We get asked a lot why we are funding home loans. Especially investment properties for foreign buyers. Like this one.
For us, it is pretty simple. We are constantly seeking arbitrage. Where can we exploit a supply/demand inefficiency and seek to provide to our investors a return that doesn’t seem to match the underlying risk?
And it all comes down to our good friends at the major banks. For a range of reasons, banks are reducing the exposure they have to real estate debt, in large part to balance their exposures across the economy.
This means that they are turning down some perfectly good quality borrowers and pieces of real estate. It is much easier for the banks to completely rule out certain products rather than decide each application on a loan-by-loan basis. As such, they have pretty much turned their backs on products such as land finance facilities for developers (in which many of you have invested with us) and investment property loans for offshore buyers.
This latter loan is one, that for us, provides the most glaring risk/return dislocation.
Banks generally fund home loans at the moment at around 4%. Yet we can fund loans on these exact same properties for over 7%.
Compare the purchase and holding of a residential apartment with the investment in a mortgage in the exact same apartment.
As the apartment owner, you will be subject to:
- The annoyance of an auction or the wait for the unknown of an off-the-plan purchase;
- Acquisition costs such as stamp duty and legal fees;
- The hunt for a tenant and dealing with an agent;
- The ongoing maintenance and upkeep costs;
- Dealing with your body corporate and paying the fees;
- Potential vacancies and lack of income during this time;
- The need for bank finance and dealing with the bank; and
The need to sell your apartment to create yourself the possibility of a capital return.
And for all of this, you get the pleasure of a return of below 4% (the current yield on apartments ranges in the 3% to 4% range in the main).
Yes, there is the potential for capital uplift when you sell. But check this out:
There is not much capital growth there for an apartment holder.
Now take that same apartment, but choose to invest in the loan:
- No stress about the purchase or purchase on-costs;
- No worry about tenants, agents or vacancies;
- No ongoing costs like maintenance and body corporate
- Income paid to you whether vacant or not;
- No bank finance issues because… you are the bank; and
- Most importantly, less risk on exit given the market can drop over 35% in value and the unit will still be generally worth more than your loan (we are generally lending at 65% LVR or less).
And for all this reduced risk, what do you get? A return almost double the owner at 7%.