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By Martin Freeman, CEO, OrbVest
Inflation in the US has fallen to the lowest levels since 2021. In August, it touched 2.9%. At last, there is consensus that the US Federal Reserve will begin cutting interest rates aggressively to prevent the economy from overcorrecting into recession. When the interest rate cutting cycle begins, it will really open up new opportunities for property investors in the US, as depressed values will recover and start rising again.
US real estate anticipates green shoots
It is normal for commercial property investors to fix our debt for a 3-5 year period in the US with the intention of selling the property after that period to take a capital profit or refinancing to extend the period. But values have plummeted as cap rates rise in line with interest rates, and loans that have reached the end of term are renewed at sometimes double the original rate devastating returns. Because the cost of debt has an immediate impact on profitability, any reduction in lending rates drops to the bottom line.
In addition, the cost of operating commercial real estate is stabilising after inflation pushed expenses upwards unexpectedly over the past three years, putting pressure on net operating income and further destroying value. But the cycle is changing with rapid interest rate decreases almost a certainty. This will result in an equally rapid value creation as cap rates follow interest rates down and buyers will become willing to pay higher prices for good real estate. Investors who have stuck it out in the commercial sector have a generational opportunity to capitalise on this.
New developments at OrbVest
In this tough environment, we have actively been streamlining our operations to remove costs and friction wherever possible. This, in turn, will improve our product offering, and our service, and ultimately result in improved returns to our investors.
Tenants are our most important customers, and strategically we need to have a strong direct relationship with them. We recently launched our internal property management division, Accretiv Management (AccMAN). This new division will enable us to provide a full service, including the day-to-day management and leasing of buildings where we are the general partner. Results have already been noticeable, particularly in leasing, where we have already signed seven leases totaling over 24,366 square feet since the division took control of eight buildings.
We have made significant changes at the Seychelles level, where our subsidiary OrbVest SA (Pty) Ltd has been approved as an Authorised Introducing Broker to the MERJ exchange. This will enable us to take over the direct broker function from PKF Capital, dramatically streamlining our process and interactions with the exchange. It will also enable us to tighten up our compliance with Know Your Client and Anti-Money Laundering legislation. We remain very involved with PKF, who will continue to provide corporate services to all our companies.
On 2 May, we celebrated the acquisition of the Forest Plaza building in Dallas. Our partners have already started to stabilize the building by rapidly signing new leases and renewals. With considerable effort and perseverance, we have secured another distressed building from Richmond Honan: Highpoint Towers in San Antonio. Highpoint Towers consists of two 11-story tower blocks on 13 acres of land, for which we paid a bargain price of $40/square foot. Our investors provided almost $10.5 million of equity for both of these high-value-added projects, which we believe will deliver exceptional returns.
We have made progress on consolidating our lower-risk diversified portfolio, AccretivPLUS. We recently incorporated more buildings into AccretivPLUS, bringing its gross value to just over $200 million. When we approached investors last year to choose whether to consolidate or not, which was almost unanimously approved, we aimed to increase occupancy from 91% to 95% over time. We have already surpassed 93% and the additional new leases will push this percentage even higher over the coming two quarters.
AccretivPLUS recently launched its first share buyback, of $1 million. The process was run completely online and will be a lot quicker next time. Most of the sellers have been paid out, except for five that will be finalized after we have migrated back to MERJ at the end of the month.
But challenges remain…
While we are celebrating a significant number of new leases, we do have to face the financial drain of funding tenant installation costs, broker commissions and free rent periods. We continue to work on the buildings that are not performing and will finally be able to refinance them when interest rates start to fall. Already we have seen more liquidity in the market.
OrbVest will continue to work on building up the value of its portfolio, with the support of its loyal investors. Click here for more information.
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