A new way to invest in sustainability

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Livewire Markets

It's no secret that the dominant theme of the next decade is ESG. The world is going green and institutions globally are shifting their focus - all at once, so it seems - to align with the desire that we all live cleaner, safer and more environmentally sustainable lives.

And that means a lot of capital is on the move.

Indeed analysts worldwide have described the ESG phenomenon as a floodgate that's about to burst open. But with so many opportunities available to investors wanting to capitalise on this ESG thematic, it's hard to know where to look, and even harder to find an edge in this space.  

Well, Australia's newest asset class - build-to-rent - is getting Andrew Schwartz and the team at Qualitas very excited. While still in its early development stages in Australia, build-to-rent is a global phenomenon waiting to be tapped into by Aussie investors. 

In this video, Schwartz discusses the investment process behind the Qualitas powerhouse, outlines why private debt is a good place for ESG conscious investors to consider and walks us through what he believes is the next big thing in property. 


Looking for regular income and diversification?

The Qualitas Real Estate Income Fund (ASX:QRI) aims to deliver investors with a regular stream of income with the added benefit of diversification beyond shares and traditional property investments. For more information, hit the 'CONTACT' button below.

Edited transcript

Can you explain the Qualitas investment process?

Qualitas is an alternative investment manager specifically focused on real estate. We look at both debt-based strategies and also equity-based strategies. Our debt strategies are predominantly in the form of being an alternative lender to the banks in the real estate market for large wholesale lenders. That comprises about two-thirds of our total portfolio and we're a provider of first mortgage loans, construction loans, investment loans. We do a few mezzanine debt loans, so it's quite a large strategy for us. And then we have an equity portfolio where we're looking at more long-dated, what they call WALE transactions, weighted average lease expiry transactions, opportunistic investing, particularly in the development type markets. So, that represents about one-third of the total Qualitas operation.

How does that diversity help investors?

You really need to tailor that to the appetite of the investor that you're dealing with, and because each has a relative risk and a relative return proposition.

And, I think that for the vast majority of investors, I really like the debt area as an investment area. I think it offers an extremely attractive risk/return proposition, and I don't just say that relative to Australian equity investments, I also on a global basis. I continue to feel that the returns from debt investments in Australia are very attractive type returns. A lot of our investors are really searching for income. It's very difficult in the current environment to find investments that people can earn a reasonable rate of return and have a good night sleep in respect of where they've invested their money. So, being able to invest in a first mortgage, know that you're well secured, you've got third party equity that's acting as a cushion for any asset value reductions that might occur due to economic or cyclical type matters really provides a great basis for investment and enables investors to earn a very predictable, very stable source of income, which a lot of investors are looking for at this point of the cycle.

How does Qualitas think about ESG?

Qualitas foremost is a capital allocator, so we run a fund strategy. We work with third-party developers and investors in the market. So, we need to look at how we influence the areas that we've identified as important to us in ESG. And so, we do that through the capital allocation model and say, we have some funds such as our Qualitas Build-to-Rent Impact Debt Fund, which has a very specific ESG focus. That particular fund has a focus on climate change. So on the E for environmental change, we've really chosen climate as being the area where we're most focused on. That particular fund is looking to reduce greenhouse emissions by 35%. So, that's our way of saying to the market that if you want to access Qualitas' capital for build-to-rent, multi-family development, then in order to do so, you need to be able to demonstrate to us your commitment to environmentally sustainable development.

And in particular, we've set a benchmark of a 35% reduction in greenhouse emissions. So, I think that financiers have quite a large role to play. It doesn't need to be just driven by the developer community, but I feel that as a financier if we can identify areas of the capital in this case, the debt markets, that may be harder to access, we have a solution, but it's subject to finding ways to improve the areas that we feel are important to us, then that's a great way for us to contribute back to society on these types of matters.

What is build-to-rent?

So, build to rent is a concept... In other parts of the world, it's known as multi-family, and it's a concept that is well understood in the US and Europe that there are many forms of it, but probably the best way to think about it is in Australia typically we built high-density buildings, residential buildings that we've started and sold on an apartment-by-apartment basis.

What build-to-rent entails is not the requirement to sell your apartments. They are owned in one line, so you have one investor that owns an entire vertical building, and it's built specifically for the purpose of the rental to third parties. So, it'll always be owned in one line. It's a different design to how one thinks about a build to sell because it's really about creating communities, and it's about the more public amenity in the building to create the community in those public open spaces. And as I said, it's very popular in other parts of the world and certainly gaining traction now in Australia as well.

Why is build-to-rent an exciting opportunity?

I think you consider it an exciting opportunity for the same reason you may consider an office or industrial or retail an exciting opportunity.

It's an ability to own real estate where you earn very long forms of income. One of the benefits of build to rent is that you have hundreds of tenants in your building, therefore quite a large diversification of income and an ability for investors to really just enjoy long-term forms of income, enjoy capital appreciation on underlying land and buildings, and it's a great proven form of real estate and not necessarily so much in Australia, because it's still a nascent industry in Australia, but certainly as I said in the United States and Europe, places like Germany, it's a very well understood asset class.

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