June 2024 Newsletter

In June 2024 Ark settled seven new facilities across Victoria, South Australia, Western Australia and the ACT. Six of these were within the residential sector across land and civil construction and land banks (pre-construction).

The seventh facility was a small IGA anchored shopping centre. We maintain our focus on the residential markets that are experiencing strong demand fundamentals due to population growth, undersupply of housing and supportive government policy settings.

Ark Bedrock Mortgage Fund

Bedrock continues to attract significant investor capital inflows and by the end of June will achieve Funds Under Management (FUM) in excess of $40 million. The Fund is receiving strong interest from new and existing Ark investors attracted to the returns that have been consistently in excess of 11.25% p.a. net to investors, derived from a diversified portfolio of Ark mortgage investments. Building on receipt of the Investment Grade rating issued by SQM Research in April, and supported by the continued significant fund inflows, application is now underway to instate the Fund onto two investment platforms, providing easier access for investors who are directed via wealth advisors.

Interest Rate Outlook

In recent times, forecasting interest rates in Australia is like riding a roller coaster. Just when it looks like inflation is under control and heading down, new data is released that suggests otherwise. CPI results for May 2024 surprised many market commentators when it jumped to 4% p.a. from 3.6% p.a. in April. It has now been higher than expected for 5 straight months and hasn’t really fallen since December 2023.

The RBA continues to pursue CPI growth in its target band of 2-3% p.a. and with no real direction towards this, the likelihood of another rate hike now seems more likely. 

The cause of this sticky inflation appears to be wage price inflation with labour intensive services sectors particularly impacted. And now with $23 billion in income tax cuts that will start to flow through in July as well as recent expansionary state and federal budgets, there is a real risk that inflation is not just sticky at current levels but starts to accelerate above them. Money markets are pricing in 60% chance that the RBA will increase rates before September.

For the last two years, Ark’s approach has been (and will continue to be for the foreseeable future) to tie interest rates within Ark facilities to the RBA cash rate, preferably with a floor at the prevailing cash rate when the facility is initially settled. The option to move back to fixed rate lending may be considered but only when it is clear that we are in a downward cash rate cycle.

Company Updates

Investment and Performance

Deal Settled: 28

Funds under management: $323.8 Million

Weighted Average LVR (Current): 62.50%

Forecast Investor Rate: 11.38% p.a.

Investment Updates

As an overview, residential projects/investments in southeast Queensland, South Australia and Western Australia continue to benefit from relatively strong markets being driven by population growth and affordability advantages compared with Melbourne and Sydney.

Likewise major regional markets in Victoria and New South Wales are benefiting from affordability differences when compared to their capital city counterparts.

Conditions in the Industrial sector generally remain sound with an ongoing underlying shortage of land; as well as the Social (health and childcare) sector where significant government support underpins occupiers.

Bedrock Mortgage Fund Update

In May 2024, in its 6^th month since inception Ark Bedrock delivered an annualised 11.36% return, bringing the YTD return to 11.34%. The month of June, which is nearing its end has seen FUM grow by more than expected at circa $8.6m in the month, to $37.5m, ands is projected to deliver a result similar to that in May. Bedrock’s performance continues to be driven by the Ark team’s micro-focus on portfolio construction, maximum cash deployment throughout the month, and cost management. 
 
Approximately half the new funds into Bedrock have come from Ark’s long-term investors, who we appreciate for their demonstration of confidence in Ark as their investment manager, and in the new Bedrock Fund. Ark Bedrock’s dedicated Fund Manager noted that “the task of selecting investments for the Bedrock Fund is made easier by the fact that the pool of Ark Wholesale Fund loans it has to select from are such high quality. Ark Wholesale’s current weighting towards Land and Civil Construction loans, which we assess as being at the lower end of the risk curve absolutely suits the Bedrock Fund at this time”.
 
We look forward to the new financial year with excitement and anticipation as awareness of the Bedrock fund increases, and new investors join the Bedrock fund.

Available to: Wholesale investors 
Min invest: $50,000
Distributions: Paid Monthly
Redemptions: Quarterly after minimum initial term of 6 months
DRP: Distribution Reinvestment IS available
Unit Issues: First day of each calendar month
Updates: Annual distribution statements and quarterly updates of the Fund’s performance
Investments: At least 85% in registered 1st mortgage securities with up to 15% potentially invested in registered 2^nd mortgages
LVR: Average 65% across the 1st Mortgage investments
Fees: 0.75% Fund Manager fee
Direct Costs: Up to 0.25% direct costs