Lauren Ryan from Thinktank speaks to Laurence Parker-Brown for our IN60 series. The Inside Adviser
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Alceon’s private debt fund remains resilient despite rising input costs and higher rates
With construction pricing and supply chains stabilising and a continued rebound in the international and student market, growth in non-bank lending continues to offer attractive opportunities for the private debt sector.
Despite this, it’s been a challenging year for a construction industry dealing with rising input prices, program delays stemming from weather, unavailability of staff and supply chain issues that all cause intermittent time and cost incursions.
Private debt purveyors Alceon Group have been keeping a close eye on rising construction, material input, freight and energy costs, but have partly offset these pressures by revenue escalation according to the investment managers latest quarterly report.
“The increase in inflation across the across the sector is between 15 per cent to 20 per cent, where high rise builders generally operate on 5 per cent to 6 per cent margins and home builders operate on 12 -15 per cent margins,” the report stated, noting that the main protection against inflation is to ensure a conservative loan to Loan-to-Value Ratio (LVR), “generally in the range of 60 per cent to 65 per cent”.
At the same time, interest rates and lending rates are on the rise as the RBA targets an inflation rate of between 2 per cent to 3 per cent.
According to the quarterly, some of the headwinds causing inflation are near term pressures arising from downgraded global economic growth due to higher inflation, Russia’s invasion of Ukraine and China’s COVID containment policies.
Private debt funds are predominantly made up of an underlying portfolio of first ranking mortagage loans held over the construction of real property on a floating rate base. Alceon primarily invest in low density house and land, plus town house constructions.
The housing construction industry is also facing significant delays in construction programs due to weather, unavailability of staff and key materials. Alceon has said that it made allowances for time and cost contingencies.
“A significant percentage of Alceon’s facilities are interest paid, in which case delays do not materially impact our risk,” the report stated. “Alceon separately maintains the capacity to manage development delivery, construction and sales if ever required.”
The report draws attention to negative real estate sentiment and the increase of borrowing costs impacting sales. There has been a housing price correction in the order of 10 per cent to date with further downside expected over the next 6 months.
Alceon notes that the slowdown in housing demand will also help with labour costs that should free up a number of resources in the business. Other positives include a revival in the international student market with migration also coming back. Low vacancy rates will contribute to demand.
“Alceon has been factoring in a market correction in our assessment of new transactions over the last 12 months. Pre-sale cover provides significant risk mitigation. Updated valuations can be commissioned if there is risk of LVR breach,” the report stated.
Alceon Group maintained its view that the sector will remain strong for the balance of this year given its robustness and healthy deal pipeline.
