This article appeared in the Australian Jewish News on 25 September 2020.
One of the unexpected consequences of the COVID-19 pandemic is a sharp increase in savings.
With much of the economy shut down, many consumers continue to earn income or collect government assistance, but have fewer avenues to spend with travel, dining out and many forms of entertainment no longer possible. As a result, considers are saving more and cash is flooding into low interest bank accounts. ANZ Bank chief executive Shayne Elliott recently sad the bank had received about $12 billion in household deposits over the pandemic.
“The system today is flush with liquidity,” he said.”most of those deposits go into operating accounts which … are essentially zero [interest] cost [to the bank].”
In response, the major banks have reduced deposit rates so most accounts now earn an interest rate below the rate of inflation. Not only are these accounts not generating real income, the purchasing power of money in these accounts is actually eroding over time.
For investors and self-funded retirees that depend on investment income, many traditional defensive investments, like term deposits, have become unsustainable.
Investing in higher risk asset classes like ASX shares has been impacted by the dividend cuts, while rental income from property trusts and direct property ownership has been impacted by rental waivers and deferrals due to COVID-19 related business shutdowns.
Against this backdrop private mortgage investments, which have been steadily growing in popularity as the industry matures, have seen a surge in interest.
Private mortgages generally offer investors seven to 11 percent returns secured by first-ranking registered mortgages, and higher returns for second mortgages.
Accessing high-quality transactions is critical to mortgage funds and private lenders. “We work to find our investors the right projects to lend on, and right developers to partner with,” said Bowery Capital co-founder Vann Fisher.
Repeat business is key to generating investment opportunities according to Bowery Capital’s head of loan origination, Mark Murray.”There is no substitute for relationships. Several of our directors previously ran finance broking businesses so we draw on an extensive network of borrowers and developers,” said Murray.
When brothers Dr Sepand and Dr Sam Navidi, both dentists, considered funding options to develop four luxury apartments in Toorak, Bowery Capital’s funding solution provided the certainty they needed to move forward with the project.
“Dealing with a private lender meant we could obtain a commitment quite quickly despite the uncertainty of the COVID-19 pandemic,” said Sepand.
Investors like the combination of first mortgage security over a blue-chip property, modest gearing, competitive interest rate and highly bankable sponsors developing a high-quality project.
With more and more investment opportunities being generated by private lenders and mortgage funds, it is little wonder investors are questioning the value of traditional defensive investments.