Weathering the storm

Diversification was key to commercial property lender Thinktank's success in navigating COVID-19, writes director Per Amundsen

Weathering the storm

When Thinktank, a specialist commercial and residential property lender, recently closed its first residential mortgage-backed securities (RMBS) issue for $500m, it validated a strategy of diversifying from small commercial loans into the residential debt market.

In a COVID-19 environment, this diversification has allowed the company 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 first 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 believed there was a niche here for a conservative lender that understood this market better than the major banks and could deliver better loan products 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 want residential finance, and Thinktank, via its deep and trusted network of mortgage brokers and aggregators, is well positioned to provide this as an adjacent product. By 2018, residential loans had steadily grown to comprise between 10% and 15% of its book.

However, COVID has seen that percentage of loans grow to about 50% today. Two 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 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 that 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 has generally 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 RMBS in August 2021. Institutional support for this RMBS issue was strong, with the transaction launched at $400m but growing to $500m due to keen demand. 

This reflects the ongoing strength and stable performance of the Australian securitisation market. The nature of losses seen overseas in the wake of the GFC simply didn’t happen in Australia. In the case of Thinktank, 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, each of which is expected to be larger in size than preceding transactions. Thinktank is confident 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 Australian business and consumer borrowers. This, in turn, offers product diversification and significantly adds to competition with the country’s major banks.

Per Amundsen is a director of Thinktank, a lender specialising in commercial property finance.