Is Private Credit Australia’s New Megatrend?
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Is Private Credit Australia’s New Megatrend?

And what it means for the property market.

By Paul Miron
Mon, Oct 4, 2021Grey Clock 5 min

OPINION

The modern-day world we are living in is growing increasingly high-tech and fast-paced. Consequently, Investors are faced with much more pressure, decisions, choices, and information than ever before.

Many years ago, investor demi-gods, such as Warren Buffet, at the start of their careers, sent out handwritten letters to listed companies requesting financials and prospectuses, which took weeks to receive.

In today’s efficient markets, where we all have equal access to an abundance of information at our fingertips, new information is instantly distributed and analysed virtually instantaneously by all market participants, thus making it near impossible to gain an advantage over the market.

What techniques are investors turning to today to gain meaningful glimpses of the future with the hope of investing more confidently?

 

What Is a Megatrend?

Megatrends are long-term trends transforming the way we live, work, and play. The driving forces are caused by macroeconomic changes, technological gains, a shift in migration, and social changes.

To understand the full power of Megatrends, one must look to the past.

A prime example is Bill Gates’ vision that a personal computer could be a powerful tool used by everyday households. Interestingly Gates was not the only visionary with the same idea at the time; the difference was his superior business acumen and the pivot in building the Microsoft operating system to enable this technological transition from concept to reality.

When seeking the insights of Megatrends for success, It is critical to acknowledge that the market is a collective of people, and as a result, markets tend to boom and bust while inevitably moving in traditional cycles.

My favourite Mark Twain once said, “history does not repeat itself, it rhymes.”

It is impossible to predict the timing of the next boom or bust consistently. Still, you can prepare yourself through diversification and understanding that certain asset classes will follow predicted behaviour over time.

So, what are some of the Megatrends that Msquared can see on the horizon being a specialist direct commercial mortgage fund manager?

 

Interest rates internationally

Indeed, we are living through uncharted territory regarding low-interest rates globally near-zero official interest rates set by most Central Banks globally, primarily to combat the negative economic impacts of COVID -19 now and into the foreseeable future.

In Australia, the Reserve Bank’s primary role is to set official interest to a level to stimulate both consumers and business activity while not allowing for the market to overheat with higher inflation. The bank’s traditional targeted inflation band is 2%-3%. If longer-term inflation increases beyond 3%, interest rates will reluctantly need to increase to place downward pressure on asset values.

That said, with the official cash rate at 0.10% p.a., the by-product of cheap credit has pushed up the value of assets such as real estate and shares, far beyond most expectations, despite being in the middle of one of the most economically challenging times due to the COVID-19 pandemic.

The five and ten-year bond rates are presently sitting at circa 0.63% and 1.18%, respectively. The combination of the most brilliant economists and bond traders believe that the official cash rate over five years may only go up by 0.5% and, possibly, 1.1% over ten years, which is essentially negligible.

The current bond rates infer that we will be operating in a very low-interest environment for a very long time. Accordingly, the expectation is that asset prices will likely keep going up until they become unaffordable or investors stop seeing any value in holding those assets.

Therefore, the Megatrend that we envisage is a continual and gradual yield compression (decrease in returns) for property, shares, and other tradable assets.

The free cash flow from these investments will continue to contract further, making it even harder for investors to generate the appropriate level of income required, especially for SMSF trustees and self-funded retirees.

The main two events that would change this outlook would be higher inflation, thus pressuring Central Banks to increase interest rates sooner, or an out of sequence market correction/crash bringing about loss of confidence due to an unexpected event.

 

 

Property

Regular readers will know my view regarding property’s resilience and its contribution to the overall health and stability of the economy.

The Australian love affair with property and homeownership is now at 67%, due to the highest net overseas migration for the period leading up to the COVID-19 outbreak and together with the supply constraints that have been added due to an inefficient planning process. As discussed in my June article, ‘Australia Is The Lucky Country’, Australians are now the wealthiest people per capita globally.

The price gap between units and detached houses has widened to the most significant gap in recorded history.

The Megatrend is that we believe that this will be reversed, however, with a twist. It is our view that the demand and price growth for the luxury, larger apartments that offer superior amenities will not only be highly sought after but will also become the best performing type of property within its asset class.

With baby boomers’ increasing requirements for downsizing accommodation in combination with the proposed restart of skilled affluent migrants coming to Australia at the end of the year, the demand for the high-end luxury apartments segment will only increase.

 

Australian Private Credit coming into Vogue

Australia, compared to the US, European, and other Asian counterparts, is lagging substantially behind when it comes to these ongoing global Megatrends.

Just over 70% and 46% of all commercial loans are written in the US and Europe by private credit providers, also known as non-bank lenders; In Australia, it is a mere 8%.

This class of investment offers the ability for investors to have ownership of the mortgage, earn more than 6% p.a. while having the security against real property. This investment generates regular income with a proven track record in preserving investor capital in any market cycle and volatile markets.

The investors in US receive returns of circa 3% p.a. due to the maturity and competitive nature of the overseas private credit market. In comparison, this is less than half of what is offered by Msquared for a similar style of investments, as our returns start from 6.50% p.a.

Considering we are operating with the same close to zero interest rate environment globally, this is significant.

We believe that demand from Australian commercial borrowers to have options other than funding through our major banks will continue to grow as reflected by the funding gap, last reported to be over $119b.

Due to ongoing government regulations and interventions, the ability of private credit providers to offer bespoke solutions, ease of capital, service and speed, private credit providers will continue to grow.

Investors are slowly learning the benefits of investing indirect commercial mortgages and seek out these opportunities. Institutional investors weigh their support into the sector both due to the lack of ability to generate consistent regular income from other investment classes and due to recognition of resilient qualities offered by real property, enabling asset preservation within the portfolio.

As the market matures, the appreciation for contributory funds will increase. Savvy investors will seek higher transparency, ethical investment requirement, and a direct line of sight of the underlying security on offer while having the added benefits of superior returns rather than a pooled fund.

Contributory funds allow more control to the investor by having these choices. The function of a contributory fund is that each investment is a separate ring-fenced opportunity, whereas pooled fund, as its name indicates, has many mortgages within one investment vehicle.

The contributory fund places the investor in the driving seat, allowing them to create their personalised unique investment portfolio in this asset class.

The Megatrend is that there will be a structural change on how and who will provide commercial loans in Australia, reflecting the path experienced in the US and European debt markets.

 

 

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

MSQ Capital

msqcapital.com

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Private club memberships and luxury cars are some of freebies on the table.

By SHIVANI VORA
Mon, Aug 15, 2022 6 min

When Ryan Wolitzer was looking to buy an apartment in Miami Beach late last year, several beachfront properties caught his eye. All were two-bedroom homes in high-end buildings with amenities aplenty and featured glass walls, high ceilings and an abundance of natural light. But only The Continuum, in the city’s South of Fifth district, came with a gift: a membership to Residence Yacht Club, a private club that offers excursions on luxury yachts ranging from a day in south Florida to a month around the Caribbean. Residents receive heavily discounted charters on upscale boats that have premier finishes and are stocked with top shelf spirits and wine. Mr. Wolitzer, 25, who works for a sports agency, was sold.

“The access to high-end yachts swayed my decision to buy at The Continuum and is an incentive that I take full advantage of,” Mr. Wolitzer said. “It’s huge, especially in my business when I am dealing with high-profile sports players, to be able to give them access to these incredible boats where they experience great service. I know that they’ll be well taken care of.”

Freebies and perks for homeowners such as a private club membership are a mainstay in the world of luxury real estate and intended to entice prospective buyers to sign on the dotted line.

According to Jonathan Miller, the president and chief executive of the real estate appraisal and consulting firm Miller Samuel, they’re primarily a domestic phenomenon.

In the U.S. residential real estate market, gifts are offered by both developers who want to move apartments in their swanky buildings and individuals selling their homes. They range from modest to over-the-top, Mr. Miller said, and are more prevalent when the market is soft.

“When sales lag, freebies increase in a bid to incentivize buyers,” he said. “These days, sales are slowing, and inventory is rising after two years of being the opposite, which suggests that we may see more of them going forward.”

Many of these extras are especially present in South Florida, Mr. Miller said, where the market is normalizing after the unprecedented boom it saw during the pandemic. “The frenzy in South Florida was intense compared with the rest of the country because it became a place where people wanted to live full time,” he said. “Now that the numbers are inching toward pre-pandemic levels, freebies could push wavering buyers over the finish line.”

Kelly Killoren Bensimon, a real estate salesperson for Douglas Elliman in Miami and New York, said that the gifts that she has encountered in her business include everything from yacht access and use of a summer house to magnums of pricey wine. “One person I know of who was selling a US$5 million house in the Hamptons even threw in a free Mercedes 280SL,” she said. “They didn’t want to lower the price but were happy to sweeten the deal.”

A car, an Aston Martin to be exact, is also a lure at Aston Martin Residences in Miami’s Biscayne Bay. Buyers who bought  one of the building’s 01 line apartments—a collection of 47 ocean-facing residences ranging in size from 325 to 362sqm and US$8.3 million to US$9 million in price—had their choice of the DBX Miami Riverwalk Special Edition or the DB11 Miami Riverwalk Special Edition. The DBX is Aston Martin’s first SUV and retails for around US$200,000. It may have helped propel sales given that all the apartments are sold out.

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An Aston Martin came with the sale for some buyers at Aston Martin Residences in Miami’s Biscayne Bay. Aston Martin Residences

The US$59 million triplex penthouse, meanwhile, is still up for grabs, and the buyer will receive a US$3.2 million Aston Martin Vulcan track-only sports car, one of only 24 ever made.

“We want to give homeowners the chance to live the full Aston Martin lifestyle, and owning a beautiful Aston Martin is definitely a highlight of that,” said Alejandro Aljanti, the chief marketing officer for G&G Business Developments, the building’s developer.  “We wanted to include the cars as part of the package for our more exclusive units.”

The US$800,000 furniture budget for buyers of the North Tower condominiums at The Estates at Acqualina in Sunny Isles, Florida, is another recent head-turning perk. The 94 residences sold out last year, according to president of sales Michael Goldstein, and had a starting price of US$6.3 million. “You can pick the furniture ahead of time, and when buyers move in later this year, all they’ll need is a toothbrush,” he said.

Then there’s the US$2 million art collection that was included in the sale of the penthouse residence at the Four Seasons Residences in Miami’s Brickell neighbourhood. The property recently sold for $15.9 million and spans 817sqm feet. Designed by the renowned firm ODP Architects, it features contemporary paintings and sculpture pieces from notable names such as the American conceptual artist Bill Beckley and the sculptor Tom Brewitz.

But it’s hard to top the millions of dollars of extras that were attached to the asking price in 2019 of the US$85 million 1393sqm  duplex at the Atelier, in Manhattan’s Hell’s Kitchen neighbourhood. The list included two Rolls-Royce Phantoms, a Lamborghini Aventador, a US$1 million yacht with five years of docking fees, a summer stay at a Hamptons mansion, weekly dinners for two at lavish French restaurant Daniel and a live-in butler and private chef for a year. And the most outrageous of all: a flight for two to space.

It turned out that the so-called duplex was actually a collection of several apartments and a listing that went unsold. It did, however, generate plenty of buzz among the press and in real estate circles and was a marketing success, according to Mr. Miller.

“A listing like this that almost seems unbelievable with all the gifts will get plenty of eyeballs but is unlikely to push sales,” he said. “Empirically, it’s not an effective tactic.”

On the other hand, Mr. Miller said that more reasonable but still generous freebies, such as the membership to a yacht club, have the potential to push undecided buyers to go for the sale. “A nice but not too lavish gift won’t be the singular thing toward their decision but can be a big factor,” he said. “It’s a feel-good incentive that buyers think they’re getting without an extra cost.”

Examples of these bonuses include a membership to the 1 Hotel South Beach private beach club that buyers receive with the purchase of a residence at Baccarat Residences Brickell, or the one-year membership to the Grand Bay Beach Club in Key Biscayne for those who spring for a home at Casa Bella Residences by B&B Italia, located in downtown Miami and a residential project from the namesake renowned Italian furniture brand. The price of a membership at the Grand Bay Beach Club is usually a US$19,500 initiation fee and US$415 in monthly dues.


The Grand Salon at at Baccarat Residences Brickell in Miami.
Baccarat Residences

Still enticing but less expensive perks include the two-hour cruise around New York on a wooden Hemmingway boat, valued at US$1,900, for buyers at Quay Tower, at Brooklyn Bridge Park in New York City. The building’s developer, Robert Levine, said that he started offering the boat trip in July to help sell the remaining units. “We’re close to 70% sold, but, of course, I want everything to go,” he said.

There’s also the US$1,635 Avalon throw blanket from Hermes for those who close on a unit at Ten30 South Beach, a 33-unit boutique condominium; in Manhattan’s Financial District, a custom piece of art from the acclaimed artist James Perkins is gifted to buyers at Jolie, a 42-story building on Greenwich Street. Perkins said the value of the piece depends on the home purchase price, but the minimum is US$4,000. “The higher end homes get a more sizable work,” he said.

When gifts are part of a total real estate package, the sale can become emotional and personal, according to Chad Carroll, a real estate agent with Compass in South Florida and the founder of The Carroll Group. “If the freebie appeals to the buyer, the transaction takes on a different dynamic,” he said. “A gift becomes the kicker that they love the idea of having.”

Speaking from his own experience, Mr. Carroll said that sellers can also have an emotional connection to the exchange. “I was selling my house in Golden Isles last year for US$5.4 million and included my jet ski and paddle boards,” he said. “The buyers were a family with young kids and absolutely loved the water toys.” Mr. Carroll could have held out for a higher bidder, he said, but decided to accept their offer. “I liked them and wanted them to create the same happy memories in the home that I did,” he said.

The family moved in a few months later.