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Investors trade illiquidity for income in alternative property

Australians have an “amazing love affair” with property, but many are limited in their investment exposure. At AIA’s recent annual conference, investors heard how three alternatives to direct ownership provide portfolio benefits with less hassle, particularly for income-seeking retirees.

Property is the largest real asset class in the world and the cornerstone of Australian household wealth, but many individual investors miss out on opportunities beyond directly buying a residence. At the Australian Investors Association’s annual conference, three leaders in the alternative property space recently made the case for alternative property investments, particularly for those seeking income.

“It’s an amazing love affair that Australians have with property, particularly residential property, in some cases acquiring as much of it as possible,” said Andrew Thompson (pictured, left), general manager of CFMG Capital, in a discussion at the AIA’s 2023 investX conference comparing investing in property with buying an investment property.  

Directly buying an investment property is still a good strategy for acquiring wealth but comes with drawbacks, and “there are other ways to do it”, Thompson said. He noted that buying a property generally involves paying a deposit of 10 per cent or more and securing and paying associated costs for tenants, agents, maintenance and insurance. And those spruiking direct property can be very persuasive.

  • “At the end of the day, it can be a good strategy if you do it right,” Thompson said. “But often with those models, you’re overpaying for overpriced property, so you’re behind the eight ball and the growth before you even get started.”

    Opportunities in alternative property

    The alternative property space consists of four key asset classes: residential, commercial, industrial and retail. Investors can access these opportunities through a range of products and providers, including listed and unlisted real estate investment trusts (REITs), managed funds, non-bank lenders, and unlisted managed investment schemes.

    Investors can generate income returns across the debt capital stack, Lauren Ryan (pictured, centre), business development manager of investments at Thinktank, said in a discussion of the non-bank specialist property lender’s evolution and mortgage-backed investment opportunities available to high net worth/sophisticated individual investors.

    Thinktank provides commercial, residential and self-managed superannuation fund (SMSF) lending solutions and is a respected player in capital markets, having issued more than $9 billion in residential and commercial mortgage-backed securitised bonds to Australian and global investors since its inception in 2006.

    Many of Thinktank’s clients invest through their SMSF or a company or trust, Ryan said. Most investors are retired or gearing up towards retirement, often having sold a property asset they no longer want to manage because they’d prefer to be earning income.

    Thinktank offers two mortgage-secured investment fund options for Australian wholesale and sophisticated investors, providing fixed-income returns between 7.65 per cent and 10.55 per cent annually as of October 10, 2023, with a minimum investment of $10,000 and minimum term of 12 months.

    With varying investment terms on offer, non-bank lenders like Thinktank offer exposure to mortgage-backed property investments without the multiyear illiquidity concerns that might keep many would-be investors away from the market, Ryan said.

    “Many of our investors have had a lot of experience with property, so they’re quite comfortable with the relative illiquidity,” she said. Nonetheless, debt funds probably aren’t for people who prefer to be 100 per cent liquid.

    “But if you are comfortable with an element of your portfolio being set for a fixed term, there is significant opportunity both on the income and on the capital side in the non-bank private credit space, especially with rates where they are, and quality credit still in good shape,” she said. “Depending on your preferences, there are many different options available for you within that debt structure.”

    Future income streams

    InvestX attendees also heard from Castlerock director Adam Bronts (pictured) about another property opportunity for Australian investors, through Castlerock’s Auslink Property Trusts, which develop sites for state and federal government clients and then continue to manage and maintain the assets, generating a long-term income stream.

    While changing workplaces may have some investors worried about future vacancy rates in office buildings, Bronts said this is less of a concern in the government space, which has had work-from-home and flexible-work policies for some time and so the concept is not new.

    “We’ve seen some downshift in the occupation of offices, and we’re seeing a few less desks but a lot more meeting rooms and facilities that are being implemented in the offices to make way for the new style of work,” he said.

    As with any investment, the presenters emphasised, it’s important for investors to think carefully about their risk profile and investment objectives, as well as consider macroeconomic factors, when allocating to alternative property.

    For instance, while Ryan noted that the reputation of mortgage funds has improved from the governance-related issues that came to a head during the global financial crisis, the sector is still not without risks.

    “I do think investing in mortgage funds requires more stringent due diligence, so I would encourage investors to go through the history of the fund, look at how much skin they’ve got in the game and who else is investing in them,” she said. “If some of the biggest banks in the country and globally are comfortable providing capital to the lender, that’s probably a good indication that they’re doing something right.”

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