June 16, 2023

Deploying dry powder as New Zealand approaches peak rates


This week, New Zealand (NZ) tipped into technical recession with two quarters of negative GDP growth (0.1% & 0.7% respective contractions). Contrary to some negative news regarding this event, we’re seeing high quality opportunities for private credit in NZ.

With inflation falling (down 0.5% year-on-year at 6.7% in March) and the cash rate 5.5%, up from 0.25% in October 2021, the Reserve Bank of New Zealand (RBNZ) has signalled it may be at the peak of its hiking cycle (RBNZ May 2023).

We see several strong macro drivers that underpin positive lending conditions, such as high net migration post-pandemic (72k April 2023 year-to-date), unemployment at a 30-year low (3.4%), record-high labour force participation (72%) and key supply shortages for critical real estate assets (housing, prime office, social infrastructure, etc) (Stats NZ).

With several NZ loans in our portfolio about to repay, we’re closely assessing the NZ pipeline to redeploy into NZ real estate where asset prices have already come off 15-20% over the past 12 months and significant further rate increases look less likely.

Since late May, RBNZ has also provided a more optimistic tone on house price expectations, predicting a flattening of values from late 2023 (RBNZ).

We recently retested valuations on several key properties and found valuations are holding reasonably well (three higher and two lower, all within 7% of original valuations). This is, in part, a reflection of our strategy to target borrowers where they are creating value to the underlying asset base we hold security over. For example, we recently revalued the Indigo Hotel at 51 Albert Street, Auckland that’s currently under development. The project value has increased by 3.7% from the May 2021 valuation with forward trading assumptions no longer being impacted by the pandemic.

The most advanced loan in due diligence is a commercial asset in Auckland CBD, which is forecast to return approximately 11.0% IRR to the Merricks Capital Partners Fund (the Fund) with an initial LVR below 40%. This opportunity which is expected to settle in July is representative of the many new loans being presented.

The Fund currently has 11 loans secured against New Zealand assets totalling 32% of the Fund’s investments. To date, no assets have been materially impacted from recent weather events and the conservative attachment point across our New Zealand exposure, 63% LVR, has proved an effective shield from retreating asset prices.

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