Trilogy bullish as real estate confidence returns

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An Australian east coast capital is the pick of the nation's residential property markets, and a sector that withstood the Covid-19 onslaught on retail and office segments and will remain sought after into 2021, said Trilogy Funds managing director Philip Ryan.

The past year has seen major shifts in property markets, but not in Australian attitudes to property. Buyers may favour different areas or property types over time — and price growth may occasionally stall or even reverse — but a close analysis of the sector shows that investor faith in bricks and mortar remains solid. But it is also true that Australian residential real estate has come a long way since the dark days of March and April, when the threat of Covid-19 first disrupted everyday life.

Most residential property regions are returning to normal and consumer confidence reports are proof of this, said Trilogy's Ryan. The only outlier he sees is the slow processing of loan applications by banks, with funding approval dragging out to 60 days in some cases. Ryan is broadly bullish on the opportunities for alternative lenders and clearance rates as RBA easing and government stimulus packages move through the market.

“It is pleasing to see that many industry commentators, including Commonwealth Bank of Australia and Westpac, are now forecasting property market improvement over the coming years, with actual property market impacts of Covid-19 being shown to be lower than expected and forecasted back in March and April,” Ryan said.

“We are similarly positive about the property sector moving forward. Continued low-interest rates, government incentives and economic stimulus, and pent up migration and immigration demand are all likely to continue to drive activity in housing and other property sectors. We are already seeing our borrowers identifying and planning suitable projects to bring to market in 12 to 24 months’ time as more of these factors are expected to boost sales.”

Returning migrants

While residential property prices are traditionally underpinned by interest rates, unemployment and immigration, it is the latter that may be the most significant over the next 12 months. Ryan argues that a Covid-19 vaccine is key to reopening borders and expects to see significant immigration to Australia if this does arrive in 2021.

“Immigration has been the backbone of GDP growth … and the question is where do we stand if we don’t have migrants coming into Australia? Where do we stand in terms of property prices?

Ryan sees opportunities for investors in the Brisbane residential property market — which has yet to experience the same boom as its southern counterparts — and may benefit from both international and interstate migration. This is reflected in the makeup of Trilogy’s circa $419m pooled mortgage fund, the Trilogy Monthly Income Trust, which invests a large portion towards Queensland.

As at 31 October, the Trust’s loan book consisted of 87 construction loans secured across Australia’s eastern seaboard, with a weighted average Loan to Valuation Ratio (LVR) of 62.65%. Queensland represents 46% of the loans, with 28% in New South Wales and 26% in Victoria. Residential construction makes up 53% of Trilogy’s loan book, followed by land development (33%), completed residential (10%), completed commercial/industrial (2%) and commercial/industrial construction (2%).

Ryan said Trilogy would continue to back developers with a strong track record and knowledge of the markets they’re operating in.

“We consider loans based on a borrower’s property development experience, reputation, quality of the business plan and clarity of expectations set out in the loan proposal, rather than relying solely on the level of pre-sales,” he said.

Industrial property a compelling story

Ryan’s view is that industrial property has continued to perform while the pandemic rocked the retail property and office sectors. He says the Trilogy Industrial Property Trust has benefited from the low Australian dollar, high commodity prices and exposure to the booming logistics sector. The industrial property sector is widely tipped to continue as one of the most sought-after property asset classes locally.

"I think it would be quite a miserable experience at the moment if you owned retail properties in Queen Street Mall or Pitt Street Mall. That would be stressful … it’s difficult to know where those areas will be down the track,” he said.

Despite yield compression, industrial is set to remain a compelling story for investors as Ryan sees opportunities in regional areas, especially in Queensland and South Australia. A recent capital raising saw Trilogy investors pour $18 million into its industrial property trust in the space of a week. The capital was in part be used by the Trilogy Industrial Property Trust to acquire its first industrial property in Brisbane.

Ryan called the fast turnaround time a “fantastic result” with the Darra property comprising a total of 15,300 square metres, which includes a high bay warehouse with crane rails and a commercial-grade office over two levels. He said the acquisition of the property was an opportunity to diversify the trust’s portfolio, in terms of income, tenant type and geographical location.

Learn more about Trilogy

Trilogy is one of Australia’s leading fund managers of property-based investments. For over 22 years, seeking income and managing risk on behalf of thousands of investors has remained at the heart of everything they do. Find out more here.

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This article was prepared in partnership with Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) as responsible entity for the managed investment schemes mentioned within this article. Trilogy does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. All figures are based on unaudited figures as at 31 October 2020 and may be subject to change. LVR is based on a valuation inclusive of GST. Past performance is not a reliable indicator of future performance. Application for investment in Trilogy’s products can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) available from www.trilogyfunds.com.au. The PDS contains the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making further investment. All investments, including those with Trilogy involve risk which a can lead to loss of part or all of your capital or diminished returns. Trilogy is licensed only to provide general product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed.

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