At Merricks Capital, we are constantly in discussion with leading office sales and leasing agents. Despite current lockdowns in Melbourne and Sydney, agents continue to see strong demand from local buyers for prime office buildings. This is being driven by the low cost of capital and liquidity as well as limited supply of prime office product in good locations.
The demand is strongest for modern and smaller boutique buildings in CBD or fringe locations where landlords are in a better position to negotiate lease terms, given smaller buildings to lease and the ability to create a differentiated product.
We continue to be selective in funding office which target these points, funding below replacement cost, as well as in office markets where there is limited office that is currently under construction or that has significant pre-commitments in place. We will reach financial close on a $146m office construction loan in Sydney CBD around mid-September with further office opportunities currently sitting in due diligence and in the pipeline.
Regarding our current office loan portfolio, the recent sales evidence has shown that yields have tightened by 25-50 basis points in comparison to the valuations accepted originally. Effectively the LVR’s on these loans have reduced from 60-65% to 55-60% which along with the leasing commitments secured is creating significant interest from the banks to refinance the asset on completion. Despite record low bond yields we are continuing to monitor for the potential increase in yields that may occur over the next 12-24 months because of any pullback in stimulus from central banks. Ultimately, we are assessing if there is enough of a risk premium in the office yield to offset any increase in bond yields for each project.
In agriculture, like commercial real estate, we are consistently in discussion with rural sales agents and are seeing strong demand for properties valued at more than $10m. The agriculture investment strategy is focussed on $25-$50m loans where we see the strongest investment opportunities.
When we complete loans, we do not assume any asset value appreciation in Loan to Value Ratio (LVR), our key credit metric. However, asset value appreciation reduces individual loan risk exposure in our Agriculture Investment Portfolio.
Based on the market signals above, we anticipate asset values will continue to rise, however we will continue to remain conservative in our assessment of each individual loan, assuming no rise in underlying asset values for the life of the loan investment.
