In light of the recent health crisis and impact on financial markets we intend to provide a brief update every Friday. Currently there is limited impact on our strategy, but we feel it is important to over communicate in these uncertain times.
With the fear of COVID-19 will the property market follow the share market downwards?
The world is currently gripped by fear of COVID-19. No one can say for sure how far or how quickly the virus will spread or what the economic consequences will be. Nonetheless we are confident that senior secured property lending is a good place to have your money in terms of asset protection and an ability to keep earning a good income.
Should we expect the property market to follow the collapsing share markets?
Not necessarily, according to a recent analysis from CoreLogic. CoreLogic’s data shows Australia’s property market typically holds up well during economic slumps. At the height of the early 1990’s recession, property prices fell just 4.4%. During the Global Financial Crisis, the average Australian dwelling price fell just 7.5%. while the share market crashed by more than 50%. As investors in debt as opposed to equity, we take great comfort that there is little precedent for a dramatic decline in values as we would only begin to experience any impairment if property prices fell 30 to 40%.
In terms of the Partners Fund, our strategy to provide investors with investment exposure to first mortgage real estate assets in Australia and New Zealand remains unchanged.
We believe the most likely impact on the portfolio of the COVID-19 induced economic downturn will not be in any permanent impairment of loans but rather delays in the repayment of some loans. Importantly though, any delay in the repayment of a loan will see the Fund earning a higher interest rate (typically +5% per loan).
Our portfolio insurance, which protects the Fund against a decline in economic certainty/confidence, has seen a marked increase in value and at this point will likely add 1-2% to March’s performance.
We are currently holding 15%-20% of the portfolio in cash in anticipation of normal loan drawdowns as well as dry powder for any distressed opportunities that may arise out of the current crisis.
We continue to monitor all loans closely and remain in regular contact with borrowers.