June 2, 2023

No quick fix to housing supply shortage


Senior secured, asset-backed lending in Australia and New Zealand is supported by a supply shortage across many real estate sectors, including housing, prime office spaces, lifestyle and retirement living.

During the first five months of 2023, widening dislocation in residential commercial real estate emerged, with no clear pathway to ease supply constraints with construction costs likely to remain elevated for at least another 12-24 months and the impact of broader higher inflation.

Further, this week’s ABS building approvals data showed an 8.1% MoM decline from March and the lowest level since 2012 while migrant population growth is at an all-time high. This supply shortage also appears to be providing support to house prices even in a higher rate environment, with Core Logic data showing a 1.4% MoM increase in Australian major cities house prices for May and advertised rent up 0.8% MoM (10% YoY, NAB).

This dislocation has created opportunities for Merricks Capital to selectively fund multi-residential projects (apartments) both complete, commonly referred to as residual stock facilities (RSF), and new development projects. Over the past six months, we have settled $300m of new investments across residential projects and RSF, increasing the Merricks Capital Partners Fund exposure to 11% residential and 4% RSF, up from 6% and 2% 12 months ago. This is a noticeable increase from the 5% (approximate) position held across both residential and RSF two years ago.

Merricks Capital has a further $200m of residential and RSF investments in due diligence which are forecast to return a weighted average of 11.5% (net of fees and costs). We view these investments as excellent risk-adjusted returns. This is due to sector demand outpacing supply for at least the next two years and our senior secured attachment point providing a 30-40% borrower equity buffer to asset price protection.

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