Private Equity Real Estate Magazine: Asia Focus

by Florence Chong, PERE Magazine

With Australia’s superannuation pool growing rapidly, some local fund managers are looking to move into a commercial real estate financing space that they see as inadequately serviced by the major banks.

After what seems like a false dawn, Australia’s nascent real estate debt market may be reawakening, with several fund mangers hoping to raise at least A$2 billion ($1.76 billion) between them from institutional investors in the coming weeks. It will lbw a test of whether Australia’s institutions are ready to invest in debt as an asset class in its own right.

The first of these debt funds, Qualitas Real Estate Debt Fund, is due for its first close by the end of 2014. A boutique fund manager, Qualitas is targeting a minimum of A$500 million in the first instance, from both domestic superannuation and offshore investors.

Another Sydney-based firm, Balmain Investment Management, a broad-based financial services firm with long experience in commercial mortgages and loan servicing, also is marketing a debt fund, Balmain Investment, and expects its first closing in February, initially aiming to raise A$500 million.

Perhaps the most ambitious of all is the Melbourne-based MaxCap Group, which is in advanced negotiations with two leading Australian superannuation funds and a large US pension plan, each for mandates of A$300 million to A$500 million.

Falling between the crack

Industry sources told PERE that, until now, real estate set in Australia has not been seen as an investment option, but perhaps that mindset is starting to change.

According to Michael Wood, senior partner of Quadrant, a specialist real estate lender, a real estate debt market has not yet developed in Australia because of the many challenges that exist in the market. One of the major challenges, he says, is the imprecise classification of debt within an investment portfolio.

Wood shares the views of other that real estate debt as an asset class falls between the cracks – neither fixed income no special opportunities nor real estate. Yet, debt per se – such as government and corporate bonds – does have a role in the investment strategy of Australian institutions. For example, at the end of September Australia’s $104 million sovereign wealth fund, Future Fund, has 11.3 percent of its assets (A$11.8 billion) in debt securities, compared with property at 5.8 percent.

With the nation’s superannuation pool growing rapidly – it stood at A$1.8 trillion on December 31, 2013 and is forecast by the Australian Treasury to pass the A$7 trillion mark by 2030 – the ambition of some fund managers is to redirect some of this money into commercial real estate financing.

The need to have an alternative real estate financing market was clearly amplified by the global credit crunch, when many large global and US money market funds closed down. For a brief moment, it seemed Australia was primed to develop an alternative real estate debt market as a circuit break to the liquidity crisis that had engulfed the corporate sector and, most of all, the vulnerable and high-geared property sector.

Australian banks, which had – and still have – a stranglehold on real estate funding, pulled back from lending – in development finance, commercial real estate mortgages and the refinancing of existing loans. Fearful borrowers breaching their loan-to-value (LTV) ratios, the banks started to call in some highly-leveraged loans, nearly sending some of the largest listed and unlisted property groups to the wall. For six months, they reportedly stopped lending altogether.

To read the article in full go to Private Equity International.