The manager of Real Estate Credit Investments (RECI ) has flagged an opportunity for lenders to bag their best-ever returns in the property market as banks deem the high interest-rate environment too risky to loan cash. 

Writing in the Citywire award-winning fund’s half-year results, manager Ravi Stickney said property owners had to refinance their loans to avoid selling their assets at a loss in the collapsed real estate sector, presenting lenders with the chance to lock in loans at a high rate.

While the £302m trust’s lack of capital meant it could not fund any new deals in the six months to the end of October, it used £50.7m of £72.6m received in cash repayments and interest for further commitments to existing positions.

Stickney has also been selling the Gurnsey-domiciled trust’s market bond portfolio to recycle money into new loans, with £25.2m raised in October, post-period end alone.

The October factsheet shows the 9.1%-yielder had firepower of £22.7m to deploy into new investments, with 81% of the 36-strong portfolio of loans across Europe at a fixed interest rate, while the remainder are floating.

‘It goes without saying that the margins and absolute rates of return garnered on new senior loan origination far surpass those at any period of time, including the 2008-9 period,’ Stickney (pictured below) wrote. 

The results showed that the underlying net asset value per share barely moved over the period, rising 1p to 148p per share, but the interim dividend of 6p boosted total returns to 4.8%.

In August the board, chaired by Bob Cowdell, initiated a £5m share buyback programme until the end of March. Since the announcement, the share’s discount to net asset value has narrowed from 13.6% to 11.4%, as at close on Monday this week.

Given the trust’s focus on the riskier high-yielding end of the property credit sector, the manager took steps to decrease risk, including making senior loans almost exclusively and lending to mainly institutional grade larger institutions, as well as those with strong fundamentals underpinning their valuations. 

While every sponsor is facing similar pressures, Stickney wrote that larger institutional sponsors have been proven to have the resources and skills to defend their assets with additional capital and a constructive approach to their lenders. 

As a protection against downside, RECI works with sponsors to de-risk their loan book, giving them time to benefit from an improving rental tone and then seek an orderly exit, as was the case after Brexit and during Covid.

‘For the rare borrowers that cannot or will not seek an orderly exit, RECI has in the past sought to enforce its position to realise the underlying asset on its own (a position it is able to do as its manager has a significant real estate platform capable of owning, developing and operating real estate assets throughout Europe and the UK),’ Stickney wrote.

The board took steps to deleverage the balance sheet during the six months, reducing gross gearing of 24%, or 19% excluding cash, to 18% and excluding cash, 14% over the period. 

The portfolio’s average duration is short, sitting at 1.5 years, with an average loan-to-value of 61.1%, down from 60.4% a year ago.

Development-stage assets constitute almost three-quarters of assets, with accommodation the largest weighting at 43%, followed by leisure at 21%, while the UK is the largest country weighting at 60%, with France and Spain making up 24% and 8% respectively.

Performance since launch 

Source: Morningstar