If you have been involved in commercial property, you are bound to have heard of the Balmain Group. If you haven’t, then Balmain is Australia’s largest non-bank commercial property loan organisation, having originated more than $30 billion of commercial mortgage loans since its foundation in 1979.
In a “first” for the Australian investment market, Balmain, through its Balmain Discrete Mortgage Trusts, is providing investors the opportunity to invest in discrete, individual commercial mortgages from as little as $10,000. You select the specific commercial loan(s) you wish to invest in.
Balmain Discrete Mortgage Income Trusts
The trusts allow investors to access individual, standalone, first mortgage secured commercial property loans selected by Balmain. The loans typically run from a few months out to 3 years, and are secured by office, retail, industrial or commercial property.
A Balmain entity acts as the Responsible Entity for the Income Trusts. Structurally, a discrete sub-trust is established for each individual loan, with a cash management account sitting over the top. Investors deposit funds into the cash management account and are issued ‘cash units’, and then consider whether to invest in one or more of the discrete loan sub-trusts. They are under no obligation to do so – however if they elect to invest in one of the property loans, they are issued ‘loan units’ for the applicable sub-trust.
The minimum initial investment is $50,000 in cash units – which may then be invested in loan units from amounts starting from $10,000 per individual loan. The monies remaining in the cash units are placed on deposit with the National Australia Bank, currently earning interest at 2.75% pa. Investors can redeem their cash units on 7 days notice.
Balmain Funds Management sources, originates, credit approves and manages the loans. Loans are:
- secured by way of registered first mortgage;
- minimum of $250,000;
- target loan term of 1 to 5 years (typically under 3 yrs);
- target return of 6% to 12% pa;
- mix of loan value ratios (LVRs), property sectors and geographies (most likely eastern seaboard).
The table below show the current loans available.
|Location||Type||Term||Target Return||LVR||Loan Amount|
|East Brisbane||Commercial||2 months||6.30%||23%||$650,000|
|Sydney||Strata Commercial||9 months||6.05%||52%||$520,000|
|Banksmeadow, Syd||Indust/Office Strata||10 months||6.05%||61%||$355,000|
|Sunshine Coast||Comm/Retail||5 months||6.35%||64%||$640,000|
|Nth Sydney||Commercial Strata||10 months||6.35%||69%||$620,000|
|Nth Beaches, Syd||Indust/Office Strata||16 months||6.85%||63%||$3,506,000|
Balmain’s Credit & Investment Committee assesses each loan, using criteria that includes an analysis of asset risk, borrower risk, servicing risk and exit risk. This analysis is made available to potential investors, who are able to access this summary and other detailed information about the loan, property and the borrower in a Supplementary Product Disclosure Statement for each sub-trust.
Balmain charges a management fee of 1.65% pa of the principal amount of each loan (no management fee is charged on the cash units). The management fee comprises 3 components:
- base management fee of 0.80% pa;
- recoverable expenses (expected to be 0.05%pa);
- and deferred management fee of 0.80% pa.
Rather innovatively, although the deferred management fee accrues during the term of the loan, it is only paid when the loan has been repaid in full and investors have achieved the target return. If the target return is not met, then deferred management fee is reduced on a pro-rata basis.
There is also an additional performance fee that is payable on any “surplus recovery” (effectively the return in excess of the target return) under which Balmain receives 50% of any surplus. Arguably, the performance fee and deferred management fee help to ensure that there is an alignment of interests between the investment manager and investors.
The Balmain Group also earns fees from the origination and establishment of the loan, and from the servicing of the loan. These fees are paid by the borrower.
This is a very innovative product that massively improves the accessibility to an otherwise very difficult asset class to invest in. The website that Balmain has put together (www.balmainprivate.com.au ) is slick, and SMSFs can readily monitor their investments as well as consider new opportunities.
Commercial property loans, however, are traditionally higher risk than residential property loans. Also, because you select the individual loan (which is also one of the attractions), investment requires a higher level of due diligence than may be required if investing in a pool of mortgages. The minimum investment amount has been kept high at $50,000 to discourage “tyre kickers” and help ensure that investors approach this opportunity with serious intent. For the discerning investor.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.