Building Value: Lending Through the Residential Cycle

This week, the Merricks Capital Partners Fund (the Fund) commenced deployment into a residential development loan in Mangawhai, north of Auckland. This facility, represents 4% of the Fund, refinances our existing land acquisition loan and supports the first two stages of a 665-lot residential project. This loan exemplifies the defensive qualities of senior credit across asset cycles:

• The Fund has been involved in this development since 2021, initially financing the industrial land subdivision and town centre build before providing acquisition financing for the residential sections to an institutional purchaser. The project was successfully repositioned in 2024 when the purchaser recapitalised the facility, after purchasing at a material discount to the 2021 valuation, and accelerating the pre-sales campaign.
• New Zealand’s residential market is well-positioned for recovery following a significant valuation reset. House prices dropped by up to 25% from 2021 peaks (Reuters, RBNZ), yet demand remains strong due to tight supply, high migration, and full employment. With transaction volumes rising (CoreLogic), residential investment is forecast to grow 4-6% in 2025 (Reuters), strengthening confidence in new lending.
• Supply-demand dynamics in Australia and New Zealand for residential are similar, with the key distinction being monetary policy approach. The RBNZ already cutting rates from 5.5% to 3.75% and expected to reach 2.75% by late 2025, New Zealand’s monetary policy is easing more rapidly. This provides greater confidence in lending to house and land subdivisions, while in Australia, we remain focused on shorter-term residential towers due to the slower rate cut pace of rate reductions.
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• With residential projects now comprising 26% of the Fund’s portfolio, we remain highly selective in deployment, focusing on projects with demonstrated pre-sales momentum, institutional-grade sponsors, and supportive market conditions.
• The built-to-rent (BTR) sector remains an attractive investment theme, addressing supply constraints and affordability challenges in capital cities. In November 2024, the Fund settled a $256m construction facility for a Melbourne BTR project, that will deliver 348 apartments with an expected 14.9% IRR (net). Institutional interest in BTR assets remains strong, evidenced by recent Queensland transactions totalling $350m at a 4.5% yield.

This week, the Fund was mandated and commenced due diligence on a $258m facility to fund the completion of a 32-level mixed-use tower in an inner Melbourne suburb. The project will include 389 BTR units alongside retail, commercial, and hospitality spaces. The sponsor is a well-capitalised JV with an institutional partner, and the project is supported by a fixed-price build contract from a reputable builder with a proven track record.