Winston Churchill once said, “never let a good crisis go to waste”. As COVID-19 continues to ravage certain asset classes, fund managers and their clients are moving quickly to exploit what could be a once-in-a-generation disruption of standard investment models.
At this point in the cycle, the real estate market presents a target-rich environment. Whilst residential sales have rallied well, especially in the capital cities, other categories such as commercial and retail property are taking a hammering and alternative categories are still being underplayed here.
There’s plenty to consider but no opportunity is without risk, so it’s worth taking a deep breath before getting swept up in the rush for ‘cheap’ real estate assets.
Over the course of 2020 and into 2021, we’ve seen predictable patterns play out with those owners of income-producing assets that found themselves with unsustainably high amounts of leverage in an environment where income has slowed (or stopped entirely); unable to hold on and being forced to sell at a discount. Meanwhile we’ve seen some prudent lenders tightened access to credit with looming inflationary pressures and central banks signalling future rate hikes.
The trickle-down from these disruptions has exposed fresh toe-holds in the market for enterprising investors, and we’re looking as keenly as anyone at the opportunities via our own COVID-19 Special Situations Fund, which Jameson Capital developed to identify strategic acquisitions with a low-risk profile and strong long-term fundamentals.
On the whole, we think it’s a great time to be investing in Australian assets, particularly while international markets remain quite volatile due to the unpredictable nature of COVID-19 outbreaks.
Australia, though, moved early and decisively to prevent the widespread COVID-19 infections that crippled many other large democracies and has a well-resourced healthcare system, strong underlying economic fundamentals with high levels of personal wealth and low government debt, and firmly entrenched rule of law and democratic principles.
As well as identifying viable targets, investors should also be seeking out any vulnerabilities. Our Special Situations Fund asks important questions such as:
- Irrespective of the current crisis, would you want to own the asset in the longer term?
- Which sectors will see repricing in the short to medium term, and present buying opportunities?
- Expecting uncertainty to continue, does the return represent a good balance with risk and can we protect the client from any downsides?
- Is it a quality asset with good partners that is more likely to recover well from a crisis?
- Does the investment have a clearly defined exit strategy?
There are many pertinent risk factors to consider before rushing in to snap up a marked-down asset. No matter the attractiveness of the asset or size of opportunity, we believe that completing comprehensive and detailed due diligence is more than just an exercise in ticking boxes, it is a fundamental and essential first step.
It’s also necessary to understand how the asset came to be devalued in the first place, and are those market conditions likely to be fleeting or are they the result of a longer-term structural change. We see some central themes to the opportunities, with inability to access credit – bank lenders reducing willingness to lend, non-bank lenders pulling funding approvals, and ordinary equity investor being incapable or unwilling to contribute additional capital – often being the catalyst for asset mispricing. Assets needing to be sold to generate liquidity often in turn triggers further sales as financiers push for reductions in debt levels.
The desired outcome is to identify and move to capitalise on high-quality assets that are being sold under some form of duress or to assist the owners of these assets to maintain control of these properties by participating in reorganising their capital stack. Yet we also advise clients that asset identification is just the first step in a much longer process.
The true window of opportunity for these types of investment strategies is only starting to open up and there is still plenty of scope to capitalise on this crisis. Investors just need to be willing to think their way through each opportunity and take the time to make sound, emotionless decisions based on quantitative analysis of the facts.
About Nick Browne
Nick Browne is a Director at Jameson Capital, an Australian-based alternative assets management firm. A real estate private equity and funds management specialist with Jameson since 2015, he previously worked in senior roles at Macquarie Funds Group based in Hong Kong. Nick is driven to bring his clients innovative thinking and fresh opportunities, with a focus on the high-yielding Australian real estate. Visit jamesoncapital.com.