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  • Writer's pictureLabassa Capital

The Benefits of Investing in Real Estate Private Credit



In recent years, commercial real estate private credit has attracted increasing interest from wholesale investors. As an investment manager in private credit, this article shares Labassa’s insights into some of the driving factors for higher investor participation in this sector across Australia.

 

1   Security and Stability

Commercial real estate private credit investments are secured by registered mortgages over the underlying real assets, at an average loan to value ratio of 60% - 70%. This represents a 30% - 40% risk buffer in the event the underlying property decreases in value. Value of the assets is verified by independent professional valuation companies. Senior and mezzanine loans are drawn later than project owner’s equity and are repaid first upon project completion. Well-structured and well-documented mortgage-backed commercial credit investments offer robust protection to investors’ principal. In the case of Labassa’s credit fund, every dollar invested is secured by registered mortgages over real assets in residential and industrial sectors.


The current dynamics of supply and demand for both residential and industrial assets, represents stable market fundamentals that support asset values. For the residential sector, housing supply has fallen short of demand in capital cities in general. The rising demand is driven by strong population growth and the desire for more space following the pandemic, as some continue to work from home. In the financial year ending 30 June 2023, Australia’s population grew by 624,100 people, representing a 2.4% annual growth. This growth rate is high amongst developed countries. However, the shortage of housing supply is strained by development approval complexities, construction costs and tightened supply of consumer loans by the banks in this high interest environment.  For industrial sector, vacancy is at record low levels despite strong rent rises as growing as growing occupier demand outpaces the speed at which new industrial is being developed. The growth of online shopping continues to be a strong driver for this demand.

 

2   Regular Income and Attractive Risk Adjusted Return

Real estate private credit fund provides an alternative source of income for investors with regular income distribution.  As of February 2024, the Labassa Capital Australian Real Estate Credit Fund (The Fund)’s annualised performance since inception was at 12.66%p.a. net of fees, with an average portfolio LVR of 65.74%.  The Fund distribute serviced interest income received by the Fund monthly to investors.  All investments in the Fund are secured by registered mortgages over real assets (99% registered first and 1% registered second mortgage as of February 2024). The Fund’s return, relative to the risk profile, in comparison to other asset classes such as stocks, ETFs and bonds, is considered strong.  

 

3    Passive Income and Active Risk Management Through Managed Funds

Investors gain a range of benefits working with an active specialist investment manager when investing in commercial real estate private credit:


Access to Deal Flow and Diversification

Labassa reviews a large volume of transactions each month, only to transact on a few. The shortlisted transactions will be further filtered through a thorough due diligence process before they are offered to investors. These transactions are well negotiated, structured around risk management, and provide a premium return on a risk adjusted basis. Investors gain further diversification through investing in the Labassa Capital Australian Real Estate Credit Fund (LCL3034AU) which invests in multiple loan positions across a range of locations, sectors and asset types.

 

Active Portfolio Management

Labassa takes an active portfolio management approach post-settlements with on-going frequent monitoring on transactional covenants and provides investors regular updates on the portfolio assets and market insights. Portfolio credit risks are evaluated regularly and managed proactively on each investment in the context of the present and medium-term market dynamics.

 

Professional Investment Reporting

Labassa provides loan management and investor reporting in line with accounting and financial reporting standards. This eliminates administrative tasks associated with investing from investors, so they can focus on what they love doing and let their investments be actively managed by Labassa.

 

Labassa Capital is a specialist investment manager in commercial real estate private credit and principal investments in the real estate asset class. If you would like to know more about investing with Labassa, please reach out to book a call with us via distribution@labassa.com or contact us on +61 2 9061 6600.

 

Disclaimer: This information is for general knowledge and not investment advice. Seek guidance from qualified financial professionals based on individual circumstances, goals, and market conditions.

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