Representing innovation and connectivity, the commercial real estate (CRE) market is influencing urban ecosystems and most investors are eager to capitalise on opportunities it presents.
According to Mordor Intelligence, the India CRE market size is at $40.71 billion in 2024 and is expected to reach $106.05 billion by 2029, with a CAGR of 21.10 per cent in this time-frame. Experts are predicting growth of 7 per cent to 8 per cent in the CRE sector, thanks to the growth of global capability centres.
While investing in CRE demands significant capital, it is possible for retail investors seeking shopping opportunities to explore this sector. Developers strategically employ tactics like ‘leverage’ to maximise returns from their CRE assets. By leveraging borrowed funds, investors can access higher-value CRE assets that would otherwise be out of reach. It proves to be a suitable investment option for risk-averse investors looking for a stable source of income and minimal exposure to market volatility.
Debt is a rising investment choice for diversifying portfolios. It means investing in real estate companies’ debt rather than buying properties directly. Investors act as lenders, earning a fixed return secured by the property. This minimises risk as the property serves as collateral, in case of default. While equity investments offer higher returns, debt is attractive for its stable income and lower risk.
Debt financing alternatives
Real estate projects require substantial funds, and there are various ways to raise debt funding. One of the popular options is lease rental discounting (LRD), where financial institutions provide loans to property owners by leveraging future rent receivables. Another option is to raise funds through loan against property (LAP), where properties serve as collateral. Non-Convertible Debentures (NCDs) in real estate are high-return investments that are usually deposited with high-net-worth individuals. Compulsory convertible debentures (CCDs) are debentures that must be converted into equity over time. Each funding option has its unique advantages and considerations, depending on the specific requirements and financial goals of the real estate project or investment opportunity. Therefore, it’s important to evaluate each option carefully before making a decision.
Debt investments in CRE are becoming increasingly popular among investors due to the stable returns they offer. Furthermore, assets serving as collateral provide a level of security, enhancing investor confidence. Lenders can also invest across various segments, providing ample opportunities for risk management and portfolio diversification.
However, it’s important to note that no investment is without risks. Investors may face challenges such as borrower defaults, which can impact the timely receipt of payments. Additionally, if the sales proceeds of the property are not enough to cover the principal amount, the investor may not receive complete returns.
Investing in debts can be illiquid in nature, meaning that the principal amount is locked in once you have committed to funding the real asset. This can make it challenging to access your investment funds in case of emergencies.
To mitigate these risks, it’s important to plan carefully and select the appropriate debt instrument that aligns with your investment objectives. This includes conducting thorough research on the property, its location, and the borrower’s financial stability. It’s also important to have a contingency plan in place to address any potential issues that may arise during the investment period. Investors should be aware of the potential risks involved and take steps to mitigate them through careful planning and due diligence.
Debt investments offer predictable income but come with risks, like market volatility, borrower default, and uncertainties, that investors should consider. To balance these risks, strategic planning is necessary.
One way to mitigate the risks associated with debt investments is by opting for senior tranche debt investments. These investments have priority in case of default by the borrower, thereby providing capital repayment to the investor. On the other hand, mezzanine tranche debt investment is a hybrid of debt and equity financing that offers the investor an option to convert the debt to an equity interest in the company if a default occurs after the senior lenders are paid.
Apart from these investment options, leveraging loan origination platforms can also help investors connect with borrowers and access a wider variety of CRE options that would not have been possible through traditional means. Investing in institutional-grade, high-quality properties that offer a relatively lower risk of non-payment of rent can also be a good option for investors.
Small investors can use a real estate crowdfunding platform to pool their resources to fund large projects and get access to unique projects. Regularly monitoring real asset performance is crucial to assess investment viability and make informed decisions.
To unlock capital appreciation and passive income potential, define your investment goals and explore alternative real estate investment options. Investors can seek help from real estate advisory platforms to make wise choices and tap into the unexplored potential of the Indian CRE market.
(The writer is Founder and CEO, Assetmonk)
(Published 14 April 2024, 21:17 IST)
Published: March 5, 2024 at 10:02 a.m. ET
Story developing. Stay tuned for updates here.
The numbers: U.S. factory orders fell 3.6% in January large due to fewer contracts for Boeing passenger planes, but there was not much sign of a broad revival among manufacturers.
Economists surveyed by the Wall Street Journal had forecast a 3.1% decline.
…
Story developing. Stay tuned for updates here.
The numbers: U.S. factory orders fell 3.6% in January large due to fewer contracts for Boeing passenger planes, but there was not much sign of a broad revival among manufacturers.
Economists surveyed by the Wall Street Journal had forecast a 3.1% decline.
If transportation is excluded, orders for manufactured goods dropped a smaller 0.8%.
Big picture: Manufacturers have struggled to achieve robust growth for the past few years because of shifting consumer spending habits and higher interest rates orchestrated by the Federal Reserve to quell inflation.
Large subsidies and incentives by the Biden administration have helped to prop up industrial spending to some extent, but manufacturers could get a boost later in the year if the Fed cuts interest rates as expected.
That could help increase business investment once borrowing costs get cheaper.
Key details: Businesses are investing plenty in new computing power, an offshoot of Bide subsidies and the budding artificial-intelligence revolution. Spending is up sharply compared to a year earlier.
All other major areas of the industrial sector are quite weak, however.
Core capital goods orders, a proxy for broader business investment, was flat in January. These orders dropped 0.6% in the prior month and are down slightly compared to a year earlier.
Shipments of manufactured goods already produced fell almost 1% and have declined in four of the past five months.
These figures are factored into gross domestic product report — the official scorecard of the U.S. economy — and suggest GDP in the first quarter might not get much help from business investment.
The Dow Jones Industrial Average
DJIA
and S&P500
SPX
fell in Tuesday trades.
Rising debt costs and shrinking valuations are forcing major commercial property developers to sell millions of dollars worth of assets.
Precinct Properties has sold about $700m worth in the past 18 months, while hospital developer Vital Healthcare has sold $220m worth and Argosy just sold $20m worth.
“When interest rates revert as fast as they have, and when values come down, and we’ve seen in our business probably 7 or 8 per cent reduction in values, then you’ve got to stay in front of it,” Precinct CEO Scott Pritchard told Markets with Madison.
“We’ve been managing our levels of debt through asset sales and through capital partnerships and through raising new capital.”
The largest listed office developer and owner had drawn down $1.1 billion worth of debt, paying an average interest rate of 5.3 per cent – surprisingly less than most mortgagors.
That’s because it didn’t just rely on banks for funding. Precinct was now partnering with offshore investors including Singapore sovereign wealth funds, private equity firms and high net worth individuals.
“The key is to have a really diverse source of funds and to have a really laddered maturity profile, which is all the lessons that a lot of businesses learned out of the GFC to be honest.
“If we get other sources of capital to invest alongside us, it means we can do more things and ultimately drive a higher return for our shareholders.”
It was a strategy Vital was now considering too – seemingly a potential funding solution in a higher interest rate environment.
Pritchard said offshore investors were especially keen on residential property, which was driving Precinct’s push into developing apartments on Auckland’s waterfront.
But would that impact Precinct’s future net rental income, currently earned on offices?
Watch Scott Pritchard discuss how developers are managing debt in today’s episode of Markets with Madison above.
Get investment insights from executives and experts on Markets with Madison every Monday and Friday here on the NZ Herald, on YouTube and wherever you get your podcasts.
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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.
Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.
A member of the Barclay family has called in estate agents to sell off more than 100 properties on Sark, as part of efforts to raise cash under the threat of bankruptcy.
Alistair Barclay, 34, has enlisted Knight Frank as he races to pay down debts.
It comes as Mr Barclay, the youngest of Sir David Barclay’s sons, faces the threat of bankruptcy in Britain after he was hit with a petition from a leading private bank.
The family has said the court action is a personal matter unrelated to their business interests.
Sark, one of the Channel Islands where cars are prohibited, has been linked to the family since twin brothers Sir David and Sir Frederick acquired the nearby island of Brecqhou in 1993.
It is understood Alistair, co-founder of the online estate agent Yopa and a motor racing driver, inherited the parcel of properties when Sir David died in 2021.
Any sale of Sark properties would not include the family’s private castle on the neighbouring island of Brecqhou.
Sir David’s and Sir Frederick’s sides of the family fell out over debts and control of their businesses, which include The Telegraph and the online retailer Very.
The Barclay family regained ownership of The Telegraph in December after repaying £1.2bn in overdue debts to Lloyds Banking Group. They are barred by law from exercising any control, however.
The Barclay family’s activities on Sark have sparked controversy, as Sir David and Sir Frederick were embroiled in conflict with the island’s leaders. The brothers objected to Sark’s ancient constitution and particularly the powers it grants to the unelected Seigneur.
New York Community Bancorp Inc. has been looking to shed problem commercial real estate from its books after last week reporting a surprising $185 million loss relating to a pair of loans as part of its fourth-quarter earnings results.
The lender has offered investors a chance to bid on a $22.4 million mortgage backed by three five-story walk-up apartment buildings in Washington Heights, a neighborhood in northern Manhattan, according to details of the offering viewed by MarketWatch.
The debt backs mostly rent-regulated apartments and affiliated mixed-use space. The mortgage matured in early January, with the full amount of the debt now due, plus interest at a 20% default rate, according to the offering.
Other landlords in the neighborhood who are subject to New York City’s rent-regulation laws, which were strengthened in 2019, have seen property values tumble by an estimated 50%, according to Bloomberg News.
New York Community Bancorp
NYCB
didn’t respond to requests for comment for this article.
Efforts by the bank to tackle its exposure to problem real-estate loans come as its stock has dropped by more than 60% so far this year.
The lender has a large exposure to rent-regulated multifamily properties in New York City, about a $1.8 billion office-building exposure in the city and about $250 million to $300 million in maturities in the next few years, according to Deutsche Bank researchers.
Pressures facing the bank are reigniting fears about regional banks and their commercial real-estate exposure. Treasury Secretary Janet Yellen told lawmakers on Tuesday that she was concerned about U.S. commercial real estate, saying that some institutions could be “quite stressed,” while also saying the challenge looks manageable.
Landlords have been reeling from slumping property prices and higher borrowing costs since the Federal Reserve in 2022 began dramatically raising interest rates to quell high inflation.
Many regional banks have responded by trying to quietly shed exposure to problem commercial real estate. That activity has picked up since the collapse of Silicon Valley Bank and Signature Bank last March and JPMorgan Chase & Co.’s
JPM
takeover of First Republic Bank, which deeply unsettled markets.
Late Tuesday, Moody’s Investors Service downgraded New York Community Bancorp’s credit by two notches into speculative-grade or “junk” status.
“We took decisive actions to fortify our balance sheet and strengthen our risk management processes during the fourth quarter,” Thomas Cangemi, New York Community Bancorp’s president and chief executive officer, said in a statement following the downgrade.
Cangemi also said that the bank has ample liquidity and has been growing its deposits and that the downgrade wasn’t expected to have a material impact on the lender’s contractual arrangements.
Sales of assets, even at a discount, can sometimes help banks get ahead of greater problems facing the industry, loan buyers said. But they also expect commercial-real-estate lenders to endure a challenging few years, especially as a wall of old debt comes due at a time of higher interest rates.
See: ‘No one is throwing good money after bad.’ Why 2024 looks like trouble for commercial real estate.
China Evergrande — the world’s most indebted property developer — received a liquidation order from a Hong Kong court on Monday, but there may be little left to recover, said experts.
The order came more than two years after Evergrande sent the country’s property sector into a tailspin.
Liquidators will now take control of the company’s assets and prepare to sell them in order to repay the company’s debts, which total $300 billion.
An offshore investor named Top Shine Global brought the winding-up lawsuit against Evergrande in 2022. Its proceedings were adjourned multiple times as Evergrande sought more time to restructure its debts.
On Monday, Evergrande applied for another adjournment. But Judge Linda Chan said Evergrande had been unable to offer a concrete restructuring plan and ordered its liquidation.
“It is time for the court to say enough is enough,” said Chan, according to Reuters.
Trading in the shares of Evergrande and its subsidiaries was halted on Monday following news of the order. Hong Kong-listed China Evergrande Group’s stock price plunged 21% before the court hearing.
Evergrande did not immediately respond to a request for comment from BI.
Monday’s court order is a far cry from Evergrande’s heyday as China’s top developer by sales in 2016.
Evergrande has been mired in a liquidity crisis since 2021. It first defaulted on an offshore dollar bond in December of that year. The company filed for bankruptcy protection in the US in August and scraped a restructuring plan in October due to worse-than-expected property sales.
‘There are only losers in the collapse of Evergrande’
Siu Shawn, Evergrande’s CEO, told local media in China that the real-estate company will still ensure the delivery of homes in China, state-owned Securities Times reported on Monday.
But several experts BI spoke to prior to Monday’s court order said Evergrande’s liquidation will be challenging.
It’s bad news for creditors, Mat Ng, the managing director at Grant Thornton, a professional services firm that specializes in restructuring, told BI.
“Given its scale, a liquidation of Evergrande would be a challenging process and the likely return to creditors would be expected to be low,” said Ng.
That’s particularly since the Chinese property sector is in the dumps amid sluggish demand and falling home prices — which means any sale of Evergrande’s assets is likely to be at fire-sale prices, John Bringardner, the head of Debtwire, a fixed-income data and news provider, told BI in November.
“At this point in the process, there are only losers in the collapse of Evergrande,” Bringardner added.
In July, Evergrande cited an analysis by Deloitte that estimated a recovery rate of 3.4% on its debt if the company is liquidated, per Reuters. Creditors now expect the recovery rate at less than 3%, according go the news agency.
Investors also appear to be out of luck, particularly if they’re outside of China, and the process of getting their investments may take years.
“Onshore stakeholders are busy working to ensure home purchasers will eventually receive the homes they have paid for one way or another, but retail ‘mom and pop’ investors in the company’s offshore securities will be facing even further uncertainty and delay which would likely continue for years,” Daniel Margulies, a partner at Dechert, a law firm that specializes in restructuring in Asia, told BI.
The court order to liquidate Evergrande also signals that problems of this size in China “seemingly cannot be restructured and will likely end up in some form of liquidation, whether onshore or offshore,” said Margulies.
Evergrande’s liquidation comes as China’s economy continues to struggle
Evergrande’s liquidation comes as China’s economy faces significant headwinds from a property crisis, deflationary pressure, and a demographic crisis.
Market sentiment over China’s economy is so bad that the country’s stock markets sold down massively last week as investors made a dash for the exit door.
Despite the complications that could come with Evergrande’s liquidation, there may be some upside in the longer run.
“Evergrande’s liquidation is a sign that China is willing to go to extreme ends to quell the property bubble,” Andrew Collier, a managing director at Orient Capital Research, told Reuters.
“This is good for the economy in the long term but very difficult in the short term,” he added.
A Blackstone-led venture is looking to sell commercial property loans made by Signature Bank, weeks after the investment giant and its partners bought a stake in the loan pool.
The venture with Rialto Capital and Canada Pension Plan Investment Board are marketing $1.8 billion in performing loans, people familiar with the matter told Bloomberg. The loans are largely backed by apartment buildings.
JLL is marketing the loans. The brokerage also advised Blackstone and its partners on the December deal in which it picked up a 20 percent stake of Signature loans.
The Federal Deposit Insurance Corporation last month awarded a stake in Signature’s $17 billion commercial real estate loan pool to two Blackstone affiliates, Blackstone Real Estate Debt Strategies and BREIT, along with its partners. The venture bid $1.2 billion for a 20 percent stake in the joint venture that holds the failed bank’s commercial debt; the FDIC retained an 80 percent interest and provided financing equal to 50 percent of the venture’s value.
The loan book contains 2,600 mortgages on retail, market-rate multifamily and office properties. Ninety percent of the loans are fixed-rate, according to the Blackstone venture.
When it acquired the stake, Blackstone took over as lead asset manager on the debt, while Rialto was tasked with servicing the loans. What happens next to the portfolio will depend on how the latest sales process shakes out.
Read more
The FDIC and Blackstone declined to comment to Bloomberg, while CPPIB, Rialto and JLL didn’t respond to requests from the outlet.
Related Fund Management and two nonprofits won another closely watched slice of Signature’s rent-stabilized loans. The award drew the ire of Brookfield Property Group, warned the FDIC it would protest losing out to a lower bid. But its reaction has petered out as Brookfield hasn’t challenged the award and doesn’t appear to be planning any legal action, according to the Commercial Observer.
— Holden Walter-Warner