When Thinktank recently closed its ﬁrst residential mortgage-backed securities issue for $500m, director Per Amundsen says it validated a strategy of diversifying from small commercial loans into the residential debt market.
In a COVID-19 environment, Thinktank’s diversiﬁcation has allowed the specialist commercial and residential property lender to weather the pandemic’s economic impact, to the extent that in the 12 months to 30 June 2021 it settled more than $1bn in loans for the ﬁ rst time – a 33% increase on the previous financial year and an important milestone.
Back in 2006 when Thinktank opened its doors, residential debt was not on the radar. Instead, small commercial loans of up to $3m (although most transactions were much smaller) for the self-employed, professionals and small to medium-sized employers were the focus. The founding leadership of Thinktank believed there was a sizeable niche for an innovative lender that understood the market more intimately than the major banks and could deliver superior loan product options and faster turnaround times.
So it proved. When Thinktank closed its sixth and largest commercial mortgage-backed securities (CMBS) transaction of $600m in October last year, this took its total rated bonds issued to $2bn. As with the other issues, it met with keen institutional demand in domestic
(77%) and overseas (23%) markets and conﬁrmed the company’s reputation as a prominent capital markets issuer in the commercial property asset class.
But obviously these self-employed clients, professionals and SMEs also seek residential ﬁnance, and Thinktank, via its deep and trusted network of mortgage brokers and aggregators, is well positioned to provide this as a logically adjacent product. By 2018, residential loans had steadily grown to comprise between 10% and 15% of its book.
However, the coronavirus has seen that percentage of loans rise to about 50% today. Two key factors have been at play. Commercial ﬁnance activity fell.
A pandemic that was understandably shaking business conﬁdence and shrinking the economy inevitably meant a slowdown in demand for commercial loans. Across the ﬁ nance market, commercial lending activity initially fell by around 40–50%, and borrower hardship support grew.
But to the market’s surprise, and, to be honest, Thinktank’s initial surprise, residential lending quickly picked up, so much so that calls have emerged for regulatory intervention to take some heat out of the market where the higher risks are perceived. The fact the company funded more than $1bn in loans in the 2021 ﬁnancial year can be largely ascribed to a combined increase in residential and SMSF lending, more than compensating for the temporary decline in commercial lending.
Although the commercial property market generally has been recovering well since the initial shock of COVID-19 (retail remains a weak spot, while some individual market segments such as industrial have remained solid throughout), it still lags behind demand for residential ﬁnance.
It was in this environment that Thinktank launched its ﬁrst residential mortgage-backed securities (RMBS) issue in August 2021, with ratings assigned by both Standard and Poor’s and Fitch Ratings. Pricing was fully disclosed with the Class A1 notes set at a margin of 0.90% above the 30-day Bank Bill Swap Rate. The margins above the 30-day Bank Bill Swap Rate for the remaining notes ranged from 1.05% for Class A2 to 6.3% for Class F. The bonds were placed with 21 institutional investors, of which 83% were domestically based and 17% off shore. Real money investors represented 57% of the total amount issued, while banks accounted for 43%.
Institutional support for the company’s ﬁrst RMBS issue was strong, with the transaction launched at $400m but lifting to $500m due to keen demand.
This reﬂects the ongoing strength and stable performance of the Australian securitisation market. The widely reported losses seen overseas in the wake of the GFC simply didn’t happen in Australia. Thinktank’s investors have not experienced a single loss from its six CMBS transactions of more than $2bn issued to date.
Thinktank is looking at two or three new securitisation transactions in 2022, potentially two residential and one commercial, and each is expected to be larger in size than preceding transactions. Thinktank is conﬁ dent of strong underlying and ongoing institutional demand for forthcoming issues, further enhancing its reputation in a still-growing and important market that is a vital part of the supply of credit to business and consumer borrowers. This, in turn, offers product diversiﬁcation and signiﬁcantly adds to competition with the country’s major banks.
The outlook for the commercial property lending market over the next 12 to 18 months has improved noticeably over the last few months. Borrower hardship requests have slowed almost to a halt, and both sentiment and activity have picked up, with rising expectations around the end of lockdown and a strong bounce-back across the economy quickly thereafter.
Owner-occupiers and investors are increasingly looking beyond the current environment and have begun taking advantage of low interest rates, competitive lending options and broad-based government stimulus.