December 22, 2023

The Merricks Capital Outlook for 2024


The outlook for 2024  

Range bound  

Key Investment Thematics
Agricultural Credit
Downstream supply chain lending to lead increase allocation to Agricultural Credit 
  1. At 17%, the Merricks Capital Partners Fund is currently underweight traditional agriculture exposure, providing dry powder for our allocation to increase. 2022 and early 2023 was a highly competitive lending environment driven by the banking sector and we reduced exposure accordingly.
  2. With banks now seemingly at capacity limits the need for non-bank lending and higher spreads has remerged.
  3. The Agricultural Credit Portfolio LVR decreased from 62% to 56% over recent years as asset values increased. The past six months saw farm value growth of 0.1% compared to the prior two years generating 15% growth.
  4. Our expectations of more variable weather conditions and mid cycle commodities prices has also led us to shift subsector allocation to downstream food processing and farm infrastructure assets with secure water supply.

Residential Sector: An extremely tight supply/ demand dynamics is leading to a consensus view from debt funds that multi-residential stock and developments is one of the best sectors to allocate, however the terms need to be attractive.

  1. With 1% home vacancy across Australian and New Zealand the downside risk in this sector is well contained, however some sub-sectors of this asset class are too competitive and a poor return in our opinion.
  2. The Merricks Capital Partners Fund is underweight allocations to very large $300m+ residential developments. Currently, this is a highly competitive lending environment with international institutions and sovereign wealth capital leading to weaker covenants and lower investor returns.
  3. Our focus has been on a strong pipeline of loans against assets with values between $75 – $125m. This is in Residual Stock Facilities (RSF), apartment construction and retirement village sectors, where capital is more scarce.
  4. Housing supply shortage and offshore buyer demand for construction of higher end apartments are supporting increasing revenue in feasibilities of new projects despite the cost pressure still being driven by building sector wages.
  5. The good news is wage increases are highly predictable and material supply disruptions that were erratic have dissipated leading to certainty of development costs.
  6. The biggest unknown is how much pressure development land will experience in 2024 as developers are forced sellers. We are seeing lots of requests for finance to purchase discounted sites but are cautious unless the borrower has a clear pathway to development.

Office Sector

Refinance of 20% of the Merricks Capital Partners Fund’s fund capital in Q1 is leading to opportunistic investing with dry powder into premium office construction and strategically located office refurbishment.

  1. No new office deliveries are expected over 2025 & 2026 in Sydney (JLL) the first time in 50 years and single digit has created the opportunity to invest in this capital-scarce investment sector despite solid tenant demand.
  2. Recycling of refinanced loans will keep the funds allocation at sub-25%.
  3. Mixed-use assets have also created a new subsector of office investment opportunities, creating further repayment pathways with the multi-use assets, including Hotels, Apartments, Retail and Office.
  4. The non-consensus allocation to this sub-sector has proved to be high returning and stable over the past 3yrs despite much of the market rumblings. With such high demand for finance in this sector we can remain selective.

Sector Diversification and hedging remains a key focus to combat any unforeseen macro risk

 Any individual loan has limited risk to overall investor returns. The unforeseen contagion or problems within subsector or systematic freezing of refinance markets is always the biggest fear. We continue to manage this risk through ever expanding the hard asset sectors we lend against and hedging a lock up in money market with credit default swaps.

  1. The Merricks Capital Partners Fund invests across 15 sub sectors within our three core investment sectors, Commercial Real Estate, Natural Resources and Industrial & Infrastructure.
  2. Port infrastructure, Natural Resources, Renewable Energy Storage and Medical/Healthcare facilities and aged care/lifestyle loans have led this year’s investment diversification and 2024 pipeline.
  3. We have grown the team 20% over the last year and continue to add industry experts and service partners to find and manage loans in an expanding range of real property.

We would like to thank our investors and capital partners for your support over the past 12 months. Our mission, in partnership with our investors, is to continue to deliver consistent returns by providing innovative capital solutions across a range of hard asset sectors.

As we enter a new year, I’m reminded of a Buddhist quote: A young student calls out to his teacher across the banks of a river “Oh wise one, can you tell me how to get to the other side of this river”? The teacher pauses and responds assuredly “My student, you are on the other side”. It’s been a challenging year for many of our borrowers and they’re looking for some certainty and relief in these economic conditions. Perhaps we’re on the other side of a time that has been dominated by COVID disruptions, rampant inflation, rising rates and uncertainty. With a bit of luck, a little more stability will allow business owners to make decisions with more certainty in 2024.




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