As a fund or private investors we need to continually balance the need we have to invest our capital, the quality of the deals, the yield we are looking for and our liquidity. Until the end of 2007 the liquidity factor was not a problem, however, since then it has become one of the most difficult challenges that we are facing. Getting an appropriate yield is easier than it was and since there is limited bank lending demand for our capital is quite high. A more difficult aspect of the investment process is to find an investment of quality.
Since liquidity is one of the most important factors that will influence our interest in an investment vs. another one then let explore it first. Until the end of 2007 and more so fall 2008, as investors we were assuming that we will be paid back, sometime rapidly as most borrowers would refinance their private loan as soon as possible. Who would want to keep a loan for 12 month or 18 months at 11% or 12% when you could get easy refinancing at lower rates. In addition, as the real estate values continue to increase the fear of losing our principal was quite low. However, since then the market conditions have changed significantly.
Today we are seeing a number of problems regarding current and future liquidity. The first problem is to get our principal back from previous investments. Even when the property has not lost significant amount of value or is not in foreclosure it can be difficult to get our money back. Only borrower with good to great credit can get financing, there are no stated income programs and numerous colleagues’ private investors / funds do not have capital to approve new loans. No refinance means no capital back which means no money to approve new loans etc…. In numerous cases the only exit strategy that we are seeing making sense and getting paid back is a sale of the property. This is both for commercial and residential investments.
Future liquidity is in question as well as there is no clarity regarding the future of real estate values and availability of capital. In part we are expecting property to rise once the market has stabilized, so capital loss may not be as much an issue in the next 12 to 24 months as availability and costs of capital. If there is no capital to finance transactions, to refinance properties, or if it is too difficult then to get financing approved through banking channels liquidity will not improve. In addition, an increase in interest rate could put some limit on the number of financing approved.
Our approach at this time is cautious optimism in relation to liquidity and the future of the market. Currently, I am working with buyers of performing and non performing notes and there is a demand for it, which is the good news. For investors who need to get liquidity today this is an option. Also, we have started to see more and more private capital being made available. Currently there is new private capital focused on the most distress deals, however, we are starting to see a shift toward performing high and good return assets. Markets bottoming out and new capital entering the market, even if in small quantities, will help unlock the market and make is more liquid.
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