Oct 09 2018Add to Favorites
With the combined influences of a cooling residential property market and heightened bank scrutiny on all aspects of real estate lending, traditional debt sources are, in many cases, closed to developers and commercial real estate investors, particularly where circumstances require a specific funding solution.
·Sales rates for new developments have fallen significantly and are now unlikely to achieve pre-sales required to cover development cost;
·Programmes should be incorporating additional time to ensure sufficient facility headroom to accommodate delays in achieving sales;
·Similarly, due consideration should be applied to downside sensitivities on realisations to ensure appropriate coverage;
·Valuations for both sites and finished product are retreating which has the potential to erode equity and push up funding ratios;
·The risk of interest rate rises is increasing as the cost of wholesale funding for the banks starts to climb in line with international interest rates.
The impact of these conditions on the liquidity and value of real estate means that investors are now effectively sharing a higher proportion of the development risk than they have had to in the past and this has a flow-on effect to the pricing for the funds they are prepared to provide.
Understanding these conditions is imperative to measuring and pricing the risk of an investment to ensure returns are commensurate with the risk taken.
MP Funds Management is confident in the macro themes of Australian real estate, which we believe have sound fundamentals and pockets of value based on;
Required population growth, driven by our diminishing tax-payer base and top-heavy aging population. NSW forecasts anticipate growth from 7.7m to 11m by 2036.
Supply-demand fundamentals; a) 10 million residential dwellings to accommodate 25 million people, growing at c. half-a-million a year and; b) A planning system that is prohibitive of housing new supply.
A Federal budget and payment of an $18.2b deficit that is entirely reliant on the collection of personal taxes. With forecasts of the $18.2b deficit reaching $11b surplus by 2020 and no wages growth, this tax collection is predicated on inflows of working, tax-paying immigrants.
Infrastructure spend of $85billion over the next four years for NSW and $45billion for QLD to accommodate growth.
MP Funds Management has been working with a number of institutional and private investors to provide structured funding solutions for transactions where traditional banking channels may not be available. MP Funds Management targets specific pockets along the Eastern Seaboard where we believe the underlying property fundamentals remain sound and have strong growth potential.
Despite the fact that sentiment has improved in the residential media and commentary space it looks like we may have a way to go before actual material improvement is seen overall. MP Funds Management invests in all property sectors (commercial – retail- mixed-use, etc), not just the residential debt (and or equity) space. The reason I am so fascinated with the residential sector is that I think the sentiment surrounding the residential space is ultimately what governs sentiment for the larger segment of the population who own our c. 10million residential dwellings. which is a fairly accurate indicator of the overall economy and investor sentiment.
When I started MP Group about 9 years ago, I knew I wanted to create a funds management business. The company started off as an advisory business with the MP Report as a way to market ourselves – we also used it for research purposes. Up until this point I had been in the commercial industrial and residential agency and development space since I was 19. I had years of property experience across all sectors and as a result had developed a strong understanding of our how property behaves.
In a twist of fate, market sentiment is in full bloom after the results announcement of the Australian Federal Election. The Aussie dollar is falling which isn’t great if you are looking for opportunity because will create greater in-flows of offshore capital and result in localised competition.
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