Where does private real estate debt sit on the risk spectrum?
All investments carry some degree of risk. Generally speaking, the higher the return, the higher the risk. So, where does private real estate debt sit on the spectrum? To understand this, let’s look at some of the different types of risks associated with this investment.
The common risks of real estate debt investing
Private/non-banking lending carries some risk, just like anything else that is profitable. However, most of the risks can be mitigated – here are a few considerations.
|RISK||HOW TO MANAGE THESE RISKS|
|Borrower Risk: |
The borrower doesn’t meet their payment obligations or the terms of the loan.
|It’s important to understand what experience the borrower has in property development and their credit history as these will offer insight into their ability to service the loan.|
Documents are inaccurate or incomplete.
|Review all documentation prior to investing, including financials, to understand the strength of the borrower, quality of the asset being secured, and exit strategy from the loan.|
The property securing the loan declines in value, which increases the loan to value ratio (LVR).
|Look for investments with a higher LVR and shorter loan term to minimise the risks associated with property market movements.|
The valuer incorrectly values the security property.
|In addition to the valuation report it’s important to conduct independent research to validate the report’s findings.|
|Enforcement Risk: |
If the security property needs to be sold, the cost of enforcing recovery action may be substantial.
|Having a registered 1st mortgage over the property investment works like an insurance policy for the debt.|
|Loan Maturity and Investment Term Risk: |
The lender may need to extend the loan term if borrowers can’t repay or refinance their loan when it matures
|Pre-funding the loan before it’s offered to investors helps mitigate these risks.|
|Liquidity Risk: |
Private/non-bank mortgage loans are not listed on any exchange and are not redeemable, so investors may not be able to get access to funds from their investment when they need it.
|Offering investments that range from 3 – 36 months, and a choice of individual deals or managed funds lets investors set an investment time horizon upfront.|
The upside to the downside
The downside to any investment is the risk of it not achieving its objective or making a loss. Having said that, private real estate debt has some key features that make it attractive relative to other asset classes. Firstly, private real estate debt is secured against property, which is like an insurance policy for the debt. This makes them more secure than other types of investments.
Secondly, if the loan defaults and the security property needs to be sold, the investor holding the 1st mortgage security gets paid first. Being first in line means you have a lower risk of making a capital loss.
Thirdly, the performance of private real estate debt investments is linked to a specific borrower and specific security. This means it’s less likely to be affected by external factors that may cause volatility in other asset classes, such as equities.
Finally, the income you receive from real estate debt is set at a fixed level, because it flows from the monthly interest borrowers pay on the loan. This provides predictability as to what you can expect to receive on a monthly basis.
Is private real estate debt right for you?
At AltX, our philosophy is simple. If we wouldn’t put our own money into it, we won’t share it with our investors. Our investments are pre-funded, which means we don’t depend on commitments from investors to settle loans. Since its inception, 100% of the interest and capital on all investments has been returned to investors. To learn more about real estate debt and how to unlock alternative investment opportunities with AltX, visit www.altx.com.au/investments
Level 21, 10 Grafton Street
Bondi Junction, NSW, 2022
Phone: 1300 991 380
By digitally dividing assets into smaller investable units, you can access institutional-quality opportunities with cheque-sized investments. As published on Money Management
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