Real estate financing could tighten in 2019 and if it does, the question that will need to be answered is how can investors continue to secure alternative assets and utilize other strategies to engage in ripe opportunities to stay diversified during these times?
Softness in North American housing markets is likely to lead to more cautious mortgage lending practices in 2019 and 2020. We’ve already seen inventory grow and asking prices slashed in the single family home and condo markets in the US and Canada. Lenders typically pull back on loan to values during these periods and make underwriting tougher. This is on top of various new regulations designed to cool the housing market, along with higher interest rates. Expect some of that change in credit access to rolling over to the commercial mortgage market as well.
Although there may be many ripe opportunities in the commercial sector, shopping plazas and mixed-use properties have become far more desirable than stocks and condo developments, investors need to anticipate these changes and adapt.
Reporting on how commercial lenders are becoming more conservative in 2019, Western Investor highlights some of the increased demands creditors are making on applicants now.
This can include:
- Putting more weight on who the borrower is requiring a track record of experience by the principals involved
- Limiting geographic risk exposure
- Desiring more pre-sales or leases in advance
- Preferring cash flow producing properties versus ground up construction on raw land
They want to see income, a paper trail, and specific experience in successfully managing this type of property and exiting them in the past.
Of course, most individual investors, and even passive investors like family offices have little in the way of a resume of their own to wave around when it comes to securing the best financing on new redevelopment or construction projects.
Yet, at the same time, it is only wise to maintain diversification and liquidity by utilizing sustainable leverage. What are the alternatives?
Instead of constructing new, investors can participate in existing buildings that are already producing income and cash flow. They can inject their capital for improvements or simply a piece of ownership. This is much like the strategy the biggest funds have often used in prime property markets. Going directly instead of through the biggest funds may offer more yield, security and control.
The other alternative is to engage in more partnerships. To pool capital together with other accredited investors and take on properties with all equity. This can certainly have its advantages.
A hybrid approach would be to work with some peer partners and augment that capital with a lesser amount of financing on better terms.
As financing rule shift and investors look to restructure portfolios, there is a need to foresee coming lending changes and to deploy alternative strategies. ReDev has proven to be one of the most experienced operators and developers in Canada’s local shopping plaza space, providing accredited investors with opportunities that fit their risk tolerance and diversification needs for years. Visit us on the web and check out our recent projects.