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Residential Property

Real estate debt sails through downturn

Real estate debt

Real estate debt investments have held their own in recent months, bolstered by government stimulus.

Real estate debt investments have shrugged off the low points of this calendar year and are set on a growth trajectory, according to a real estate investment manager.

Freehold Investment Management executive director Omar Khan said his firm’s Debt Income Fund was expected to continue to perform into 2021 as it had through much of this year, returning 8 per cent a year with monthly distributions.

Khan revealed the fund, which earns its income from the repayment of loans made by non-bank lenders to real estate property developers, also committed to new developments as social and economic conditions eased in Australia, and it expected government actions to provide further impetus.

“In terms of the residential property market, there are federal and state government stimulus packages in place and borrowing costs as a percentage of disposable income is at record lows,” he said.

“While the First Home Builder Scheme is ending, we are getting a sense of what governments are doing in terms of stimulus packages and incentives, such as the planned changes to stamp duty in NSW.”

Conversely, he noted the reduction in international students and migration had an impact on the demand for property, but the growth in values is still projected to increase, and issues still to watch are how the government handled its return and the ending of stimulus packages in 2021.

Despite these issues, Khan is confident the real estate debt sector, which had previously only been open to major banks, will continue to grow, offering more access to investors.

“If we look back to 2008, the total exposure to real estate debt from all approved deposit-taking institutions was about $30 billion and the non-bank sector was non-existent,” he said.

“Looking at the same data set today, the real estate debt market is similar in size, but the key difference is non-banks have around 40 per cent of the market or about $11 billion of deployed capital.”

In June, Khan predicted the manager would not be affected by the COVID-19 market downturn as it adopted lower levels of risk when investing in residential property and that government stimulus measures would reduce volatility in the sector, and this situation had played out as expected.

“COVID-19 has been a test of the real estate debt market but we know the equity buffers within the debt because we transact and do the deals,” he said.

“When we speak with investors, their main concern is if the residential property market goes down, but we construct our loan-to-value ratios on a conservative basis.”

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