The Rise Of Commercial Mortgage Investments

Kiwi’s love affair with property as a go-to investment choice remains strong, but one option is becoming increasingly popular amid today’s unpredictable economic climate and investment landscape.

Property finance consultants Omega Capital, who work closely with Alpha First Mortgage Investments, say Commercial Mortgage Investments (CMIs) are a compelling alternative for many New Zealanders who want to invest in property. CMIs are individual or pooled investor-funded loans which are advanced to commercial borrowers and backed by mortgages over their properties.

Omega Capital General Manager Noni Martin says they offer strength and resilience among the whirlwind of unpredictable global events such as pandemics, natural disasters, supply chain upheaval and inflation.

“Ever-evolving economic volatility is now a permanent feature of the global investment frontier. Investors must make choices that will not only weather the storm, but also thrive in uncertain times,” Martin explains.

Traditionally, Kiwi investors have favoured three main property investment avenues – direct property purchasing, public exchange-listed real estate investment trusts (REITs) or unlisted property syndicates.

But in comparison, CMIs can offer better security, a high degree of control, a balanced risk/return profile, simplicity and greater predictability, she says.

“One of the primary reasons CMIs stand out is their exceptional security strength. Mortgage investment providers who manage these offerings typically extend loans at only 50-65 percent of the assessed property value. This conservative approach provides a considerable buffer to protect against property value declines and market shocks.”

If a borrower does default on their obligations, the mortgage investment provider can take prompt legal action and is first in line to recover its loan principal, outstanding interest, and costs. “This significantly reduces the risk to investors, making CMI investments a sensible choice for those seeking a secure and reliable investment option.”

Martin says CMIs also empower investors with an unparalleled level of control. While mortgage investment providers identify borrowers, structure loans to mitigate risks, and oversee loans from inception to maturity, investors maintain complete control over their lending decisions.

“Investors can select loans and terms that align with their individual risk tolerance and make informed decisions in line with their financial objectives. This makes CMIs attractive for those who value autonomy in their investment choices.”

CMIs offer a good balance between risk and return and another standout feature is their alignment with changes in the Official Cash Rate (OCR). “This alignment means that CMIs are a natural hedge for inflation and their returns increase in an inflationary environment. Also, returns for CMIs improve in a credit crisis because when bank funding sources dry up, borrower demand for loans funded by CMIs spikes,” Martin explains.

Meanwhile, property syndicates, REITs, and individual property owners all experience diminishing returns in an inflationary environment or credit crisis as they must pay their lenders higher interest costs. Martin says CMI’s will appeal to investors looking to counterbalance the downside risk of their traditional property investments during these economic challenges.

The simplicity of CMIs is another plus for investors who value transparency and clarity. “Returns are primarily influenced by supply and demand dynamics within the property lending market. This straightforwardness is in stark contrast to other property investment options where returns can be influenced by a complex array of factors.”

CMI returns are determined by the borrower’s ability to service interest payments and the likelihood of recuperating the investment in the event of a property sale. Both aspects are rigorously assessed at the outset, often backed by sound lending policies designed to manage associated risks effectively.

“Finally, CMIs offer better certainty and a more predictable path to returns. Most CMIs offer returns that typically range between 3 and 8 percent above term deposit rates so investors can enjoy a robust and predictable income stream.”

Martin’s advice to potential CMI investors is to look for a well-established and respected mortgage investment provider who employs experienced property financiers to source and select the best lending opportunities.

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