Private credit
Avoiding the pitfalls | Choosing a real estate credit manager
Drew Bowie Headshot
Drew Bowie
Managing Director
Four construction workers on site
Published 28 February 2023
Share article

As we have outlined in our earlier insights, investing in real estate credit has increased in relative attractiveness given the rising interest rate environment. Through its floating rate structure, where income is adjusted for inflation, and the security attached to the underlying investment in registered first-ranked mortgages over property, real estate credit is expanding its reach within the Australian investment community.

In the hands of an experienced manager with multi-cycle experience its secured nature and position in the capital stack can reduce income volatility and downside risk.

As in all investment decisions, the experience and track record of the asset manager is an important factor. So, what are the key questions investors should ask when considering investing in real estate credit?


What is the scale and depth of the platform?

A broad-based platform offering scale and depth provides a competitive advantage in choosing the right investments.

A diversified platform supports careful and timely assessment of the relative risk-reward profile and diversification benefits of individual loans. It also provides support to the lending manager in consistently applying strict loan criteria, particularly when macro conditions are volatile.

Additionally, a robust and varied platform provides greater depth of experience and capability for assessing the value in the underlying asset as well as the potential pool of buyers. 


How is governance embedded in the platform?

The integrity of the asset/lending manager is critical for investor and borrower confidence.

Strong governance is important to protect the lending portfolio and minimise as many risks and unknowns as possible.

For managers listed on the Australian Securities Exchange (ASX) there is the added security for investors in the requirement to comply with strict corporate governance practices, transparent, timely reporting and industry and peer benchmarking.

Institutional-grade managers have greater scrutiny of ongoing management personnel and operational capability, compliance protocols, environmental, social, governance considerations and financial capacity.


What is the experience of the lending team?

There are numerous components in assessing experience in the real estate credit universe.

Firstly, construction experience is essential. A real estate credit manager requires a team of inhouse professionals with specialist expertise across all aspects of building and construction, developed across a range of macro environments. This expertise facilitates careful assessment of loan quality and exit scenarios on a case-by-case basis.

Additionally, a broad range of direct borrower, broker relationships and networks provide a distinct sourcing advantage, securing access to a diverse variety of transactions and encouraging discernment in deal selection.

Expertise in owning and managing the underlying asset is central to success. Management experience should include not only assessing point-in-time metrics of the loan portfolio, such as standard appraisals like loan-to-value ratio (LVR), it should also run deeper encompassing an ability to understand market intelligence, analysis of fundamentals, the integrity of book valuations, macro risks and secular trends.

An experienced manager conducts scenario analysis around builder insolvency, time delays, cost increases, pre-sale or lease defaults. A prudent manager will undertake stress testing in all macro conditions, from the most benign through to riskier settings.

Astute lending practice also requires inhouse ‘workout’ experience. This extends to knowing when to seize control over the secured asset and how to manage the return of capital from that asset.


Navigating choppy seas

Finally, a track-record of investing and managing through multiple cycles is critically important.

The uncertain economic outlook, acute shortages in materials and labour, escalating price shocks, and weather delays across the eastern seaboard have placed builders under significant pressure.

Working through these issues requires pragmatism, genuine conviction and skill in managing the loan on a case-by-case basis in a timely and efficient manner.

In the hands of a disciplined and vigilant manager, real estate credit by design should provide security and attractive risk-adjusted returns across all market conditions. Backed by structural and secular growth drivers with inflation-proofed income and capital risk mitigated by secure lending structures, real estate credit offers compelling relative value.


For more information about our real estate credit capabilities and solutions, please get in touch.

Disclaimers

Important Information: This material has been prepared by MA Asset Management Ltd (ACN 142 008 535) (AFSL 327 515). The material is for general information purposes and must not be construed as investment advice. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer or invitation to purchase, sell or subscribe for in interests in any type of investment product or service. This material does not take into account your investment objectives, financial situation or particular needs. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. Any investment in a fund managed by MA Financial Group is subject to the terms and conditions of the relevant fund offer document. This material and the information contained within it may not be reproduced or disclosed, in whole or in part, without the prior written consent of MA Asset Management Ltd. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners.

Nothing contained herein should be construed as granting by implication, or otherwise, any licence or right to use any trademark displayed without the written permission of the owner. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MA Asset Management Ltd. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this material may contain “forward-looking statements”. Actual events or results or the actual performance of MA Asset Management Ltd or an MA Asset Management Ltd financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither MA Asset Management Ltd, MA Financial Group or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person, including MA Asset Management Ltd and MA Financial Group, has any responsibility to update any of the information provided in this material.

©2023 MA Asset Management (Hong Kong) Limited, all rights reserved. Facts and figures are current as at 1 December 2023.
This webpage is issued by MA Asset Management (Hong Kong) Limited (BR No.: 72294841 SFC CE No.: BQW293) (MAAM HK). MAAM HK is licenced by the Securities & Futures Commission of Hong Kong (SFC) for Type 1 (dealing in securities) regulated activity. MAAM HK is a wholly owned subsidiary of MA Financial Group Limited (MA Financial). MAAM HK’s business operations involves the marketing of funds issued by MA Financial and/or other collective investment schemes to professional investors only (as defined under the Securities and Futures Ordinance of Hong Kong (Cap. 571) (SFO)) in Hong Kong. As distributor only, MAAM HK does not have any intention to establish any client relationship with any person that intends to subscribe for units in the collective investment schemes it distributes. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any investment decision in relation to any financial product referenced on this website (or otherwise) you should consider obtaining professional investment advice that takes into account your personal circumstances and should read the current information memorandum for the any relevant financial product. Any investment in a financial product on this website (or otherwise) is subject to the terms and conditions contained in the relevant information memorandum. Any investment in a financial product on this website, or any document accessible from this website should not be construed as investment advice or relied upon in making an investment decision. Information on this website does not constitute an offer or an invitation in any jurisdiction where, or to any person to whom, it would be unlawful to make such an offer or invitation. Neither MAAM HK nor any member of the MA Financial group guarantees repayment of capital or any particular rate of return from any product. Past performance is not a reliable indicator of future performance. Neither MAAM HK nor any member of the MA Financial Group Limited group gives any representation or warranty as to the currency, reliability, completeness or accuracy of the information contained on this website. All opinions and estimates included on this website are provided as at the website creation date and are subject to change without notice. Neither MAAM HK nor any member of the MA Financial Group Limited group make any representation or warranty, express or implied, that the information and materials contained on this website are up to date, accurate or complete. To the maximum extent permitted by law, neither MAAM HK nor any other person will be liable for any for any loss or claim resulting from or in connection with the website and any information contained herein.