Property funds provide alternative source of funding
When Thinktank opened for business in 2006, traditional wholesale funding was its traditional source of debt. Major domestic and offshore banks were more than willing to support them in offering commercial property loans up to $3 million for retail, industrial, warehouse, office and professional suites.
It’s a sector of the market that performs differently to the “top end” of town, with the ownership typically split about 50:50 between owner-occupiers (e.g. accountants, mechanics, warehouses, etc.) and passive, long-term investors and, as such, is a market ideally suited to a niche lender.
Certainly, it’s a business model that has allowed this specialist commercial property lender to not only survive the global financial crisis but steadily build its loan book, having written more than $2 billion in loans over this period and issuing more than $1 billion in AAA-rated bonds (by Standard & Poor’s) to Australian and international institutions.
In 2013, limited recourse borrowing arrangements (LRBAs) became another specialist string to Thinktank’s bow. This form of finance proves ideal for many small- to medium-sized enterprise (SMEs) owner/operators wanting to achieve the twin goals of buying their business premises and planning for their self-funded retirement, as well as dovetailing with Thinktank’s expertise in commercial property lending. Today, Thinktank has more than 500 LRBAs on its books totalling more than $300 million — a sizeable proportion of its loan book.
Although this formula of using wholesale funding to build its loan book has delivered growth and profitability, Thinktank took the opportunity in 2017 to diversify its funding sources by offering investors two attractive yielding investments by raising capital via bonds in two property trusts. The funds raised from the issue of the bonds are deployed alongside bank debt to originate high-quality mortgage loans.
The market for the trusts’ bonds is the wholesale investment market, with a particular focus on self-managed super fund (SMSF) trustees. That SMSFs are the target is hardly surprising. The yields on offer are attractive and SMSFs have traditionally invested in commercial property.
Indeed, while much of the attention of SMSF asset allocation has focused on investment in residential property, it’s commercial property that has had the bigger appeal. Australian Taxation Office (ATO) figures show that at 30 September 2019, commercial property comprised $64.6 billion in SMSF FUM or 8.6 per cent of total SMSF FUM of $746 billion. By contrast, residential property made up $35 billion or 4.7 per cent of total SMSF FUM.
The appeal of commercial is not difficult to discern. For many trustees, commercial property is part of their business operations. For others, it’s a recognition that in times of record-low interest rates, commercial property offers attractive yields in an investment that is far less volatile than equities. Either way, what it means is that many SMSF trustees have a good understanding of the investment potential of commercial property.
It was this recognition of this proven interest in this asset class that Thinktank offered the two trusts — the Income Trust that is currently offering a 4.20 per cent effective annual return, while the High Yield Trust is currently returning an effective 7.10 per cent. Interest payments are made monthly, the minimum investment period is one year, and there are no entry or exit fees for investments lasting the initial term.
The more conservative Income Trust offers secured first mortgage commercial debt while the High Yield Trust is underpinned by second mortgage commercial property loans that are subordinated to Thinktank’s warehouse facility and term funding.
Thinktank’s rationale for the two trusts, which have attracted funds of more than $50 million since 2017, is no different now as to when they were first offered: investors looking for yield in a low interest rate environment but minus the volatility and uncertainty of the sharemarket — a distinction currently being highlighted by the market gyrations caused by the global outbreak of the coronavirus (COVID-19).
It gives investors investing in these trusts a diversified and stable property portfolio in a growing commercial property sector that is offering competitive returns. It also means they are not assuming ownership risk as what happens with commercial property construction or development.
Property has always been an investment staple of Australian investors. It’s an asset they well understand in terms of its risk profile, yield and capital gain. In the current interest rate and equity market environments, those three defining features have just become all that more attractive.
Jonathan Street, chief executive, Thinktank