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The risks and rewards of investment trusts

Risk and rewards, investment trusts

It’s a “good time” for Australians holding debt against commercial property, but there are a few things to be aware of, a commercial property lender has said.

Speaking to Nest Egg to mark the launch of its two investment trusts, Thinktank Group's chief financial officer Andrew Bennett said the current low-rate environment means it’s a good time for investors holding debt against commercial property rather than the physical property itself.

The group is offering a High Yield Trust and an Income Trust, with the former offering secured first mortgage commercial debt and the latter offering secured second mortgage commercial property loans.

Responding to questioning around whether there was a growing interest in commercial property investment, Mr Bennett explained that commercial property in 2017 delivered a yield of 11.9 per cent, with about half of that flowing through from rental yield.

He said the fall in the Reserve Bank of Australia’s (RBA) official interest rate has correlated with a general upswing in commercial properties’ capital value.

“I think what’s occurring is that people are saying, ‘Well interest rates can't keep going down, and in fact if interest rates start going back up, you're going to get back into the [2008-2009 era] capital losses on holding commercial property, Mr Bennett said.

“So now's a good time to be owning debt against commercial property rather than owning a physical commercial property itself. There's a bit of interest in, or a bit of a realisation that investing in commercial property debt gives you a little bit better yield than residential property debt.”

However, prospective investors should be aware of historical challenges in the space.

Mr Bennett said he hopes the GFC will be no more than a once-in-a-lifetime event. This is because during that period, mortgage trusts like Challenger Howard experienced two things.

“One, when the GFC hit, they were very pregnant with construction and development lines where they'd lent money to a developer to buy some land and built some apartments or stuff like that. We don't do any of that. We don't do any construction or development, that's just too risky for us, he said.

“The second thing is they [investors] got locked out. The investors couldn't get their money out ... when they wanted them back because everybody wanted their money back at the same time.”

Mr Bennett said this risk of becoming trapped is inherent in investing outside of a bank.

Nevertheless, he argued Thinktank will mitigate this risk by avoiding construction development and focusing on “lots and lots of little loans”.

As an investor, Mr Bennett explained that: “Basically what you're doing is you’re buying interest in a whole lot of loans, so it's a function of what those loans do and what your other co-investors want to do as well. But on the other hand, you can give your money to the bank and you won't have those issues, but by the time you pay tax and you have inflation, you're actually left with no net return to your investment.

“I've got some loan money in these trusts, but if I thought the GFC was coming next year, I probably wouldn't have the money there. But on the other hand, I don't think the GFC is going to happen next year and if I put it in the bank then I'm losing as well. If I’ve got my interest and I pay tax on my interest, then I'm going backwards just having the money sitting in the bank.”

The risks and rewards of investment trusts
Risk and rewards, investment trusts
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