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Surprisingly positive support for asset prices into 2020

  • Over the last year our loan book has continued to perform extremely well. As with most investors, we were concerned about the potential for the pandemic to cause severe problems in our markets that would impact values in the hard asset classes of real estate, agricultural and infrastructure.
  • As highlighted last month, the underlying loan portfolio in the Partners Fund has consistently provided a return of 0.7-0.9% each month and the performance for November will also fall within this range.
  • The Citibank economic surprise index below shows the positive surprise in Australia in the last few weeks, which suggest investor optimism will continue to support Australian asset prices into the first quarter of next year.
  • We witnessed the depth of cash available for deployment last week when, on our behalf as the senior secured lender, receivers sold a major land asset in Box Hill. The quality of the bidding parties highlighted that major super funds, REITs and private developers are all actively seeking significant residential development sites.
  • However, there is no hiding from the fact that apartment and town house presales are slow, and this is reflected in prices paid for development sites when contrasted with last year’s valuations.
  • Our assessment of the current market position for major development sites is that
    • Major property developers have a lot of cash to deploy
    • There is a strong view that in 2-3 years there will be a shortage in high density homes as new starts have plummeted
    • Developers are active but are currently able to buy high quality sites at a price that enables them to discount 1-2 years of planning and a slow sales cycle
    • As has happened with the stock market, however, we suspect the weight of money to bid up development land into early next year, removing the time buffer to deliver sales and development currently afforded in purchase prices.
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