Peer Estate's latest investment opportunity is a residential unit, this time in the upper north shore of Sydney in the suburb of Asquith. 

This loan is secured by a first ranking registered mortgage over a brand new apartment in a recently completed 47-unit project.  It is a 3-bedroom, 2-bathroom apartment of 95sqm (internal area) plus a 22sqm balcony and a two basement car spaces. 

The loan is advanced at an LVR of 57.78% against a fresh valuation which shows a $30,000 premium to purchase price and thus, allows for a fall in value of approximately 40% for the property to be worth less than the loan.

Investors will have interest paid to them on a monthly basis at a rate of 7.9% per annum. 

The loan has been fully vetted and settles in mid-November. It will run for a term of 12 months.

Payments to investors will be interest-only, with capital to be repaid upon maturity.

Note: this loan is due for Financial Close imminently with legal documentation being finalised. Any investment funds transferred will commence earning interest from the date of Financial Close.  At this stage that is estimated to be on or before 29 November 2017.

Key Deal Points

  • Interest rate of 7.9% per annum paid monthly.
  • The apartment is located in a brand new building and in a well established residential neighbourhood, comprising predominantly apartment living.
  • The valuation is $30,000 above purchase price reflecting a rate of $8,526 per square metre.
  • Conservatively geared at an LVR of 57.78%.
  • The apartment could be sold for around $5,000 per square metre and the full loan investment would still be repaid.
  • The Borrower shows solid asset backing and an ability to service interest even if the property is not tenanted.
  • The investment return is above the residential yield to the owners of similar properties and further provides for 40% decrease in the value of the property without impairment of capital.
  • The investment allows exposure to the Sydney residential market from as little as $5,000 with monthly interest payments.

Property

The subject unit is located on Level 2 within a part 5-storey building with a southerly aspect. Within the development, upon completion, there will be 47 similar units.

Asquith is located approximately 27 kilometres by road North West of the Sydney CBD. The area is well serviced in relation to shops and schools and a bus service operates within the suburb.

The subject property is located in a well established residential neighbourhood, comprising predominantly apartment living.

The accommodation consists of 3 bedrooms, 2 bathrooms, entry/foyer, hallway, lounge/dining, kitchen, European laundry and two balconies.  The completed unit is of a high standard with stone benchtops, tiled splashback, laminated kitchen cupboards, polyurethane kitchen cupboards, stainless steel appliances, breakfast bar, soft closing drawers, full height wall tiling in bathrooms and is fully carpeted in bedrooms and living areas.

The specific apartment was purchased off-the-plan in August 2015.

Valuation

The apartment has been valued by an independent reputable valuation firm.

The valuer used the Direct Sales Comparison approach to assess the “As Is” value of the apartment. This valuation method is the most frequently used method for such properties and involves comparison of the property to be valued with sales of similar properties. Comparisons can be made in many forms including straight comparison, or analysis on a rate per area basis (such as rate per square metre of living area). Points of difference are taken into account by the valuer including the location of the property, the difference in size and improvement quality and view and aspect differences.

The specific apartment is 95sqm (internal area) and is valued at $810,000, being $30,000 above the purchase price.  The value equates to a rate of roughly $8,500 per square metre. However, at the loan size of $468,000, the "breakeven" rate falls to approximately $5,000. This means the apartment could sell for $5,000 per square metre and the full loan, and your investment could be repaid (in the event the loans are not repaid on maturity by the borrower).

The valuer noted that there continues to appear to be a significant amount of ‘off the plan’ unit stock approved for development, currently under construction and or nearing completion within Sydney’s North, with most new developments due for completion in 2017 and 2018. While the property market continues to remain fundamentally undersupplied, high levels of forthcoming unit stock coming into the property pipeline over the next 24 months may have a mitigating effect on property values within this market segment. Accordingly, should high levels of unit stock remain on the market for sale at the time of completion, subsequent high vacancy rates may have a negative impact on both investor and owner-occupier demand and market activity.

Due to lack of settled 3 bedroom apartments, there are limited recent comparable sales for comparison purposes in this segment. In completing the comparative analysis, consideration of differences between the sales evidence compared to the subject property are taken into account, including, but not limited to, physical attributes and any changes in market conditions in the case of older sales.

Borrower

The borrower is a Chinese national, who has been through a rigorous credit checking process required to meet Australian lending standards (see Credit Checking Process below).

The borrower shows evidence of good income sourced from a permanent sales and marketing role for an equipment factory, has good asset backing and has contributed significant equity to settle the purchase of the apartment.

The individual carries no debt.

Serviceability

The borrower intends to rent the apartment as an investment with a view to it being an Australian home for her teenage daughter in a few years time. The valuer notes an estimated rental of $640 per week which shows 0.84x interest coverage on a gross basis.

However, and importantly, the borrower shows the ability to service well in excess of their obligations without any rental and after all their other personal expenses and debts are taken into account. The borrower has shown an ability to service the interest on the loan with an interest coverage of 2.6x (excluding rental of the subject property).

Capital Structure Stack

  • 3.7%
    Valuation Uplift $30,000.00
  • 38.5%
    Equity $312,000.00
  • 57.8%
    Senior Debt $468,000.00

Credit Checking Process

The loan meets the requirements under Australian Credit Licence responsible lending obligations. The borrower has been interviewed via video conference, including a visual passport verification and a full search undertaken on their credit history and identity with employment and income verified. The borrower has been 100 point identity checked and screened in accordance with anti-money laundering and counter-terrorism rules.

Key Risks

SECURITY VALUE RISK

Risk
  • The risk that value of the security property is less than the outstanding loan amount.
Mitigants
  • The LVR is conservative and with breakeven sale prices, under a worst-case scenario, the apartment could be sold well below its valuation for full repayment of the investment.
  • The valuation exceeds purchase price showing market growth in the area.
  • The apartments in this development are of a reasonably good standard and design and are located in the sought after upper north shore of Sydney. 

REPAYMENT / EXIT RISK

Risk
  • The risk that the borrower cannot repay the facility upon maturity
  • The risk that you will not be able to have your investment repaid early
  • There is no amortisation of the loans. This is an interest-only loan.
  • The difficulty to refinance given the lack of appetite for foreign investor loans by traditional banks.
Mitigants
  • The borrower has been interviewed and income verified.
  • The LVR is conservative and with breakeven sale prices, under a worst-case scenario, the apartment could be sold well below its valuation for full repayment of the investment.
  • Investors can still rely on interest payments should repayment take longer than expected.
  • Peer Estate may be able to provide refinance of the loans upon maturity.
  • New and existing lenders may return to the market over the next 12 months.
  • Importantly, the Borrower has indicated that they will repay the loan, with cash, in 12 months time.  They need further time to bring additional funds from offshore.

BORROWER CREDIT RISK

Risk
  • The risk that the borrower cannot meet the requirements or effectively service and manage the asset.
Mitigants
  • The borrower has passed a rigorous credit checking process and has shown strong income and solid asset backing. As part of Peer Estate’s due diligence process, the Borrower's employment and income were verified by way of a telephone call to the employer and an employers’ letter confirming all employment details.  This due diligence was conducted with the assistance of Peer Estate’s appointed translator.
  • The Borrower has also provided a significant equity contribution to settle the purchase.
  • Should the borrower not continue to support the loan, Peer Estate, as manager, has a range of options under the terms of the mortgage.

SERVICEABILITY RISK

Risk
  • The risk that interest will not be serviced.
Mitigants
  • Strong history of income from the borrower.
  • Income sensitised to take into account FX potential movements.
  • Even without rental income, the borrower has shown an ability to service the interest on the loan with an interest coverage of 2.6x.

Key Terms

Facility Limit $468,000 (57.78% LVR against 3-bed apartment) Purpose To assist with the purchase an apartment.  A bridge loan whilst further funds are sourced from offshore. Financial Close November 2017 Maturity Date November 2018 Interest Rate 7.9% p.a. fixed rate loan
Interest paid monthly Fees The Interest Rate is a net return to Investors. In addition to this, Peer Estate charges an upfront fee for originating the loan. The upfront fee charged was 1.0% and the gross rate to the borrower is 8.5%. Security First ranking mortgage over the apartment; and   Borrower is borrowing in own name which means the loan is also full recourse. Other conditions

Full valuation in place.

Proof of interest coverage across all income, expenses and liabilities.

The property must be fully insured.

   

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Project Updates

Dec 1 2017

Asquith Project Update

We can confirm the loan reached Financial Close today, with settlement occurring at 2pm Friday 1 December.

Peer Estate, an authorised representative under the Qualitas Securities P/L A.S.F.L. 342242