Interest Rates, Inflation and the impact on Commercial Real Estate – what should you pay attention to?
Part 1: The Interplay of rates, inflation and real estate On the first Tuesday of November at around 2.30pm each...
Corval Avenue sees many lending opportunities or deals – some good, others…not so good. In determining whether to proceed with a deal and present the mortgage opportunity to our investors, numerous factors come into play.
As a commercial real estate fund manager with a 25 year track record, Corval Avenue is critically aware of the responsibility we have to our investors to offer loan opportunities that are robust and provide the appropriate risk / return trade off.
So what is it that we look for to determine whether it is a “Deal” or “No Deal”?
Every opportunity is different and accordingly there is no cookie cutter approach but key to all transactions is assessing what is commonly referred to as the 5Cs of Credit:
| Character | The borrower’s past and expected future behaviour, their experience and reliability. We would enquire why their existing lender (if any) is not renewing their loan, assess any past lending experience and performance with Schroders RF, capability in delivering their projects, media articles, credit reports and company searches |
| Capacity | The borrower’s ability to meet ongoing financial obligations – e.g. interest service (or requirement for retained interest) and operating costs |
| Capital | The amount of equity a borrower has access to either on balance sheet or via personal guarantees – i.e. the borrower’s capacity to inject additional funds if required |
| Collateral | The security asset/s – Loan-to-value-ratio, location, asset type, environmental issues such as risk of flooding, bushfire exposure or heritage issues and the feasibility of developing the property |
| Conditions | External factors such as market supply and demand, construction costs and the anticipated timeline to achieve a Development Application or project completion etc |
The 5Cs provide insights into the borrower’s credit history, financial stability, security asset and likelihood of loan repayment at the end of the term. There is no right or wrong answer to any of the categories, but rather they are assessed in combination to produce a considered and balanced outcome. It is not uncommon for a risk to be identified within one of the categories – Character (e.g. lack of relevant borrower planning experience) that on its own may result in “No Deal”. However, if this can be mitigated via a strength in another category – Collateral (e.g. engagement of an experienced planning consultant and a lower loan-to-value ratio allowing capacity for further loan extensions if planning approvals are delayed) there may still be an acceptable risk profile and, hence, a “Deal”.
In addition to the above ”5Cs”, Corval Avenue factors in our overall risk appetite and the inclusion of loan terms and conditions (e.g. undertakings or milestones) that enable our team to track progress and react prior to loan maturity should the repayment strategy slip. We look to ensure that there are
viable repayment strategies for the mortgage opportunities we present to our investors.
Just like the TV show – deciding whether an opportunity represents a “Deal” or “No Deal” is not always easy. No two opportunities are ever the same and thorough due diligence is essential to evaluate all the risks and mitigants, as well as the likelihood of the loan being repaid within the agreed term.
Corval Avenue is acutely aware of its responsibilities to investors, and investors can be confident that any “Deal” that is offered for investment has been thoroughly assessed. Our strong lending record, combined with extensive experience lending in different market conditions and diverse asset types and geographies reinforces our confidence in deciding “Deal” or “No Deal”.
Corval Avenue Limited ACN 089 265 270 AFSL 238546 (Corval Avenue) is the responsible entity of the Corval Avenue Select Credit Fund ARSN 090 994 326
This document does not contain and should not be taken as containing any financial product advice or financial product recommendations and has been prepared without considering your objectives, financial situation or needs. Before making any decision relating to a Corval Avenue fund, you should obtain and read a copy of the product disclosure statement and target market determination, or other relevant disclosure document for that fund, and consider the appropriateness of the fund to your objectives, financial situation and needs.
Past performance is not a reliable indicator of future performance.
Corval Avenue does not guarantee the accuracy, reliability, or completeness of the information in this document. To the fullest extent permitted by law, Corval Avenue, its group companies, and their directors, officers, employees, consultants, and agents disclaim all liability for any direct or indirect loss or damage arising from the use of this document. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed.
