How this LIT overcame the odds

To establish a "pure property debt" listed investment trust amid all negative sentiment permeating the Australian property market would have many pundits scratching their heads – but that is exactly what Qualitas did successfully in the final quarter of 2018, raising $230 million. And appetite for commercial lending only looks set to increase in a post-Royal Commission Australia, as the banks continue their retreat from the space given new regulations, increasing capital requirements, and tightened lending restrictions.

In this exclusive interview, Tim Johansen , managing director of real estate investment manager Qualitas, helps guide those investors who are hungry for alternative investment classes through a market that has undergone a significant "detox" and where sophisticated operators can provide them with an alternate source of returns.

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Has property lending changed since the GFC?

Tim Johansen: I think the market has become more sophisticated over that 20-year period. I think we had a period leading into the GFC where there was a lot of finance available, and banks were taking risky positions that probably they shouldn't have taken leading into the GFC.

The GFC came and cleaned out the market in terms of some of the fringe operators and the banks became more conservative. Then coming out of the GFC, you had this wave of new entrants into the market which were providing alternate products and lending.

Real estate markets work in cycles, so at the top of a market, it always happens that you have a clean-out of the market in terms of losing novice developers who haven't got long-term experience – they always come to the market at the top.

You see deals that shouldn't have happened and what that does is set you up for the next cycle in much better shape, and that's what's happening at the moment.

In a way it is a detox of the market, but we see it as a good thing.

Has the Royal Commission been a positive for non-bank lenders?

Tim Johansen: We've been on this journey for 10 years and it just so happens that there's been a Royal Commission late in the cycle, which has sort of compounded the market position, which was sort of suffering, in some regard, in certain areas of supply.

But it's good for us as a business because we've been planning for this and we're doing transactions that are very bank-like, in addition to transactions that banks won't do. So, I think we're benefiting from what's happening in the market.

For us, it's all about who's borrowing the money, their capability, what their experience is, what their financial backing is. So, we really spend a lot of time on the client.

Once you've got through that and you're happy with the client, then you look very hard at that asset. Whether it's a development project or whether it's a passive asset, you look very hard at why that particular asset works.

What is your current view on the dynamics of the property market?

Tim Johansen: At the moment, there's lots of noise in the market. You've got an election coming up in May, and then out of that, you have lots of policies that are floating around. You've got Labor talking about negative gearing and capital gains tax.

All of that impacts on a purchaser's decision to buy an asset or invest.

The uncertainty about what policies are going to be does affect people's psyche and what they're going to do.

You've also got a market where we've had a good run of property price increases over a period of time. Now, property markets don't just keep going. They go in an orderly fashion hopefully and they occasionally have a little dip, and then they keep moving up.

What you don't want is the market to scream ahead and then fall off a cliff. We don't think that's happening, but we think there is an adjustment at the moment and that is where you have values reset for the next cycle and you find a new baseline of value.

How is the upcoming Federal election impacting commercial property?

Tim Johansen: A lot of developers are sitting on their hands at the moment because they're waiting to see who is going to govern, because it does drive investment decisions.

So, not only are they dealing with what's happening in the credit market and the winding back of real estate exposure by the banks, but they've also got to consider what the policy change is going to be by the government.

The developers who have deep capital pockets, the ones who have been very successful, they'll continue to trade in the market because they are well-supported by the banks, and they are well-supported by groups like Qualitas.

You will get very strong operators continuing to support the market.

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.

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