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Qualitas Real Estate Income Fund (QRI) gives real estate finance exposure

ETF Watch - Oct 31, 2018

The Qualitas Real Estate Income Fund (QRI) is open until 13 November 2018. Find out more and download the prospectus here.

Whilst equity based Listed Investment Company IPOs have been the flavour of the month in recent times, with 20 new listings in the last 2 years, investors interested in alternate asset classes have had much less options. Today we take a look at the latest LIC IPO, one that focuses on commercial real estate finance. The Qualitas Real Estate Income Fund (QRI) IPO is open until 13 November 2018, and aims to raise up to $500m.

Who is Qualitas?

Launced in 2008, Qualitas is a real estate investment management company, who invests in the major capital cities in Australia. They manage a number of funds, including a unique Food Infrastructure Fund, which invests in flour mills and the Senior Debt Fund, investing in first rate secured loans across commercial real estate. Qualitas manages over $2 Billion in investor funds.

What is QRI’s investment mandate?

QRI’s objective is to achieve a target return of 8.0% pa, net of fees and expenses, providing monthly income to investors.

QRI will invest in  a sub-trust, the Qualitas Wholesale Real Estate Income Fund, a existing unlisted fund, meaning investors will not be investing in a new investment strategy, rather accessing a listed version of a previously unlisted strategy.

The fund offers investors access to the commercial real estate finance market (more on this below), with loans in the portfolio secured by first or second real property mortgages.

What does the commercial real estate finance market look like?

According to the prospectus, the commercial real estate finance market is typically made up of the following secured loans:

  • Land loans: secured against vacant land with the potential for development. This includes land (i.e. undeveloped land that is capable of subdivision into smaller lots), land that has not been approved for development and land that has been approved for development.
  • Construction loans: provided to fund development and construction costs of real estate development projects. They are secured against land with the potential for development, or real estate assets that are soon to be or are under construction. Construction loans also include financing for land subdivision projects. Construction loans are typically progressively drawn down over time to finance the project to completion.
  • Investment loans: secured against real estate assets that are income generating or have the potential to generate income on a going-concern basis.
  • Other loans: secured against real estate and/or land for which the purpose does not fit within the above categories. This could include owner occupier loans, short term loans (i.e. bridging loans), pre-development early works loans and working capital loans.

To put the above into a lifecycle that is simple to understand, a land loan is where a developer finds a new site and requires finance to buy the block of land, eg a site to build a new office tower. A construction loan for the developer to finance the build of the officer tower. Once the developer has finished the build, they will sell to an investor who will rent out the space to tenants, and will require an investment loan to finance the purchase.

Isn’t lending already handled by the banks?

According to Qualitas, 94% of Australia’s $273 billion commercial real estate finance market is handled by the banks. However, increasing scrutiny and capital adequacy requirements by the banks has opened a market of financing by non bank lenders such as Qualitas. Whilst non bank lenders account for just 6% of Australia’s commercial real estate finance market, this figure is 40-50% in the US and European markets.

Listed Investment Trust Structure

The fund will be listed as a Listed Investment Trust (LIT), compared to the more common Listed Investment Company (LIC) structure. We first looked at the two structures when Forager Australian Shares listed in 2016, with the key difference being the trust structure must pay out all earnings to investors, whereas a company is able to retain earnings.

What else is available like QRI on the ASX?

There’s been three other fixed income focused LITs launched in Australia over the last couple of years, the Gryphon Capital Income Trust (GCI), MXP Master Income Trust (MXT) and NB Global Corporate Income Trust (NBI). All are different to QRI, with NBI focusing on global corporate bonds, MXT providing exposure to diversified corporate loans, and CGI having a residential mortgage focus. For investors seeking exposure to the high yield (but potentially higher risk) commercial real estate finance market, QRI is the only LIT available.

For investors willing to expand their search to ETFs, the list of available options is huge, with 22 ETFs available on the ASX with a fixed income exposure. As per the LITs, none have a commercial real estate finance tilt, with most providing diversified exposure or corporate bond exposure. The highest yield of this list of ETFs over the last 12 months is 5%, much lower than the 8% that QRI targets.

More on QRI

The manager will collect a management fee of 1.53% per annum, in addition to responsible entity fees and recoverable expenses. Once these are taken into account total management costs will be 1.86 to 2.16% per annum, depending on how much is raised in the offer (with the lower fee applying if the full $500m is raised). A performance fee of 20.5% applies for any return above the target of 8.0% pa.

The manager will cove all costs on the IPO, meaning investors in the IPO will not have their share holdings diluted.

Details of the offer

  • Minimum Raising: $150m
  • Maximum Raising: $500m
  • Share Price: $1.60
  • Offer expected to open: 16 October 2018
  • Offer expected to close: 13 November 2018
  • Shares expected to begin trading on ASX: 27 November 2018

This post was prepared with publicly available information available from Qualitas Securites. ETF Watch did not receive any payment from Qualitas for this post, however has received payment from Qualitas for other marketing activities. The Qualitas Real Estate Income Fund (QRI) is open until 13 November 2018. Find out more and download the prospectus here.

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