Roy Prasad

The Reserve Bank’s decision to reduce interest rates has reinforced investor concerns about income generation outside the familiar territory of term deposits, says Roy Prasad, head of mortgages with Australian Unity Investments.

“Today, investors need to invest four times as much in a term deposit to earn the same amount of income as they did before the global financial crisis,” Mr Prasad said.

“For many investors, options such as contributory mortgages are filling the income gap, by providing the higher levels of income needed, without requiring investors to take on huge amounts of additional risk.

“Under a contributory structure investors can select individual first mortgage loans over commercial property or create a portfolio of investments to suit their own risk and return requirements.

Investors are also able to select the term of their investment – up to a two year maximum – with many investors opting to roll over into a new contributory mortgage opportunity at the end of the term.

“The marketplace for commercial mortgages is at an exciting stage of transformation, and is becoming more efficient, transparent and user friendly.

“With lending criteria from the banks – the traditional sources of finance for property development – becoming tighter, there is genuine need for non-bank lenders for commercial property development.

“Investment in commercial mortgages offer a number of advantages for investors. When managed correctly, it offers high returns relative to other floating-rate investments, low volatility, with low levels of default and low levels of loss, low correlations to other asset classes and is resilient to margin pressure.

“Investment in a first mortgage loan is generally a capital-stable investment, offering investors competitive monthly interest payments despite interest rates being at record lows.

“For instance, over the past 12 months the Australian Unity Select Mortgage Income fund – a contributory mortgage fund – has generated yields of over 7 per cent (after fees) by focusing on smaller, high quality, boutique developments.”

When it comes to contributory mortgage funds, not all fund managers are alike.

“It is important to invest with a manager that has a long history of successful property investment, an experienced team, a thorough due diligence process and robust credit procedures,” Mr Prasad said.

“When managed correctly, contributory mortgage funds are very different to the mortgage funds of old.
“The new breed of contributory mortgage have addressed many of the problems inherent in the previous pooled mortgage fund structure,” Mr Prasad said.

For investors, the benefits of a contributory mortgage fund include income stability, control over where to invest, capital stability, credit quality and a defined term of investment.

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Roy Prasad

Contributory mortgage funds have addressed the problems which have affected the pooled mortgage funds of the past, and offer excellent income opportunities for investors, said Roy Prasad, head of mortgages at Australian Unity.

A contributory mortgage is when one or more people contribute, as lenders, to the loan. Rather than having all investors registered on the certificate of title to the property, the mortgage is usually registered in the name of a trustee on behalf of all investors to that loan. Each investor has an exposure to the loan in the proportion that each contributed capital. Investors are entitled to interest income and a return of capital from a specific syndicate-fund, not from a diversified pool of mortgages.

“Investment in a first mortgage loan is generally a capital-stable investment, offering monthly interest payments that are typically higher than those payable by retail bank deposits,” Mr Prasad said.

“Contributory mortgage funds are an improvement on the pooled fund structure, as they allow investors to tailor risk and return, location, and the duration of returns to their own preferences. In some ways they are an expanded form of the peer-to-peer lending which has grown so strongly in recent years.

“Investors can construct their own asset exposure—from a single concentrated investment to a diverse portfolio of registered first mortgage investments.”

Investors in a contributory mortgage fund have the option to put money into discrete syndicate funds of their own choosing, giving them greater transparency and control over their investment.

Mr Prasad said there are a number of other benefits to a contributory mortgage fund, including income stability, capital stability, credit quality and a defined term investment.

“Monthly interest income provides investors with a high degree of cash flow certainty. In the case of the Australian Unity Select Mortgage Income Fund, we currently offer interest rates between 6.50 and 9.50 per cent per annum, depending on the date, type and term of the loan and security provided.”

Each individual investment (or syndicate fund) is secured by a registered first mortgage over real property assets, generally geared to a maximum of 70 per cent, and each investment opportunity for the mortgage fund must receive credit approval from the fund manager before being offered to investors.

“Investors can also choose the term of the investment, and know their money will be returned at the end of that term. In the case of the Australian Unity Select Mortgage Income Fund, the term is a minimum of 12 months to a maximum of two years.

“A contributory mortgage fund can provide investors with the best of both worlds—the ability to select an individual investment that suits their own risk and return requirements, and professional mortgage management from an experienced team,” Mr Prasad said.

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Mark Pratt

Australian Unity Real Estate Investment (AUREI) has successfully acquired Owenlaw Trust Limited, the manager of the $60 million Owenlaw First Mortgage Income Fund and the $20 million Owenlaw Mortgage Trust.

The Owenlaw First Mortgage Income Fund is a ‘contributory fund’ where investors can invest in individual mortgages with different terms (up to a maximum of two years) and different interest rates payable. The fund will now be known as the Australian Unity Select Mortgage Income Fund.

The Owenlaw Mortgage Trust, now known as the Australian Unity Pooled Mortgage Fund is an investment scheme that invests in a portfolio of registered first mortgages and is currently closed to new investors.

Mark Pratt, general manager, Australian Unity Real Estate Investment, said the acquisition comes at a key point in the market cycle, and that now is an opportune time to expand and grow the mortgage investment business.

“The future of non-bank lending looks promising with the doors to competition starting to open presenting opportunities for mortgage funds like these.

“With interest rates predicted to remain low for some time to come, mortgage funds are very well placed to provide investors, particularly retirees, with solid and stable income returns that are well above the cash rate.

“AUREI has an extensive track record in mortgage investments and our mortgage portfolio is currently valued at more than $228 million.  We have an experienced and high quality mortgage team led by Roy Prasad, and have long believed that mortgage funds have a useful role to play in investor portfolios.

“The Owenlaw First Mortgage Income Fund and Owenlaw Mortgage Trust are quality mortgage funds which have provided investors with stable and regular income for almost 20 years.  We intend to continue managing the funds in line with their   current investment strategy.

David Owen, chairman of Owenlaw Trust, who is retiring after 40 years of managing the business, said Australian Unity is widely recognised as one of Australia’s leading mortgage investment managers.

“In addition to the newly acquired funds, AUREI is responsible for a quality mortgage portfolio and hasdemonstrated expertise and commitment to investors in its mortgage funds.

“After the sale, both director Luke Anderson and office manager Maria Andricopoulos will join AUREI to continue to look after the Funds’ investors and borrowers, helping to ensure a smooth transition,” Mr Owen said.

The Funds will continue to pay monthly distributions and investment statements will continue to be sent quarterly.

“AUREI recognises the value of this acquisition and will look to leverage its national footprint to provide new investment opportunities for investors and borrowers alike,” Mr Pratt said.

Roy Prasad, head of mortgages at AUREI said that Owenlaw has a strong track record providing development finance for small and medium sized commercial and residential developers.

“These businesses often find it difficult to source funding from the major institutions for a variety of reasons and we look forward to continuing to service this important part of the market.”

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