The Merricks Capital Partners Fund (the Fund) returned 0.7%* in August and 10.1%* on an annualised basis since inception. A 4.0% distribution was paid during the month.
Global markets saw sharp swings in August, starting with a sell-off driven by US recession fears and the unwinding of Yen carry trades, followed by a recovery on renewed rate cut optimism. As risk-on appetite returned, CDS spreads tightened with the Fund’s CDS hedging costs at 7bps (9bps with FX hedging). Continued signs of weakness in both the US and China support maintaining the Fund’s macro credit protection, particularly given the relatively low cost. The RBNZ’s 25bps rate cut during the month was well received, with the market now pricing in a further 185bps cut over the next 12 months (Bloomberg). While businesses welcomed the cut, we see the near-term outlook for New Zealand as challenging for equity players who will bear the brunt as real asset values continue to reset in the coming months.
During the month, the Fund received repayment on one of its largest loans, a 9.2% allocation secured against a town centre and residential development project 80km north of Auckland. The Fund retains a 4.2% allocation to the same assets as lender to the incoming purchaser, a highly credible sponsor. Also during the month, receivers were appointed on one of the Fund’s farming loans in Bundaberg, QLD (1.0% allocation). The borrower had been unable to operate the farms due to working capital constraints, and a structured sales process was assessed as the best way to return investor capital. The Fund’s 4.5% allocation to the Melbourne Place Hotel project is nearing practical completion and a sale of the asset is expected to be contracted in line with this milestone.
In line with the Fund’s 2021/22 strategy to focus on leading amenity office assets located in specific precincts, JLL Research reports that geographic bifurcation in Melbourne is significant. 10% of Melbourne’s CBD office buildings (38 properties) account for 63% of total vacancy, primarily in Docklands (~250,000 sqm) and the western core (~160,000 sqm), while the remaining 90% of office assets have a vacancy rate of just 9.9%. In Q4, we are expecting three of our office assets to repay: River Street, South Yarra (2.3% allocation) is well advanced with refinance offers, York Street, Sydney is on the market to transact (6.7% allocation), and Pitt Hunter is advanced in a sale process (4.7% allocation). Queen Street, Auckland (8.0% allocation) will likely take until Q1 2025 to repay with New Zealand’s economic conditions and leasing environment still depressed until further rate cuts are forthcoming.
Our view across commercial real estate is that Q4 2024 will largely mark the bottom for many asset prices. While this could represent equity erosion for borrowers where it coincides with loan repayment timing, the risk to senior debt is largely mitigated by the position in the capital structure. We expect this ‘bottom of the cycle’ environment to also drive new credit opportunities with borrowers looking to buy ‘cheap’ and lenders able to capture better credit spreads and reset valuations. We are currently assessing $800m in new investment opportunities across residential, commercial mixed-use, mixed farming, dairy, and specialised processing assets, and we expect the Fund to remain fully deployed through 2024.
