Monday 23 March 2015 by Elizabeth Moran Opinion

Diversifying your property portfolio

This article was published in the Australian last Saturday. It outlines Residential Mortgage Backed Securities (RMBS), a fixed income instrument that is an appropriate choice for investors looking to diversify their portfolio. RMBS are low risk investments that provide exposure to the property market in a different way.

RMBS different coloured houses

For Australians, property ownership and investment is a way of life. It’s been kind, rewarding many of us with substantial gains in recent years, but there is no guarantee.

The Reserve Bank again registered its concern about price growth in the Sydney and Melbourne residential property markets in its latest Minutes released this week, as well as concern about the commercial market.

Given the risks in property ownership, some investors may prefer to gain exposure to the market in a different way. One option is through fixed income via Residential Mortgage Backed Securities (RMBS). RMBS are issued by financial institutions to recapitalise their balance sheets. Hundreds and sometimes thousands of loans are pooled together via a trust. The trust breaks the combined pool into smaller, marketable classes, making the RMBS attractive to investors.

In this way, the classes act like a normal company capital structure, where investors with the lowest risk appetite target the senior bonds (or in the case of RMBS, the highest classes) and those with a higher risk appetite target the lower ranked capital, like hybrids or shares (or in the case of RMBS, the lowest ranking classes).

Credit rating agencies play a significant role in RMBS as they rate each of the classes, giving investors an indication of the risk involved.

According to the credit rating agency, Standard & Poor’s, domestic RMBS on issue totalled $139 billion at 31 December 2014.

Wholesale demand for these very low risk investments has been strong. According to KangaNews, there was A$35 billion equivalent of RMBS issued in the Australian domestic market in 2014. In the last month alone, five institutions have issued a total of A$6.2 billion: CBA $2 billion (upsized by $1bn), Bank of Queensland $900 million, NAB $1.75 billion, Resimac $300 million and Suncorp Metway $1.25 billion.

Many of the issues investors face with direct property are mitigated by investing in RMBS.

Different classes of RMBS offer a spectrum of risk although they are typically low risk due to high underwriting standards, conservative loan to value ratios (averaging around 70%) and the fact that loans retain full recourse to the borrower if selling the property can’t recover the borrowed funds.

RMBS pass through the principal repayments from the pool of mortgages, unlike bonds that pay interest and principal at maturity, so RMBS terms can be quite short. Income is known upfront and is based on a margin over a benchmark, usually the bank bill swap rate (BBSW).

For example the highest ranking class RMBS in the most recent CBA issue, rated AAA, will pay 1 month BBSW plus 0.80 per cent on a quarterly basis. The weighted average life, or expected term to maturity of this class is just 2.8 years.

RMBS offer investors a known return that specifically targets their risk appetite, with security over the mortgages and the benefit of lenders mortgage insurance on high loan to valuation mortgages. They can also offer liquidity, and a less stressful investment as the problems of occupancy and maintenance as well as the cost of borrowing are borne by the owners of the properties.

Most superannuation funds and bond funds will invest in RMBS. As they can only be accessed in the over-the-counter bond market, individual investors must find a bond broker that can transact on their behalf.

FIIG Securities make RMBS available to wholesale investors from $50,000 as the bonds become available in the secondary market.

For more information please contact your FIIG Representative. 

Disclaimer

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.