When commercial property lender ThinkTank launched a high-yield mortgage fund last year, offering an 8.5 per cent yield, it faced plenty of questions about the risks that investors would be taking to get such a high return on property loans.
ThinkTank chief executive Jonathan Street pointed out that since the company launched in 2006 it had originated $1.6 billion of secured commercial loans and suffered just $1 million of losses.
That is a loss ratio of around 0.08 per cent, which any big bank would be happy to report to investors.
“We have a conservative approach. We do not do development loans, land banking or anything with environmental issues,” Street said at the time.
ThinkTank is about to celebrate the first anniversary of its High-Yield Trust and its Income Trust, and not much has changed.
“These funds have had zero arrears and zero defaults,” Street says. In any case, if there had been any losses they would be covered by cash surpluses in the trusts.
Each fund includes a loss provision to cover defaults – 1 per cent of the loan pool for the Income Trust and 2 per cent of the loan pool for the High-Yield Trust.
The HighYield Trust is paying 8.4 per cent currently, with income distributed monthly. The Income Trust is paying 5.5 per cent. The yield has shifted a little over the past year because ThinkTank provides variable rate loans, with the rate set at a margin above the bank bill swap rate.
The funds are open to wholesale and sophisticated investors, with a minimum investment of $10,000. Funds must be invested for a minimum term of one year.
The management fee is 70 basis points and there are no entry or exit fees (there is a 2 per cent charge for redemptions within 12 months). Both funds have income reinvestment options.
Street says the fall in the residential property market has had some flow-on effect in the commercial market.
“There has been some softening. It is the wealth effect. The SMEs and investors we deal with may be more reticent to borrow if the housing market is soft.
“However, economic fundamentals are the real driver in this market. Commercial values have softened a little.”