Merricks Capital Partners Fund Portfolio and Market Update August 2022
The Merricks Capital Partners Fund returned 0.7% in August and 10.4% on an annualised basis since inception. There were no new loan investments settled in August. Underlying loan income benefited from floating rate loans passing through rising interest rates in Australia and New Zealand, while our portfolio’s macro credit hedge saw Credit Default Swaps narrow.
In the Australian market, we are seeing the impact of supply chain disruptions and rising interest rates increase the volatility in domestic building approvals. July ABS data showed a fall in approvals that exceeded expectations, down 17.2% month-on-month. This drop was led by a sharp decrease in the total number of private sector dwellings excluding houses approved (down 43.5%). Lower approvals for large apartment developments were the leading factor, falling to the lowest level in a decade. This sentiment was echoed in NAB’s quarterly commercial property survey which reported the number of developers planning to start new works in the next six months has fallen to a three year low of 38% in Q2 2022.
Despite a higher level of uncertainty around the short-term outlook of the Australian housing market, the Merricks Capital Partners Fund has continued to see positive performance across its residential sector loans. For example, in August, an $89.8m mixed-use construction loan was partly repaid from settlements and the residual debt on the apartment residential stock will be rolled into a new facility with an LVR of <60%. Further, we have had multiple conversations with developers who see the market conditions as an opportunity to deliver more supply over the next five years and meet the forecast demand driven by expected inbound migration in a market with a national rental vacancy rate around 1%.
The seasonal outlook for the agricultural sector in Australia and New Zealand remains encouraging with the Bureau of Meteorology’s ENSO Outlook indicating at least a 70% chance of La Niña reforming later this year. This is around triple the normal likelihood and will increase the chances of continued above-average rainfall for northern and eastern Australia during spring and summer. This outlook is positive for the 20 agricultural investments secured by land assets in the Merricks Capital Partners Fund, as high commodity prices and strong land values allow for multiple paths to exit for our investment capital.
We are in exclusive due diligence on +$850m of new commercial property investments, including ‘A’ and ‘Premium’ grade office developments in the CBD markets of Sydney and Melbourne. In the agricultural pipeline, we are forecast to settle three new loans in September, deploying $65m with an average weighted investor IRR of +11% and <65% LVR.
The “Fed put option” is dead and buried: our portfolios are set up to generate returns in the face of a long grinding unwind of central bank balance sheets.
The Merricks Capital Partners Fund returned 0.7% in August and 10.4% on an annualised basis since inception. There were no new loan investments settled in August. Underlying loan income benefited…