Where CRE debt fits into a defensive income-driven portfolio
The problem of obligations
Times are tough for investors looking to add value through a defensive portfolio. For most investors, defensive investing is synonymous with bonds.
But the problem with investing in bonds isn’t just the lack of income from the historically low (or even negative) yields on offer. This is because bonds no longer react positively to falling stock markets – traditionally a major asset class advantage.
Take the wind up from last year’s pandemic. Bond values have not risen, they have fallen. They just don’t play the defensive role they’ve played so well in the past.
Investors have little choice but to take more risk. But if you’re feeling disheartened, Commercial Real Estate Debt (CRE) is an asset class that offers compelling benefits for those seeking income.
An alternative source of income
A CRE debt investment seeks to generate monthly income by providing loans to commercial borrowers who require financing for real estate purposes. Its income stream is predictable because the interest and fees for the loan are agreed in advance, so this “fixed income” is known for the life of the loan.
The investment also helps to preserve capital and diversify the portfolio; its loan value does not fluctuate – unlike stocks – and it ranks ahead of equity in the capital structure.
A growing opportunity
Within Australia’s commercial real estate industry, bank loans account for 93% ($ 355 billion) of the debt currently issued to borrowers. The rest is provided by alternative lenders, a sector which, although small, is well established and has grown steadily, becoming increasingly sophisticated in financing solutions for borrowers.
As alternative lenders gain market share, so do the opportunities for investors. Why? because borrowers will pay a premium for the flexibility offered by alternative lenders. Flexibility on loan terms, availability of loan options and speed of financing.
Include CRE debt in your defensive portfolio
Commercial real estate debt is an attractive, income-oriented defensive 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 loans – translates directly into premium returns for investors. In addition, these returns are agreed in advance and are locked and charged for the life of the loan.
- Diversification of the portfolio. CRE debt is unique in that it can fall into three asset classes: fixed income, real estate or alternative. Debt allocation can also diversify your portfolio across the capital structure, thereby reducing risk. It may be suitable for investors seeking less capital volatility than stocks.
- Preservation of capital. This is where the defensive nature of CRE Debt shines through. CRE loans are generally secured by first mortgages on physical property. If the mortgage guarantee has to be fulfilled, investors are paid off before anyone else. Additionally, the lender only lends a certain percentage of the property’s value, so there is a “capital cushion” to further protect investors against capital losses.
- While offering real estate exposure, the indebted nature of CRE’s debt makes it less affected by fluctuations in real estate prices. Regular interest payments from the underlying loans also mean that returns are more predictable than those from equity-based real estate investments.
Choose a manager with the right expertise
Qualitas is an Australian real estate investment specialist, managing $ 3.7 billion in debt and equity investments. We are well positioned in the Australian market due to our long-standing local presence and our close relationship with borrowers, built on trust and repeatable lending over many years.
In our 13 years of activity, we have completed over 169 debt transactions and have not suffered any loss of capital, which is a testament to our disciplined investment.
We launched Qualitas Real Estate Income Fund (ASX: QRI) in 2018, which is listed on 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 portfolio of around 30 loans to established Australian commercial real estate investors and developers. We all know our borrowers individually and the loans are of high quality. 97% of the loans are first mortgage loans and 98% have a personal guarantee.
Access the opportunity
We are reopening the QRI fund to new investors in October 2021. [What other info is important to communicate here?]
Visit the fund’s website to find out how to access the CRE debt opportunity.
This article is sponsored content. The provider of this content has a commercial agreement with Switzer Financial Group.
This has been prepared by QRI Manager Pty Ltd (ACN 625 857 070) (Representative AFS 1266996 as an authorized representative of Qualitas Securities Pty Ltd (ACN 136 451 128) (AFSL 34224) and the communication has been issued by The Trust Company ( RE Services) Limited (ACN 003 278 831) (AFSL 235150) as the entity responsible for Qualitas Real Estate Income Fund (ARSN 627 917 971) (“Fund”).
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