Why real estate debt investment can offer investors diversification, low volatility and risk-adjusted returns.

Country Garden is an innocuous name. But China’s biggest property developer is anything but. The company founded in 1992 is losing billions of dollars, likely to default on its debts and seemingly destined for bankruptcy. Not only are many Chinese who have prepaid for a Country Garden-built home at risk, so too is China’s economy.

The latest property woe from China adds to growing angst about global commercial property, which includes health, industrial, office, residential and retail sites. The shift to work from home during the pandemic and the post-pandemic legacy mix of days between the office and home is catching up with office values.

Rising Vacancy Rates and Reducing Valuations

While many office blocks are holding their worth, offices are only a small part of commercial property, and the other categories are performing as usual, there is no shortage of bleak news about the category. McKinsey in a recent report estimated that remote work could remove US$800 billion from office-block values in major global cities in the next seven years. The consultant estimates demand for office space will be 13% lower in 2030 compared with 2019. Rising vacancy rates for commercial property is lowering rents just as higher interest rates are adding to owner and developer costs and reducing valuations. In the US, where vacancy rates average 20% compared with 12% pre-pandemic, office values have dropped an estimated 35% and the decline could extend to 40%.

Australia is facing a similar challenge. Investment bank Barrenjoey warns commercial property values here could decline 20%. Some office towers have been sold at prices well below recent independent valuations. Many Australian super vehicles hold listed and unlisted property investments. In recent months, some super funds have reduced the value of their office holdings by up to 15%. Listed developers and fund managers have done likewise, though the write-downs have been less percentage wise. On the residential side, some developers have collapsed due to the biggest jump in interest rates in a generation.

Diversified Solutions

What to do from an investor’s point of view? The basic investment principle is to diversify. Property, along with shares and bonds, is a staple for any portfolio. Property’s investment qualities are as alluring as ever and justify its inclusion in any balanced portfolio designed to deliver competitive long-term returns. Property provides steady income streams via long-term rental leases that typically exceed the returns on bonds and cash. Property offers capital growth and is typically less volatile than shares.

One option for wholesale investors when a key part of the commercial-property market is struggling is ‘boutique’ property funds that invest in real-estate debt. This debt comes in the form of ‘bridging loans’ that finance short-term property-backed transactions and ‘construction loans’ that provide developers with the money to complete projects.

The typical boutique property fund manager here offers funds that contain debt tied to Australian projects – and, as ever with investing, selection is the key.

At AltX we offer investors the opportunity to invest in either individual deals or Managed Funds. We offer multiple funds that typically hold numerous smaller loans, which ringfences risks so that the funds are well placed to withstand market dislocations – in the last three months, AltX has raised over $220m.

The AltX First Mortgage Debt Fund, for example, is a variable-rate debt fund that offers exposure to 147 ‘first ranking registered mortgage’ backed short-term loans, where the ‘first mortgage’ entails a priority claim on interest and principal and the assets. The fund is linked to investments with loan-to-value ratios that average about 60% – a conservative level – and offers a 7.53% annualised return (net of fees)*. 

Protecting Capital

The loans in this fund are for three to 36 months to Australian companies for business purposes and are secured against Australian property. The Fund pays investors monthly interest ensuring a stable and predictable income stream.Property’s diversification benefits are delivered because the fund’s return has a low correlation to other asset classes because its performance is based on specific borrowers and is backed by specific collateral. Since AltX was founded in 2012, we have originated and managed more than 1,700 mortgages and written loans worth $3.85 billion. Among all that, AltX can claim a perfect record of protecting the capital of third-party investors. No Country Garden-style upheavals here.

To learn more about the AltX First Mortgage Debt Fund and other investment opportunities with AltX, please complete the form below.

*Target return is not guaranteed by the Trustee or the Manager.