Updated: 49 minutes ago
New to real estate private credit? Start with our overview, Real estate private credit: an income strategy worth understanding.
Private credit has been in the headlines this year, and not always for good reasons. In May the Financial Stability Board, the international body that monitors the global financial system, warned about vulnerabilities in private credit, including opaque valuations, complex layers of borrowing and lending concentrated in a few sectors such as technology and healthcare.
Those warnings deserve attention. But "private credit" is a broad label. It can describe a wide variety of loans made by lenders other than banks. This can cover many kinds of lending, including loans to mid-sized companies, early-stage businesses, companies in financial difficulty, infrastructure projects and property.
The level of risk across the private credit market varies just as widely, so the label alone tells investors very little. What matters is what sits underneath: what the loan is funding, who is borrowing, what secures the loan and how the fund is run.
So what is real estate private credit?
It is the part of that market that lends against property. A non-bank lender, funded by investors, lends money to a borrower, and the loan is secured by a mortgage over real estate. The borrower pays interest, and that interest becomes the investors' income. The property stays with the borrower, as security for the loan.
Here too, what sits underneath the loan matters. Some funds take on more risk in pursuit of higher returns. Others are structured conservatively, with several layers of security built in to help safeguard investors' capital.
Five questions to start with
The following questions are a starting point for assessing any real estate private credit investment opportunity. They are not exhaustive, but each one goes to how well the lending is secured and managed, or how investors get their money back.
1. Where does the loan rank?
Why it matters.
A property can have more than one loan secured against it. Each loan is given a rank: first, second and so on. The rank is the order lenders are repaid if the borrower defaults and the property has to be sold. The first-ranking lender is repaid in full before any other lender receives anything.
But a first-ranking mortgage doesn’t always mean investors are first in line. Where a bank also funds the loans as a senior lender, the bank is repaid first and investors’ money sits behind it.
What to look for.
First-ranking mortgages, which are repaid first. Second-ranking mortgages and other lower-ranking loans carry more risk.
The Oyster Credit Fund.
Every loan is made by Rockpool Capital – the Fund’s lending platform - and secured by a registered first-ranking mortgage over New Zealand real estate. Rockpool Capital funds its loans with money from two sources: a New Zealand bank and the Fund. The bank is the senior lender, so it is repaid first, both before and after any enforcement.
2. What is the LVR?
Why it matters.
LVR stands for loan-to-value ratio. It shows how much has been lent compared with what the property is worth. The lower the LVR, the more room there is for the property's value to fall before the loan is at risk.
For example, if $650,000 is lent against a property worth $1 million, the LVR is 65%. At 65%, the property could lose a third of its value and still be worth more than the loan if it had to be sold. At 80%, a fall of just a fifth would wipe out that margin. In practice the margin is smaller, because the costs of enforcing the loan and selling the property are paid first. A fall in value is also not the only risk. A loan can run into difficulty if the borrower can’t keep up its payments or repay at the end of the term.
What to look for.
The LVR limit that a fund works to. More conservative lenders typically cap it at 65% or below, while higher-risk lenders may lend at 75% to 80% or more.
The Oyster Credit Fund.
The portfolio’s weighted average LVR is capped at 65%.
3. What is the loan secured against?
Why it matters.
When a loan is secured by a mortgage over property, the basis on which that property is valued matters. Some lenders assess its value in its existing condition, while others may lend against its expected value once a proposed development is completed. The latter introduces additional risks, including construction delays, cost overruns and the possibility that the completed development is worth less than expected.
What to look for.
Whether the lender relies on the property's value in its existing condition or its projected value following development, and whether the fund provides construction finance.
The Oyster Credit Fund.
The Fund lends against property valued in its existing condition, rather than its assumed value once a proposed development is completed. It does not provide construction loans. This means the security value supporting the loan does not depend on future construction being completed.
4. Who checks each loan before it is approved?
Why it matters.
A loan is only as sound as the checks made before the money is lent: who the borrower is, what the property is worth and how the loan will be repaid. In some funds those checks are done only by the manager's own team. In others, an independent party reviews the loan as well.
What to look for.
An experienced lending team and a clear approval process. Ask whether anyone independent of the manager also reviews each loan.
The Oyster Credit Fund.
Loans are sourced, assessed and managed by Rockpool Capital, a joint venture between Oyster Property Group and Fortis Capital. A leading New Zealand bank also carries out its own independent due diligence on every loan it co-funds, before approval.
5. How and when can investors access their money?
Why it matters.
Real estate private credit generally has a shorter investment timeframe than owning property, including through an unlisted property fund. But investors' money is out on loan, so it can't be handed back overnight. Returns come from interest earned over the life of each loan, so capital needs to stay invested while those loans run.
What to look for.
Clear terms, set out upfront: how long you need to stay invested, how much notice a withdrawal needs and the circumstances in which it could take longer.
The Oyster Credit Fund.
Loans have initial terms of up to 18 months, and any extension needs investment committee approval. Investments are held for an initial 12 months, after which investors can apply to withdraw with six months' written notice. Withdrawals are subject to the fund's terms, available liquidity and the manager's discretion, and may be deferred or suspended.
These five questions are a starting point, and no investment is free of risk. But together they give investors a clear view of what they are investing in: what a fund lends against, how its loans are secured, who checks them and how investors get their money back.
The Oyster Credit Fund is now open to wholesale investors. To learn more, contact the Oyster Property Group investor team at investor@oystergroup.co.nz.
WHOLESALE DISCLOSURES
Investors must qualify as a wholesale investor under the Financial Markets Conduct Act 2013, with a minimum investment of NZ$250,000.
Any offer to invest in the Oyster Credit Fund is made solely under, and subject to, the Information Memorandum, including the risks, terms and conditions described in that document. Prospective investors should read the Information Memorandum in full before making any investment decision.
References to investment returns or capital outcomes are indicative only and not guaranteed. See the Information Memorandum for further detail.
