We have seen some pleasing activity in the settlement of completed apartments and land lots this week, suggesting home buyers and investors are being supported by the banks. One of the larger loans in our portfolio is secured against a Perth apartment development which has seen all but three purchasers indicate they will meet settlement dates. Similarly we are seeing the sale of several existing apartments in completed buildings in Melbourne over the last week as buyers seem to have come out of a one month hibernation.
All of the stimulus and government support has been necessary to avert a major economic crisis but we simply cannot wish away the dramatic damage that a sustained period of lower economic activity, profitability and employment will inflict on the balance sheets of governments, companies and consumers. As a result, we reiterate our core view that “senior debt will be well protected but undiscounted equity in general now offers limited upside”.
With this backdrop our current intention is to:
- Continue lending against assets at conservative LVRs, as we feel the stimulus has averted 30-40% declines in real estate prices but there is not upside to values
- Maintain higher interest rates to take advantage of the limited competition in private markets
- Use the bounce in markets to increase our hedge book (suggest insurance as that is the term we have used previously) which will protect against an economic crash, accepting it may have a short term negative impact on Fund performance
- Maintain very healthy cash balances to work our way through any potential delayed or defaulting repayments
- Maintain a preference for financing existing buildings/assets versus construction loans
We have witness near record enquiry for commercial real estate loans over the last four weeks and this has resulted in a number of new terms sheets being signed. These potential loans are now in the due diligence phase and will likely take longer than usual to review as valuations are taking longer to complete.
The Merricks Capital Partners Fund continues to perform as expected and our investment strategy remains unchanged.
Enquiry rates from new borrowers remain strong and we are working our way through a number of new opportunities, albeit cautiously in this market. We expect two agricultural related loans to reach financial close next week. We are still maintaining our cash balance of 15%-20% across the Fund and expect some negative impact on our April performance as the value of our portfolio insurance declines by up to 1% of the Fund’s value as markets rally.