The World Bank estimates almost 93% of countries will face economic contraction on a per capita basis in 2020 as a result of the pandemic. It is a crisis that has impacted businesses across the spectrum, with a global halt in economic activity. However, while some businesses are being disrupted, others will undoubtedly thrive in the post-crisis recovery.
For investors seeking regular income streams with some capital stability, it has become more difficult. Interest rates have been pushed down further, and the earnings outlook on some companies is unclear. As has been noted already in this series, the post-inflation return to investors in term deposits (TDs) is now negative.
In times of uncertainty, we tend to shift to quality or move further up the capital stack to achieve capital stability and deliver attractive risk adjusted returns. Understanding private debt
Real estate debt is similar to traditional bank debt. The lender, in Freehold’s case this is the fund, provides capital to finance the purchase of a property asset, or the development or redevelopment of a property. In return, the fund (and ultimately investors) receives interest on the loan, which is paid either monthly, quarterly, or capitalised and paid at the end of the loan term.
How the value of an asset, which is the loan security, is determined varies by asset type. If the loan is simply financing the acquisition of land, it is secured against the current or ‘ as is ’ value of the property whereas, a construction or redevelopment loan is typically secured against the end value of the project. The end value includes improvements that the loan is being used to finance.
For loans financing residential development land acquisition or construction, the weighted loan-to-value ratio (LVR) for senior secured first mortgages, our area of focus, tends to be between 40% – 60%, and gross interest costs to borrowers between 8% – 12% p.a.
In instances where the purchase of a commercial property is being funded, such as an office building or retail centre, the loan is secured against the market value of the asset and the interest is paid with the underlying asset’s rent. Banks continue to be an active lender to commercial property, so usually non-banks finance commercial assets where LVRs are stretched (>65%) or when an asset is being repositioned. Drivers behind the growing investment in real estate debt
Historically, most real estate developers would approach a […]