Trump administration could ignite commercial property growth and clear regulatory hurdles – Orbvest’s Justin Clarke
Donald Trump's re-election as US President is expected to accelerate the US economy, boost confidence, and benefit the commercial real estate market. According to Justin Clarke, the Director of Operations at OrbVest, a company that invests in medical commercial real estate across the USA. Clarke said a good economy boosts confidence, leading to more companies signing long-term leases, unlike the post-COVID era marked by uncertainty. In an interview with BizNews, Clarke highlighted the burdensome regulations in the US real estate, which cause delays and increased costs, and expressed the hope that the new administration might streamline these regulations to enhance efficiency. The influence of Elon Musk, who has become a close confidant of Trump, could lead to a push for the US government to deregulate, he says. Commenting on some of OrbVest's medical real estate buildings that have not performed as expected, Clarke said COVID led tenants to walk away from office spaces, and rising interest rates have caused challenges. However, he said, "The wind is starting to blow behind us." Added to a changing economy is an ageing US population with increasing healthcare costs, which he said ultimately means more tenants and more money flowing around in the healthcare space. And here is an interesting titbit he shared: the US government has been OrbVest's worst tenant so far.- Linda van Tilburg
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Highlights from the interview
In a recent interview with Linda van Tilburg of BizNews, Justin Clark, Director of Operations at Orbvest, discussed the company's investment approach in US medical real estate, its performance, and insights into the US economic landscape. He began by commenting on the potential impact of Donald Trump's re-election on the US economy, emphasizing that it could accelerate growth and benefit commercial real estate, especially in the industrial sector. However, Clark highlighted challenges, such as high interest rates and regulatory burdens, impacting the real estate market, including Orbvest's properties.
Clark discussed the difficulties Orbvest faced, particularly in managing legacy buildings, with some underperforming due to factors like COVID-19, inflation, and interest rate hikes. He shared how Orbvest had to acquire distressed properties at significant discounts and restructure them to recover value. Despite these setbacks, Clark expressed confidence that the company's strategy of focusing on healthcare real estate—an area benefiting from the ageing US population—would drive future growth.
Orbvest has shifted its investment model from single-property investments to a diversified portfolio, aiming for steady returns focusing on tenant relationships and property management. The company currently distributes about R100 million annually to South African investors and targets a 5-8% cash-on-cash return, with expectations of a strong internal rate of return over the next five years.
Clark explained how Orbvest's healthcare real estate investments differ from typical REITs, which have struggled in South Africa. Orbvest's strategy emphasises asset value growth over time rather than speculative trading, positioning it well for long-term success.
Edited transcript of the interview
Linda van Tilburg (00:33.19)
Hi, I am Linda van Tilburg for BizNews. Orbvest presents an interesting opportunity for South Africans to invest directly in medical real estate in the United States. Joining us today is Justin Clark, Director of Operations at Orbvest, to discuss their approach and the potential impact of a
Let's start with the week's significant news that could impact US real estate: Donald Trump's presidential re-election. What are your thoughts on this development?
Justin Clarke (01:33.932)
I don't think I'm going to add anything about the new administration, apart from the fact that there is a general consensus amongst our network that it will certainly accelerate the US economy and be very good for it.
Let's focus on how this impacts commercial real estate. Fundamentally, commercial real estate thrives in a strong economy. When companies are confident and expanding, they tend to sign long leases. Post-COVID, with all the uncertainties, no one was committing to leases even when they needed space. However, as confidence returns to the economy, everyone is eager to dive in. Regarding subsectors, we know Donald's views on manufacturing and anticipate tariffs, leading to a rush for industrial space.
Even though we are not there, we feel very confident about the industrial space. Our focus is on healthcare. But certainly, we think that that will accelerate very, very fast. My appetite, and certainly one of the things I've been very surprised at in the US, Linda, is regulation. It takes us months to get a construction permit for a very simple remodelling of a space, and a delay of three to four months to get yourself constructed into space costs a lot of money in one of these buildings.
We hope the new administration will do something about these layers of regulations built up over decades. That is one of the administration's core messages, and we're certainly looking for that.
I must give you a little bit of insight. We have two buildings leased by the US government, and they are our worst tenant. Since we acquired these two buildings, they've only been on a year-to-year lease. So, you start negotiating the new lease when it kicks in, and we've been trying to extend that lease for years.
You would think I'm exaggerating, but I was trying to give you an idea of the layers and layers of negotiations we ended up having to go through to extend this lease to a five-year lease. But now that we've signed the lease, they can't even pay it on time. It is just remarkable the difference between how inept the government is in the US and what we experience in South Africa. So, I think that's some interesting news.
Linda van Tilburg (04:15:019)
Indeed
Justin Clark (04:39:34)
Interest rates are our worst enemy in the commercial real estate space. To leverage your returns, you will always have some form of debt, normally senior debt from a bank, which means you're paying the going interest rate. If interest rates crank up, the value of the building effectively goes down. So, it's an inverse effect you want, and when interest rates come down, then cap rates go down, and the value of the building goes up. So, high interest rates are certainly not in our favour, and they've hurt us a lot. Over the last three years, we had 11 interest rate increases, and then they stuck there for a good part of a year plus, which has been painful. One of the byproducts of the administration creating excess commercial activity in the US would be that inflation will be ramping. So, we are going to watch inflation. There is a way to mitigate inflation if the administration is wide awake enough and cuts back on government spending as the economy accelerates. Let's hope that they do that and encourage innovation. Innovation means we won't suffer from a shortfall of labour, which will be the case in the US. Automation and increasing efficiency have to be part of the solution.
Linda van Tilburg (06:29.466)
Can we revisit what you said about regulations? How do you see Elon Musk potentially influencing this? Could he turbocharge efforts to address the regulatory burdens that weigh down the economy?
Justin Clarke (06:50.588)
I do have a bias. I'm fascinated by what Elon has achieved, and I hope he can have some influence and at least push for the government to deregulate. The amount of regulation in the US commercial real estate space is just absurd.
Linda van Tilburg (07:14.089)
You talked about some of your issues with people not paying rent, even the US government being a problematic tenant. After a prolonged period of high interest rates, have any of your buildings underperformed?
Justin Clarke (07:36.076)
I think there are two things that perhaps I would like to talk about. The first thing is this Black Swan event that impacted and decimated America's commercial real estate space. I liken it to a roller coaster in the US. If you ride a roller coaster at Seven Flags, it goes up 100 meters and down equally fast. If you ride the same thing in South Africa, it goes up 30 meters and comes down much less fast. That's how real estate compares, certainly commercial real estate compares there versus here.
During COVID-19, office tenants, the small office tenants, just walked away from their spaces. Many of the big office tenants, some of them that rented 15,000, 16,000 square foot have not moved back into the office, their staff are all at home. When it came to renewals, office space was decimated. At the same time, you experienced inflation, which increased your operating costs. Then, the third thing was that interest rates, as I say, climbed 11 times. So, yes, it's been incredibly tough, and we've learned some very tough lessons.
There were about 13 buildings that we inherited when we formed in 2018, which were probably our worst. We are, however, pleased to say that the wind is starting to blow behind us, and we've been working pretty hard to get these properties back to perform again. And we've had some very big winds. Perhaps this was quite interesting last week. We managed to acquire one of these buildings in San Antonio. To give you an idea, it's called Half Point Towers, 300,000 square feet, 30,000 square meters, roughly 11-story towers. The value of those buildings was in the region of $18 million, and we've just acquired them for $13 million.
We are restructuring them, reinventing them, and bringing back value to those buildings. Over 18 months, we've been fighting and working with the bank to try and get these buildings back, and that's the discount that we've got to bring back value for those investors and ourselves who are deeply involved in that particular building. So overall, yes, several buildings have been impacted. I can't say that the legacy buildings have done particularly well, but we're working super hard to fix it and ensure that we can give returns to the investors in those buildings.
That's the basis of those legacy buildings and what we currently deal with.
Linda van Tilburg (11:04.316)
What progress have you made in growing the fund, and how is it performing? Could you tell us more about your product?
Justin Clarke (11:14.39)
There were some very good lessons, and I think there are two types of investors. In the early days, investors were fairly high-net-worth individuals who were prepared to take on a bit of risk, wanted to chase big returns, and preferred investing in a single building like you would, for example, in South Africa.
We have realised that there is quite a lot of risk if you're in a single building because you have no diversification. So, what we have done very successfully is we've taken our best buildings and consolidated them all together into one commercial entity. There are about 1,600 investors. But these are our best buildings.
So far, we've brought in 24 buildings over the year. I must say, I'm quite excited about what we're achieving so far.
Let me explain the other lesson we learnt. The traditional way that REITs operate their buildings is by outsourcing a lot of the property management. That's the day-to-day stuff that the tenants deal with. We realised that we wanted to create a full service, which means we wanted to have direct contact with the tenants in our buildings. Our tenants are our most important customers, which has been a major change.
So, we now have a direct relationship with tenants and do the property management. We are the general partner, and of course, we're the asset manager. It means that we have control, another big learning. As I say, we put these things together, and as a result of being directly involved with these buildings, we have managed to get our occupancy up to 95%.
I have some statistics for you, which I think are super interesting. We distribute around R100 million annually to South African investors, about $1.5 million a quarter. We have over 100 tenants, and many of them are credit tenants in that portfolio as it stands now.
We are trying to build this portfolio's value as quickly as we can over five years, which is now four years, because we've already been going a year. At that point, we will then offer it to the market. We believe the timing should be fantastic because in the next three to four years, we think that rates will drop off and the economy will accelerate, which means there'll be a great appetite and a lot of capital around that would like to acquire a health care portfolio of probably $400-500 million.
So, that's our outcome, and the only way we make money is if we can grow the value. Investors come along for the ride and share in that profit.
Our cash-on-cash dividend is between five and eight percent. Since we put these properties together, we have consistently maintained over seven percent. So, seven percent cash-on-cash. We're looking at a nice double-digit internal rate of return over the four to five years of the investment, and we are super excited about that.
Linda van Tilburg (14:52.442)
Okay, well, let's look at some comparisons to South Africa. Property REITs and funds in South Africa have undergone this phase of trading significantly below the asset value. So how does your product, AccurativeMed, differentiate itself?
Justin Clarke (15:13.4)
REITs haven't necessarily been decimated. The asset value hasn't been decimated. It's the share price that's been decimated. The building and the tenants remain exactly the same. However, the market is not prepared to pay fair value, which is the difference. Our whole offering is a five-year lock-in, and we are building the portfolio to exit in five years. Although people do buy and sell, we don't encourage trading, but it's not a listed equity that moves up and down with the market sentiment. That's the fundamental difference. mean the REITs were killed after COVID.
South African REITs were especially battered post-COVID, trading below asset value. Our product, however, maintains a steady asset value, reflecting only the actual appreciation of the real estate over time.
Linda van Tilburg (16:31.408)
Thank you, Justin. Is there anything else you want to add?
Justin Clarke (16:34.656)
I think that the issue of health care is another quite interesting one. We've talked a lot about office spaces. The US has an ageing population, and the amount of money spent on health care has increased above the growth in GDP for the last 100 years. It's quite incredible to look at those two graphs. So, healthcare costs will increase whatever government comes in, whatever administration takes over, no matter the intent. Ultimately, that means more tenants and money are flowing around in healthcare, and more people are looking for services.
That is why we are so focused on the healthcare space. It is very interesting. There is a small niche within the market, about 27,000 odd healthcare buildings in America, which is, believe it or not, small, and that's also another very important component of our offering.
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