After a surge in non-performing loans due to increasing interest rates, Canadian real estate lender Romspen Investment has scaled down its dealmaking activity.
Derek Jenkin mentioned in an interview that the business, which is funded by New TIG Advisors, is behaving "defensively" in response to the present economic climate in the nation. Right now in Canada, we're being quite picky about the projects we fund.
The Bank of Canada's rapid rate hikes, high home prices, and increasing commercial vacancies in certain locations, especially Toronto, have all wreaked havoc on the country's real estate market. On Wednesday (Oct. 26), the central bank announced yet another rise, this time bringing the overnight lending rate to 3.75 percent, the highest in the Group of Seven.
According to Jenkin, "when you have such a dramatic, quick interest rate change, it creates a bit of an air pocket in the market," and the market needs some time to respond.
Romspen is a leading specialist manager of private mortgage funds in Canada, with a focus on pre-development, construction, and other loans for commercial and residential development. At the end of June, nearly exactly half of the assets Romspen Mortgage Investment Fund were in loans inside the United States and the other half were within Canada.
The majority of its loans are for less than two years, but in recent months there has been a dramatic increase in the number of defaulting debtors. Compared to the average range of 20–25% for the fund, non-performing loans are “ballpark” around 40%, according to Jenkin.
When developers fall behind on their payments, Romspen takes over the project, sends teams to finish it, and then sells it. "the market would have to move by around 30 percent for us to suffer any substantial loss in our book," Jenkin added, referring to the company's loan-to-value ratio of 65%.
As a result of the current economic climate, Romspen has reduced the amount of money that may be withdrawn from its flagship fund by investors.
"The Fund has fulfilled nearly C$700 million (S$726.3 million) in redemptions over the previous 18 months," the company wrote to unitholders last month. However, "this level is simply not sustainable in the short future," since "the aforesaid market dislocations are generating delays in converting mortgage assets to cash," At the end of June, the fund had invested C$2.8 billion across 134 mortgages.
Romspen will transfer funds from the repayment of loans or the sale of properties to this "runoff pool" in order to maintain liquidity for investors who choose to withdraw their funds. This strategy is quite similar to the ones used in the first months of the epidemic and the financial crisis of 2008.
According to Jenkin, this year's unexpected increase in rates is less significant than the two previous spikes. The process, however, is slowed down. Developers and lenders will be affected by a "ripple effect" as real estate agreements take much longer to finalize. The Romspen borrowers, he added, had been trying to have their loan amounts increased to the maximum allowed under the terms of the agreement.
When compared to Europe, the United States has less "dysfunction," and the company's smaller US mortgage fund has seen no redemption backlog. This product's primary function is to provide rapid financing to real estate developers, with about half of the capital going to borrowers in the states of Florida and Texas.
Only one month, in 1995, did Romspen's mortgage activities show a loss. The average rate of return over the last 25 years was 7.4% each year.
Over the next two to three quarters, the company aims to attract Middle Eastern, European, and Asian investors to put US$500 million into its US vehicle, and raise between C$200 million and C$250 million into its flagship fund.