Andrew Watson, Managing Director of Fortius Debt Capital, shares his insights regarding commercial real estate debt and how it can deliver results for investors.
In recent years, there’s been a great deal of talk about private debt and its potential to deliver reliable income and capital preservation for investors. This is particularly the case with commercial real estate debt – the uptake of which is growing at a rapid rate in Australia.
So what exactly is commercial real estate debt and why is it attractive to investors?
A commercial real estate (CRE) debt investment seeks to generate income by providing loans to commercial borrowers who require funding for real estate.
The individual terms and conditions of a loan are agreed and documented at the commencement of the loan. Because of the contractual nature of the loan agreement, the income stream provided to investors is reliable.
CRE debt investment supports capital preservation in a number of ways. Firstly, loans are typically secured by first ranking mortgages over real property, which means they have the highest ranking priority for repayment. In an event of default on the terms and conditions of the loan, a first mortgagee can enforce its security, taking possession of the property to realise its value if required. Additionally, the lender advances funds at a conservative Loan to Value Ratio (LVR) which means that there is a considerable “equity buffer” to protect investors from capital losses.
CRE debt investment also provides portfolio diversification and low correlation to other asset classes, including traditional fixed income and equities. The return premium on offer is also substantial, compared with other sources of income, and has a lower risk profile given the real property security.
The opportunity in commercial real estate debt
Historically, the Australian CRE debt investment market has been dominated by the four major banks.
More recently, change driven by bank regulators including the Australian Prudential Regulation Authority (APRA) has reduced the amount of bank capital available for commercial real estate lending. Additionally, bank lending criteria has become far more rigid. Overall, this has resulted in a large and growing opportunity for non-bank lenders such as Fortius to take market share.
Within the Australian commercial real estate sector, Australian Deposit Taking Institutions (ADIs) have total facility limits totalling $381.2b, as at 30 September 2021.[i]
While Australian banks still make up the lion’s share of commercial property lending in Australia, evidence suggests borrowers are prepared to pay a premium for the flexibility on the terms of a loan, the availability of the loan and the speed at which the loan can be provided. As a result, there is a significant opportunity for alternative debt providers.
Why choose Fortius for commercial real estate debt investment?
In this changing market, Fortius is ideally positioned to help investors generate superior returns in CRE debt investment.
Our property expertise
Our team has over 30 years’ experience and pedigree in managing real estate assets and portfolios for superannuation funds, offshore and onshore institutions, as well as for high net-worth and SMSF investors. Our investment decisions are underpinned by our deep, strategic knowledge of the sector, and we also contribute ongoing project management and oversight capabilities to ensure that borrowers are in compliance with loan terms and conditions, and to assist with any problems that are encountered.
Importantly, CRE debt investment is naturally aligned with our real estate equity investment capability, and leverages the same high-quality systems, strategies and expertise as our broader property investment business. The breadth of our network also means Fortius consistently originates attractive lending opportunities that may not be available to competitors.
In addition, our team is highly skilled at real estate and credit due diligence, which means any lending opportunity presented to Fortius investors is thoroughly vetted, with all risks identified and mitigated. Fortius, our directors, and staff co-invest in all of our CRE debt investments, ensuring alignment with our investors.
Another benefit of real estate debt investing is that typically loans are for a relatively short duration. Typical loan terms are between 12-18 months, which means capital is not tied up for extensive periods of time.
Fortius provides investors with different options to invest in real estate debt.
For investors who wish to invest in a diversified portfolio of loans, Fortius offers a diversified fund in which investors share an interest in all of the loans in the portfolio. Investors in the fund have exposure to the returns and risks of the entire portfolio of loans, according to their proportionate interest in the fund.
For investors who wish to choose which specific loans they invest in, the Fortius Private Debt Fund is structured such that investors are able to select the CRE debt opportunities that match their specific investment preferences. Each loan in this fund is segregated, and investors in a given loan opportunity have exposure to the returns and the risks of that loan only.
As demand for private CRE debt investment rises, and more financiers are willing to provide it, the ability to identify best-in-class opportunities is becoming increasingly vital. This is where choosing a reliable and experienced partner like Fortius is imperative.
We are very optimistic regarding the outlook for CRE debt investing in 2022, and are seeing strong levels of borrower enquiry across various market sectors including residential, office, industrial and mixed use.
We anticipate that alternative lenders such as Fortius will continue to win market share from the major banks and that CRE debt investment as an asset class will continue to evolve in Australia.
As an experienced property lender and investor, Fortius is ideally placed to assist investors in generating income through investing in real estate debt.
For conservative investors focused on income, investment in CRE debt compares favourably to other types of income investments, including bonds and equities.
If you are interested in finding out more about Fortius and our CRE debt investment capability, please don’t hesitate to get in touch and subscribe to receive information related to future investment opportunities.
[i] APRA, Statistics, Quarterly authorised deposit-taking institution property exposure statistics – highlights, [online], http://www.apra.gov.au/sites/default/files/2021-12/Quarterly%20authorised%20deposit-taking%20institution%20property%20exposures%20statistics%20-%20Highlights%20September%202021.pdf