The Goldilocks Zone: How Modern Market Disruptions Curated Ideal Investor Opportunity

Our next presenter is Ben O'Hara, Executive Director at GPS Investment Fund.

Ben is a seasoned management executive with over 20 years of experience within boutique and major Australian financial institutions.

Ben is going to talk about the Goldilocks zone, how modern market disruptions curated ideal investor opportunity.

Welcome Ben.

Thanks, Angelina, and thanks for having us here today to run through this overview of the property private debt industry in Australia, and how a number of modern market disruptions have created what we believe a great environment for our financial industry to thrive in.

But of course, anything financially related, I'll need to state that anything I say here today is general in nature and does not take into account the views, particular needs and objectives or circumstances of the individual.

So if you need advice, we advise you to seek the service of a qualified financial planner.

And I also think it'd be good for people to know what is the GPS investment fund and what sort of lens I'll be looking at this presentation today in the debt industry that we're involved in.

GPS is a commercial real estate debt provider.

We take investor funds and deploy them via registered first mortgage against physical property, be that residential, commercial or industrial, but main cases it's residential.

We've been in operation for over 30 years, mainly in Southeast Queensland and offer investors the opportunity to participate in debt.

And this debt is backed by industry regulation and solidified by our property's expertise and capacity.

This is as compared to a commercial real estate investment trust that uses equity from the investor and then seeks debt from the funder.

We actually seek equity from our borrower and provide the debt thanks to investments from our investors.

So we're lenders most importantly, and more importantly, we lend because we want to, not because we have to.

In past, we've given money back to investors because the actual circumstances weren't right.

And as you can see, market disruptions have created the opportunity for the private debt market in Australia.

And those major market disruptions have been the dot com crash in the early 2000s.

And as you can see, then we went through to the GFC and then most recently the COVID-19 crash.

And the recovery through the dot-com crash up to the GFC was largely fueled by the availability and access to credit.

That came about through deregulation of the banks, new foreign and international banks coming in where we saw a total credit rise from 50% to 160% of GDP.

And the assets of financial institutions increased from 100% to 370% of GDP.

So when the GFC came through, the offshore banks left, we had a

additional regulations applied through Bail and APRA, and I'll come over those later, but what it also enabled was a hole that the private debt market was able to fill, an unmet demand.

And more recently, the most recent market disruption was COVID-19, which we're seeing locally now with immense levels of unmet demand for housing and shortages that are gonna take years to fix.

But from the GFC, we saw the evolution of the private debt market.

And as you can see here, banks traditionally funded 87% of the commercial real estate debt up to and through the conclusion of the GFC.

And recently, banks are now only looking at 72% of that debt.

And that can also be shown in their balance sheet allocations to commercial real estate, which has dropped from 10% to five and a half percent now.

And that's been a combination of the bail three regulations and the APRA regulations.

The bail three ones are where banks have to wait capital and pay for it.

So it's become more expensive for banks to put capital aside to lend for commercial real estate than it is safer home loans that they prefer to lend on.

and the APRA regulations have tightened credit controls around that availability as well.

So what that has meant is that the bank's ability and want or I suppose demand to lend to commercial real estate loans has shrunk.

And so in that void, we've seen the growth of the private real estate debt market.

Now in Australia, that accounts for about 10% at the moment of the commercial real estate debt, which is small when you look at a global average of 49%.

And even in the US, it's around 60%.

So we think that this private debt market will continue to grow over the future.

And if, but for nothing else, the inflation of construction and property prices will demand that those debt levels keep rising.

And don't forget, as I said before, we're talking about debt, not equity.

And this debt ranks ahead in preference to the equity.

So we're talking about the debt markets.

But when you're looking at debt for investors, especially looking at property, you have to look at what is that risk versus return.

And when we look at that risk return equation here, we've got a phrase called the Goldilocks zone.

And that is the distance where life can exist from the stars or the sun as astronomers coin it.

So where can you find that balance between stakeholders?

And for GPS, you've got the stakeholders primarily being the investor and the borrower.

And the Goldilocks zone requires us to identify projects which meet our lending requirements, but also offer a desirable return to our investors.

And so that they're not classed as too risky and pass that extra risk onto our investors.

So this balance is calibrated by our team of experts here.

They know the market, they know the industry, and they research who's involved.

It's a risk-first return balance.

But it's not only unique to our funds, it's unique to all funds out there in this private debt market.

So this investment return, I suppose the easiest way to look at this is like an iceberg.

What you see above the water is the rate of offer, the rate of interest being offered back to the investor.

But it's also lies underneath the water that's of more concern.

And that's where we look at this risk to find the Goldilocks zone.

And when we look at that, we say who, what, where, when, and why.

Who is the investment manager?

Who are they giving the loans to?

What's the security of the loan or the property type?

Is it residential, industrial?

And what's the history of the fund on the other side?

What is their length of tenure?

Are they new or are they experienced investors?

Where?

Where's the money being sourced and where's the money being applied?

Where's the property located?

Is it a good market?

Is the security in a good area?

Because we always have to look at your exit strategy upfront.

It's one thing to lend the money, it's another thing to get it back.

So you always need to start with the end in mind, how to exit the deal.

And the when, is now the right time.

As I said before, we've given money back to investors in the past because we didn't think it was the right time to participate in the market.

So what's the long-term prospect and view for market?

And finally, the why.

And this is ultimately should be first consideration is for you, the investor.

For any fund, investors are first and foremost priority here at GPS.

When we're looking at our investor base, we always endeavor to act in their best interest and provide an appropriate rate of return to balance that risk.

Like an iceberg I said, 80% of that risk can't be seen by the investors and it's under the water and it's what the fund manager needs to assess and get a good balance on.

And ultimately in what we think provides that Goldilocks zone.

So if you bring this all back together, if you are looking at entering into the market and participating in the private debt market, which has had a lot of press lately and a lot of coverage, you need to look at the criteria that we think will put you in that Goldilocks zone as well.

So this looks at all those options and especially as the market continues to shift.

The other thing is also that what we know will come along another time is another market disruption.

They've happened before, they will happen again.

So when assessing risk versus reward, it's important to keep in mind those Goldilocks Zone attributes, they should also have the ability to flex in the market and move as well.

So, and this is something that we're extremely familiar with here at GPS.

And for your consideration of any of our funds, what you need to know is that experience matters.

And the development finance is one that we have operated especially successfully here in South East Queensland in the last 30 years.

And so if you're interested in talking to us or any other funders, our links are provided below.

Thanks, Angelina.

Thanks, Ben.

Do you have time for two questions?

Sure.

Are all mortgage funds the same?

No, not everyone's always the same.

We have a retail licence, so we have an ASIC registration to take retail clients and some operate just in the wholesale market where they don't need that extra layer of regulation.

So it's horses for courses and where people want to apply their efforts to raising investors' funds.

But yeah, we're all similar, but not identical.

How can investors research the risk profile of a mortgage fund?

A very good question.

I think we have two types of mortgage funds pooled where it goes across all our projects and diversifies risk and select where you can actually choose which type of mortgage and investment or property that you would like project that you'd like to invest in.

I'd suggest people have a look at some of those select offerings from different providers where they can see if they're happy with the types of

projects that are being sponsored by them.

And if they get comfortable with those being the location, the type of property, the loan to value ratios, by all means, you know, use that as a first initial thing.

But ultimately, ask questions of the fund manager.

Ask where they're using the money and how they assess that risk.

Thanks, Ben.

Thanks very much.