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Seasons greetings to our MP Report readers, sponsored content members and our investors

16-Jan-2017


What a year it’s been!

2016 for MP Funds Management has seen redemption of invested capital from the Property Link IPO which listed in the second quarter of this year, and this generated a 24 per cent IRR over the two-year period of investment.

In the real property sector, the following mezzanine loans have been redeemed:

  • 120-lot land subdivision in Schofields in Sydney’s North West
  • combined mezzanine facility for a 26-lot town house project and a 24-lot townhouse project in Brisbane
  • mezzanine facility for a multi-residential apartment development of 80 units in Arncliffe in South Sydney
  • mezzanine facility for a multi-residential apartment project of 140 apartments in West End in Brisbane
  • mezzanine facility for a multi-residential apartment project of 30 units in Waterloo in Sydney’s South

The investor return across all redemptions for 2016 has been a blended 19 per cent IRR, each individual project met or exceeded the initially forecast return.

As major banks continue to tighten their policies in the construction financing sector, we remain focused on lending to high-quality residential development projects, as well as investing in core plus income-producing assets with repositioning upside.

 

Short to medium term.

One of the key drivers behind the banks tightening is the Basel 3 and 4 policies, which principally govern and restrict the leverage ratio of the bank in an effort to ensure liquidity in events of financial crisis.

Major domestic banks are still lending to developers who have a strong track record, where they are an existing client of the bank, and at reduced Loan to Cost (LCR) and Loan to Value (LVR) ratios. This means the developer requires higher levels of equity to get banked.   

An emerging trend is Australian banks will front a traditional senior debt development funding deal and syndicate the deal to overseas Chinese banks.

Other institutional non bank lenders will provide a higher LVR and LCR loan than what traditional banks are now able to, a stretch senior debt, which either will have a higher base coupon rate, or a combined higher base coupon rate and profit share. This is significantly more expensive to the developer but means the project will achieve financial close and get delivered. 

With the global investment climate experiencing significant changes and rising uncertainty in the wake of the Brexit vote and the US election global dynamics have shifted. Australian mortgage rates are starting to creep up, and this will affect over-leveraged homeowners and under-capitalised would-be homeowners looking to buy property with a high loan to value mortgage. 

There are lot of residual, low-quality, off-the-plan apartment projects being built, and developers in some cases are experiencing difficulty with sales and settlements in Sydney, Brisbane and Melbourne, however this is principally for lower quality product.

The market for high-quality, well-located and appropriately priced residential product continues to be very solid for both off-the-plan sales and successful settlements.

Read VIDA Brisbane settlements this month.

 

Inflows of offshore investment capital

A significant amount of our MP Funds Management investment funds are sourced domestically as well as from Europe and Asia. Feedback we are receiving from global investors is that investment returns from unlisted Australian property - residential development financing as well as core plus income producing assets with upside; [specifically CBD and fringe commercial, mixed retail and industrial] - represents a consistent and attractive yield and upside that is difficult to replicate globally in other asset classes. 

The fact remains that regardless of nuances of a hamstrung government, there is a degree of visibility and transparency that makes Australia very attractive to offshore funds.

On the FIRB mortgage issue, even though Aussie banks are publicly saying they are not lending to FIRB borrowers, the higher quality product is selling and settling. The off-the-plan property that has been bought speculatively (i.e. in the hope of a capital gain and sale over the construction period and before settlement) is where the settlement issues are arising. The key is the quality of buyer and quality of selling agent.   

 

Domestic investors

Let’s not forget those trophy sales at Sydney’s Opera Residences, where the penthouse smashed the Australian record at close to $100,000 per sqm, or $27 million for the apartment. The same buyer purchased two sub penthouses for children, equating to a total $50 million investment by one family in the project. If only…

The entire project, with a value of $500 million, was sold out on launch day by CBRE Residential Projects, making the JV developers, Macrolink and Landream very happy customers.Read the report here.

I think in Australia we underestimate the level of wealth the rest of the world has, and we also underestimate just how attractive we are as an investment destination. That distinction between domestic and offshore domicile of funds is becoming increasingly blurred, as Australia and greater Asia morph together with proximity a major factor in this convenient coupling.

For investors, the tricky part will be finding the high-quality investment and consistent deal flow as the global hunt for yield becomes more and more competitive and Australia is well and truly on that global map.

Australia is a young country, with a relatively small economy, but we are politically uncomplicated with a fertile environment. We are however, an ageing population.

For the last few years the Australian population has grown by about 300,000 people per year, which means we need high quality, affordable housing. Current new development that will actually get funded and off the ground doesn't satisfy this requirement.

 

Long term; our aging population.

As our population ages, in order to continue to enjoy a comfortable life we need to be more focused on growing personal wealth as a priority. It’s true we are highly taxed, but with that comes benefits like universal health care and the pension for retirees.

In light of our ageing population and mid-year fiscal forecast foreshadowing a short-term deficit rise of $10 billion over the next three years, together with rule changes to superannuation in November, which should claw back around $3 billion in savings over the forward years, the onus is increasingly on the individual on how to create and protect personal wealth.    

As food for thought, according to the Australian Bureau of Statistics, in 2012 people aged 65 years and over made up 14 per cent of Australia's population. This is projected to increase to 22 per cent in 2061 and to 25 per cent in 2101. Note that with current annual population growth the forecast population is 53 million by 2101, today it is 24 million, meaning that that 25 per cent above 65 years old is going to be a very significant and exponential burden on the working population. 

  

What does this mean for investors?

Global bond rates and interest rates are at an all-time low, pension funds are being forced to buy lower yielding assets due to the global squeeze on yield. High quality assets and high quality deal flow in the property space is increasingly competitive. Wages growth has also been minimal in Australia.

To support the ageing population, the government will need to fairly aggressively stimulate immigration and infrastructure spending to increase the working population and hence taxpayers. These people will all require housing - cue the need for more high quality housing. Or we are going to be working much later into life with marginal government support.

It’s important that investors are on the front foot with forward thought to the implications of this demographic change. This is one of the fundamental factors in the MP Funds Management investment philosophy and is a good one to put towards the top of the 2017 resolutions list!

We thank you for your support in 2016 and we look forward to continuing to keep you entertained and informed with the latest in global property news via the MP Report and the Property Addict.

We look forward to working with you in 2017 and wishing you all the best for the holiday season.

 

Mandi Prager

MP Funds Management

myp@mpgroupinternational.com

 

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