Bedrock Mortgage Fund – August 2024
August 2024 Fund Commentary
August 2024 Update
August 2024 saw Ark Bedrock deliver another strong return of 0.95% (11.25% annualised). Funds under management (FUM) rose by $2.7 million, ending August at $43.7 million, with an additional $3.0 million received for unit issuance in September. The year-to-date (and inception-to-date) Bedrock return is 11.35% annualised. At the end of August, the portfolio comprised 20 unique loans to 13 borrowers across 9 different geographies in 6 states/territories, spanning 3 different development sectors and 3 different loan types. Land and civil construction loans continue to make up the bulk of the portfolio at 91.7% of the total, with the remainder invested in commercial and industrial built-form loans.
There were two notable changes to the portfolio in August, with $4m invested in a civil construction loan for a residential land subdivision in Burpengary East, Brisbane, and a reduction of $1.25m in a residential land banking loan in Ballarat, regional Victoria. The average loan-to-value ratio (LVR) increased slightly to 63.9%.
The Development Environment
In recent months, we have provided commentary on the pressures facing property borrowers in various states and development sectors (most notably in Victoria and NSW, specifically in built-form projects). Ark has maintained its focus toward geographies such as South Australia, South East Queensland, and Western Australia, where the development sectors have been displaying more favourable investment conditions with strong demand and supply metrics. We have also discussed Ark’s response in terms of the types of loans we are issuing, with a focus on lower-risk land and civil construction loans. Furthermore, we have emphasised our commitment to providing a truly diversified investment portfolio in Bedrock, recognising that many investors have chosen Bedrock due to the risk-reducing benefits of diversity. Pleasingly, we continue to achieve this. All of these messages remain relevant as we move forward.
It is becoming increasingly apparent, however, that lenders who typically offer larger loans for built-form construction projects are beginning to compete more in our mid-market, land, and civil works space, and in the geographies we have been active in. This is leading to increased competition for higher-quality investments, and we expect that this, along with forecasts of lower future RBA rates, may have a downward impact on new loan interest rates and, consequently, returns to the fund. We view this competitiveness as part of the cycle, something Ark’s loan origination team, with its extensive experience across numerous credit cycles, has encountered multiple times before. During competitive cycles, our focus on due diligence discipline is even more critical, micro-analysing loan projects, scrutinising the stability of contractors engaged by the borrower, and thoroughly understanding the value of the security we are accepting. In these environments, Ark’s leadership team is content to hold capital on the sidelines rather than deploy it into loans with unacceptable risk/return metrics. We anticipate that when the challenges impacting built-form construction loans dissipate, many of the lenders currently entering our space will likely shift back up the “loan size” curve into their traditionally core lending projects.
Defaulting Loans and Transparency
Ark dedicates significant time and resources to loan management, which typically gives us the advantage of identifying problem loans or delayed projects at an early stage. Our Executive Directors’ experience as property developers, combined with their extensive market knowledge, enables Ark to proactively address potential issues and work on solutions before they fully emerge. Importantly for our investors, in the event we need to enforce a loan, we are workout specialists capable of identifying and bringing to the table multiple repayment options. This contrasts with other lenders who might simply seize and sell the security property, writing off any shortfall and negatively impacting investors.
Much has recently been written in the media about “secrecy,” “opaqueness,” and “private lenders with problem loans,” with calls (often by the large banks) for greater regulation in the Private Credit space. Ark expects that ASIC will respond to this by imposing greater regulation, oversight, and transparency in the real estate private debt sector in due course, and to an extent welcomes it. Ark takes an “investor first” approach to all our decisions and continues to build on and invest in our compliance, governance, and management processes and structures, to ensure that communication and transparency with our investors and stakeholders are at the forefront of everything we do.
Outlook for Bedrock
The Ark Wholesale Mortgage Fund, into which Bedrock makes all its syndicate investments, has a strong pipeline of potential loans for origination and settlement in the coming months. As existing investments mature and new investor FUM is received, the Fund Manager remains confident that there will be sufficient investment opportunities to maintain both portfolio quality and high cash utilisation in the Fund, enabling Bedrock to continue delivering consistent 11%+ returns to investors in the medium term.