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Often when people think of unlisted property funds, they consider an equity investment in a physical real estate asset. However, an alternative real estate vehicle is an unlisted debt fund, that provides the finance for developers to build a new property.
While the risk profiles of debt funds differ from equity funds, so do the return profiles. Unlisted real estate debt fund returns can generally range between 4% earned by retail investors and 10% available to some wholesale investors.
These have been appealing yields to many High Net Worth Investors (HNWI), especially in the current low interest rate environment where Australia’s cash rate is 0.10% (as at 7 July 2021).
Like equity funds, a Manager raises capital from HNWI who typically invest between $100,000 and several million dollars. These HNWIs are considered sophisticated investors.
The pool of capital raised is lent to commercial borrowers who borrow for a variety of purposes secured against real estate they own. Borrowers include developers who require financing for construction, land banking or asset ownership. Other commercial borrowers include commercial borrowers seeking to unlock capital tied up in property assets. Financing is provided against a range of assets including residential developments, office buildings, industrial facilities or specialist property assets such as retirement homes, childcare and healthcare.
Unlisted debt funds can range from fixed-term single-asset funds to open-ended multi-loan funds. Additionally, the type of lending can range between senior debt (first mortgage or first Lien) and mezzanine debt (second mortgage or second Lien).
The term for senior debt fixed-term unlisted funds is generally less than two years with returns of 6% to 9%. For an open-ended fund where there is no term, return targets are very similar.
Mezzanine debt fund terms can be as short as a couple of months to two years and provide returns of up to 15%.
Some fixed-term and open-ended unlisted funds provide quarterly or monthly distributions and others are structured with capitalised interest, with all the return coming at the end of the project.
Currently, the unlisted real estate debt fund market is focussed on senior loans, as the major banks have tightened their lending criteria. Senior loans are first in line to be repaid at expiry of the loan or where the loan is enforced while mezzanine is the last. Therefore, senior loans are considered less risky and consequently pay a lower return.
From a borrower’s perspective these types of loans are increasingly prevalent and are often referred to as “non-bank lending. Currently in Australia, the big four banks dominate all lending with more than 75% market share1. However, in the US, bank finance accounts for approximately less than 40%2. We could see this trend from non-banking finance lending be replicated here in Australia.
The size of loans to borrowers also varies. Middle-market loans within non-bank lenders are generally between $5 million and $50 million, however, larger loans over $100 million can be provided.
Centuria has a 23 year history of executing successful unlisted real estate equity funds. Now, we are providing our sophisticated investors with an opportunity to invest in unlisted real estate debt funds throughout a newly created joint venture, Centuria Bass Credit. This is led by seasoned professionals Giles Borten and Nick Goh.
For further information, visit our Real Estate Debt Funds page.
1 According to the Australian Government Productivity Commission’s Competition in the Australian Financial System, Productivity Commission Inquiry Report Overview and Recommendations (No. 89, 29 June 2018)
2 According to the US Federal Deposit Insurance Corporation (FDIC) Quarterly – Bank and Nonbank Lending over the past 70 years, Chart 1