Private debt markets — especially those we focus around, namely real estate debt — tend to seize up during volatility periods associated with stock market panics.
Unless there is an important reason for real estate owners to refinance in that given moment of volatility...
Unless there is an important reason for real estate owners to refinance in that given moment of volatility...
...you tend to see most asset owners hold back from the market place and pass on doing any activity for the time being.
This shrinks the volume of private debt markets dramatically, something we are about to see in the coming months for the space we focus on.
This shrinks the volume of private debt markets dramatically, something we are about to see in the coming months for the space we focus on.
Will the real estate private debt markets go through the kind of forced selling that we saw in the 2008 & 09 period?
It's hard to say. I don't like using a crystal ball.
However, it is quite apparent to us that, for the most part, real estate leverage has been a lot lower...
It's hard to say. I don't like using a crystal ball.
However, it is quite apparent to us that, for the most part, real estate leverage has been a lot lower...
...during this cycle compared to the previous one (when global real estate was truly a bubble).
Furthermore, there has been a whole lot less speculation in this area, because hot money chasing hot trends has really focused on other sectors more popular today.
Furthermore, there has been a whole lot less speculation in this area, because hot money chasing hot trends has really focused on other sectors more popular today.
Nevertheless, ZIRP policy, especially in Eurozone, has "forced" developers to overbuild & create an oversupply.
During my 2019 travels through the continent — visiting London, Manchester, Frankfurt, Munich, Vienna, Prague, Zagreb, Athens, Cyprus, etc — cranes were everywhere.
During my 2019 travels through the continent — visiting London, Manchester, Frankfurt, Munich, Vienna, Prague, Zagreb, Athens, Cyprus, etc — cranes were everywhere.
Private markets move a lot slower than public ones, so it will take time to see what the fall out will be.
It is said that stock markets tend to overshoot, both on the upside & downside.
We aren't sure just yet whether the current crash, similar to 1929 & 1987, is just...
It is said that stock markets tend to overshoot, both on the upside & downside.
We aren't sure just yet whether the current crash, similar to 1929 & 1987, is just...
...an overshoot or something more.
And therefore, it is hard to predict how private debt markets in the real estate sector (a place where we are always active) will be affected in the coming months.
And therefore, it is hard to predict how private debt markets in the real estate sector (a place where we are always active) will be affected in the coming months.
Our RE strategy isn't well understood by a normal investor, whose focus is mainly on stocks.
We tend to like opportunities that are inefficient & illiquid but are quality deals in top tier real estate locations & structured in a way that gives us a meaningful margin of safety.
We tend to like opportunities that are inefficient & illiquid but are quality deals in top tier real estate locations & structured in a way that gives us a meaningful margin of safety.
Most of the deals we have undertaken over the recent years — a period where I've been discussing how to position a portfolio defensively during the late cycle of the economy — are in the senior & mezzanine tranches of top tier real estate developments.
The question is, how well structured are our deals so that lower priority tranche positions will absorb losses before they impact our principal?
Most of the junior debt has us at very high returns, but also with meaningful downside protection (a buffer of 20 to 25% break-even).
Most of the junior debt has us at very high returns, but also with meaningful downside protection (a buffer of 20 to 25% break-even).
Most of the senior debt has us a moderate return, but incredibly strong downside protection with a buffer of 35%+ break even.
In other words, when you dig into the structures, there is at least 20% points of equity, which can absorb losses, before our principal is affected.
In other words, when you dig into the structures, there is at least 20% points of equity, which can absorb losses, before our principal is affected.
Some examples of the deals our family, our partners and our clients participated in that have had a positive outcome despite the ongoing Coronavirus crisis.
We are part of a 75 million AUD development (33 luxury units) in Gold Coast, AU which basically sold out in one weekend.
We are part of a 75 million AUD development (33 luxury units) in Gold Coast, AU which basically sold out in one weekend.
It even made the national news in Australia for such a fantastic response from the buyers.
Give it a watch.
Give it a watch.
Furthermore, we are also part of a 13.5 million Pound development (25 affordable units) in North London, UK which is about to go into selling mode just as Coronavirus struck the world economy.
Recent news we got is that "Housing Association who has exchanged on the 8 out of the 25 units already, are now potentially interested in purchasing the entire development."
Both of these developments are examples of what we could call investing in great deals. Luck also helps!
Both of these developments are examples of what we could call investing in great deals. Luck also helps!
Our experience and performance might be completely different from the broad conditions currently occurring from NYC to London and from Singapore to Sydney.
As I have always mentioned on my feed, our focus remains on picking the right developer to co-invest alongside.
As I have always mentioned on my feed, our focus remains on picking the right developer to co-invest alongside.
They have to have a top track record (stress-tested through previous downturns).
They also tend to pick the right location for RE developments & make sure the "comps" makes sense so that we giving value to buyers.
Examples of this include a cheaper overall price...
They also tend to pick the right location for RE developments & make sure the "comps" makes sense so that we giving value to buyers.
Examples of this include a cheaper overall price...
...better overall location, better quality finishes & appliances, more square feet or m2 for the same price, higher unit ceilings, better floor plan dispositions, better building amenities and so much more.
Finally, we also make sure we only work with developers that have...
Finally, we also make sure we only work with developers that have...
...a large #skininthegame (something we love about real estate, and something Wall Street hardly ever admits on) so that developers' interests are aligned with ours.
Finally & most importantly, lower than average LTV leverage has been important during the last two years...
Finally & most importantly, lower than average LTV leverage has been important during the last two years...
...because we did not want to enter into overleveraged, risky deals just prior to an economic downturn just so we can pick up a few extra percentage points of return.
It just didn't make any sense, since we were operating from a defensive, higher margin of safety, standpoint.
It just didn't make any sense, since we were operating from a defensive, higher margin of safety, standpoint.
