector, bank loans make up 93% ($355 billion) of the debt currently provided to commercial borrowers1. The remainder (~$25 billion) of CRE debt is provided by alternative lenders, a sector that while small, is well-established and has been growing steadily, becoming more sophisticated in funding solutions for borrowers.
In the current economic climate, banks have been withdrawing from the lending market, leading to a shortage of debt capital for borrowers, and better opportunities for alternative lenders such as Qualitas.
As alternative lenders gain market share, the opportunity for investors also grows. Why? because borrowers will pay a premium for the flexibility provided by alternative lenders. Flexibility on the terms of the loan, the availability of loan options and the speed of funding.
Including CRE debt in your defensive portfolio
Commercial real estate debt is a good defensive and income focused asset to hold alongside other income generating asset classes. Some of the benefits of investing in CRE debt are:
- A reliable income stream. The premium paid by commercial borrowers for alternative financing – in the form of fees and interest on the loans – translates directly into premium returns for the investors. Plus, these returns are agreed upfront and are locked and loaded for the duration of the loan.
- Portfolio diversification. CRE debt is unique in that it can fit into three asset classes: fixed income, property, or alternatives. An allocation to debt can also diversify your portfolio across the capital structure, reducing risk. It may be suitable for investors looking for less capital volatility than equity.
- Capital preservation. This is where the defensive nature of CRE Debt shines through. CRE loans are secured by first or sometimes second mortgages over a physical property. If the mortgage security ever needs to be enforced, the investors are repaid before anyone else. Plus, the lender only lends a certain percentage of the property value, so there is an ‘equity buffer’ to further protect investors from capital losses.
- While providing exposure to real estate, the debt-based nature of CRE debt means it is less affected by property price fluctuations. The regular interest payments of the underlying loans also mean the returns are more predictable than those from equity-based property investments.
Choose a manager with the right expertise
Qualitas is an Australian-owned property investment specialist, managing $3.7 billion across both debt and equity investments. We’re well positioned in the Australian market due to our long-standing local presence and deep borrower relationships built on trust and repeat lending over many years.
In our 13 years of operation, we’ve closed more than 160 debt deals and have incurred zero losses of capital, which is testament to our disciplined investing.
We launched the Qualitas Real Estate Income Fund (ASX:QRI) in 2018, which is listed on the ASX. It aims to provide regular income and portfolio diversification by investing in the opportunities of the CRE debt market.
QRI’s model is simple: we actively manage a book of circa thirty loans provided to well-established Australian commercial property investors and developers. We know all of our borrowers individually, and the loans are high quality.
It has consistently outperformed its target objectives since its launch.
Accessing the opportunity
QRI is readily available through the ASX, and on various platforms.
Visit the fund’s website to find out how you can access this opportunity for you or your clients.
1 Australian Prudential Regulation Authority Quarterly Authorised Deposit-taking Property Exposures December 2020; RBA Financial Stability Review April 2021.
Notices and Disclaimers
This communication has been issued by The Trust Company (RE Services) Limited (ACN 003 278 831) (AFSL 235150) as responsible entity of The Qualitas Real Estate Income Fund (ARSN 627 917 971) (“Fund”), and has been prepared by QRI Manager Pty Ltd (ACN 625 857 070) (AFS Representative 1266996 as authorised representative of Qualitas Securities Pty Ltd (ACN 136 451 128) (AFSL 34224)).
This communication contains general information only and does not take into account your investment objectives, financial situation or needs. It does not constitute financial, tax or legal advice, nor is it an offer, invitation or recommendation to subscribe or purchase a unit in the Fund or any other financial product. Before making an investment decision, you should consider whether the Fund is appropriate given your objectives, financial situation or needs. If you require advice that takes into account your personal circumstances, you should consult a licensed or authorised financial adviser.
While every effort has been made to ensure the information in this communication is accurate; its accuracy, reliability or completeness is not guaranteed and none of The Trust Company (RE Services) Limited (ACN 003 278 831), QRI Manager Pty Ltd (ACN 625 857 070), Qualitas Securities Pty Ltd (ACN 136 451 128) or any of their related entities or their respective directors or officers are liable to you in respect of this communication. Past performance is not a reliable indicator of future performance.