WEEKLY REVIEW

As Covid-19 spreads through the world – and cities and countries go into lockdown – global markets are reacting with extreme volatility. But some investors are looking to real estate as a safe haven or perhaps an inflation hedge.

There’s now little doubt the economic consequences of Covid-19 will be severe. Closing down significant portions of the economy and restricting the flow of people and goods will, of course, lead to a period of low production and high unemployment – otherwise known as a recession.

However, as has become the custom since the GFC central banks and Governments are beginning to flood the world with unprecedented liquidity.  The reaction of liquid asset prices to date has been very positive and there is some sense that markets will rally in the face of a deep economic slowdown. This type of reaction has not made fundamental sense to us for the last decade, but investors are well trained by central banks to buy the dips.

As a firm, Merricks Capital will largely stand on the sidelines and not participate in the high-risk parts of the capital structure i.e. equity. We have focussed on senior secured debt over the last 5 years as it remains extremely defendable when running stress tests of deep recession and the potential miscalculations of central bankers.

In the face of this share market volatility, Domain reports that some sophisticated buyers are looking to the property market as a safe haven for their money. In particular, they’re buying off-the-plan – often for properties that won’t settle for another three years. We have the advantage of being able to access senior secured loans below replacement cost of this type of residential property as well as office, industrial and agricultural sectors. If we can earn the yields typically associated with equity investments via lower risk debt we will happily stick to our strategy.

The current shock is most likely a disruption to the need to add real estate stock to house, feed and accommodate commerce. There’s a level of confidence that, while the economy is on hold, it will come back to life once we’ve defeated the threat of Covid-19 and be supported by a growing Australian population. The clearing price of this real estate will be uncertain in the face of a recession, but we remain confident it will be well above the levels we need to have our debt and interest repaid.

In terms of the Partners Fund, our loan book continues to perform well with our portfolio insurance expected to add an additional 1-2% to March’s performance.

We are still maintaining our cash hold of 15%-20% to fund our normal loan drawdowns as well as being ready to take advantage of any distressed opportunities.

Lending rates have significantly increased over the past 2 weeks and we are now seeing opportunities in low risk mortgages and lending to traditional bank customers that need more certainty, flexibility and speed.

We are also leaning towards lending on more completed / existing assets across commercial real estate, infrastructure and industrial as opportunities in this space increase