Costs for the compensation scheme are spiralling out of control, with the FAAA estimating another $4,165 will be added to every adviser’s CSLR bill – bringing the estimated total to $5,709 – if the funding model isn’t re-examined.
Real estate credit funds have firmed as an attractive source of alternative returns in the past few years. What matters, however, and what doesn’t, for these non-bank private credit lenders, has largely been left unexplored by investors.
Eyeing end of rate rises, Thinktank sees cause for optimism
While heightened volatility continues to dominate global markets, steadier signs on the global interest rate front indicate a likely soft landing in Australia, according to Thinktank. The outlook from here largely depends on domestic interest rate movements and how businesses and consumers are responding to higher debt costs, but the specialist property lender remains “quite optimistic” about credit performance.
“The second quarter of 2023 saw Australian interest rates eventually pause following the rapid increase from record lows of almost a year ago,” Thinktank said in a recent market update. “Economically, we technically had recovered well from a period of below-trend growth domestically after Australia faced significant volatility due to the ongoing impact of the COVID-19 pandemic.”
Despite the challenging backdrop, the company this week announced it more than doubled its loan book in the past three years. Thinktank’s commitment to proactively managing sound credit risk preferences through the cycle has enabled them to progressively build and maintain a well-balanced portfolio of over $5 billion. This underscores Thinktank’s reputation as a prominent capital markets issuer and mortgage-secured lender focussed on providing straight forward property finance solutions for self-employed, PAYG and investor borrowers, according to CEO Jonathan Street (pictured).
“Considering much of this period spanned the COVID-19 pandemic then interest rates rising at an unprecedented pace, with varying impacts on economic, business and social activity, it is a very pleasing result, especially as this growth has come organically and not at the expense of prudent lending standards or dilution of credit policy,” Street said.
In August, amid testing conditions for Australian issuers, Thinktank successfully completed a $500 million commercial mortgage-backed securitisation (CMBS) issue, its ninth CMBS and 13th overall securitisation, taking its total bonds on issue to $6 billion. The transaction was more than two times oversubscribed, with investor bids topping $1 billion.
“While the continuing impacts of higher interest rates are being variously felt throughout the economy and the demand for credit has certainly softened, our outlook for credit performance remains positive at this time, and we are keen to maintain our long-term support of SME and self-employed borrowers seeking mortgage finance solutions,” Street said at the time.
All eyes on arrears levels, interest rates
Looking at capital markets for the quarter as part of its regular summary of economic and financial conditions in Australia, Thinktank noted the impact of above-normal volatility on the ASX and global equity markets, with the ASX 200 Industrials falling 3.2 per cent over the past year, mostly in 2022, before picking up again in 2023. The ASX 200 Bank index saw an even larger decline over the year and was down overall in the past three months.
Default risks among borrowers are ever present with any lending business but particularly so when stresses emerge in the economy and/or property markets. Thinktank adopts a proactive post settlement management approach of its portfolio to quickly identify any loans that may need intervention or remedial action.
“We expect mortgage stress and loan arrears to peak at slightly higher than historical levels before showing steady improvement once interest rates have stabilised, of which there now appears to be more encouraging signs,” the report stated.
Thinktank – whose loan book consists of 66 per cent residentially secured and 34 per cent commercial property loans – also cited improvement in residential markets over the past few months, with house prices rising 2.8 nationally over the quarter. Capital city prices were up 3.3 per cent, led by Melbourne and Sydney, while regional performance improved by 1.1 per cent.
For Thinktank, loans in arrears remain below historical averages, although it has experienced a slight increase recently, with 90+ day arrears reaching 0.57 per cent at the end of fiscal 2023, Street explained on Monday. “In addition, there are no loans in the portfolio we expect to incur anything more than an immaterial shortfall in full recovery.”
The company also has a more positive outlook than the consensus on the strata office sector, although it said in the market update that subprime office sales are “shaking market confidence”. And while consumer sentiment is likely to remain negative until interest rates definitively flatten, it said, that moment appears near at hand.
“That now leaves 11 markets of 25 rated as good and/or strong, which is up from last quarter,” the report stated, adding that only two retail markets remain weak, while most residential sectors are rated fair and stable. “The outlook into 2024 is positive and is not far off now.”
