Private real estate debt for portfolios resilient to the COVID-19 crisis
Private Real Estate Debt is a form of financing in which a private party grants loans for the acquisition or construction of properties, which are mortgaged to the lender as collateral. Private Real Estate Debt funds allocate capital to a broad pool of loans, which reduces exposure to the risk of any single loan.
Renan Barros (CEO & Co-Founder of Ativore) and Austin Carlson (Investor Relations at Parkview), who is responsible for the private debt fund (Private Real Estate Debt) that has been showing strong resilience to the COVID-19 crisis, talked in the 7th edition of Ativore Talks about the strategy of adding private real estate debt assets to increase protection and reduce the volatility of real estate portfolios.
Watch an excerpt of the conversation.
Video transcript
Renan: Hello everyone. I'm here today with Austin Carlson from Parkview for another Ativore Talks. We have been working together for a few years now and it has been a pleasure, so thank you, Austin, for talking with us again. It's a pleasure to have you with us.
Austin: Thank you, everyone, and I'm glad to be able to provide more information about what we have been doing here at Parkview. Just a brief reminder about our strategy for everyone who already invests with us, and possibly for those who will invest in the future... We focus on the private real estate debt spectrum, more specifically on construction financing. So for many of the multifamily properties you can see here in the U.S., we are the ones providing financing to the builders to enable them to grow. As a result, we charge them an origination fee, interest and some other fees over the life of the loan, and that accrued income is passed on to investors quarterly. The core idea is that we provide capital to the builder, construction then proceeds for 18 or 24 months, for example, the construction is completed, they need to pay us back, they sell the asset or refinance to then pay us off... So the exit from each project comes in various forms.
Austin: The big differentiator we have here is the fact that, from the CEO to the underwriting and construction team, we do everything in-house. We re-price each project down to the last screw and lend based on the construction cost of the asset and not on an arbitrary, estimated future value 2 or 3 years later. For us, cost is what we can control today, and that is definitely one of the ways we control the risk of the process and of different strategies.
Renan: We started investing in Private Debt between 2018 and 2019, adding this type of asset to increase protection and reduce the volatility of our clients' real estate portfolios. It seems we got it right with this strategy and with you, choosing Parkview as a business partner, since the Parkview Financial Fund has performed quite steadily despite the largest crisis we have seen. Why does this happen? Why is this type of asset so defensive during a period like the one we are facing?
Austin: Great question. Starting about 3 years ago, we believed the market's growth cycle was overly extended. We made an early decision that paid off in the long run, and what I mean by that is that we began to observe certain things on our side of the real estate market that did not make sense. For example, the future-price appraisals that third parties or other lenders were assigning to projects that would be completed a few years later were extremely high. And what we call Loan to Value (or LTV), the amount a lender would be willing to lend on a project, was climbing. Here in the U.S., just think about financing your home. The LTV the bank will give you is around 80%, with 20% of your own equity. Here, we provide only about 60% or 65% of the future value, so another lender needs to complete the deal's capital. And sometimes (for those firms) that rate reaches 80% or 90%, or even 100% on some construction projects, which makes no sense at all. Another thing we began to focus on was the portfolio's exposure to multifamily assets. No matter where you are in the economic cycle, people will move out of the place they own and live somewhere, so they will need to rent. So rent values may come down in a recession, but, at the same time, occupancy tends to stabilize. So there will always be demand for multifamily construction, and everything is playing out exactly as we predicted in times of crisis.
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