September 11, 2023
At CC&L Private Capital, we pride ourselves on evolving our investment platform to best meet client objectives. As market opportunities arise, we look to incorporate new strategies when we believe they can improve return or diversify risk. Canadian commercial mortgages are the most recent addition to our platform.
An experienced team
Our real estate investment management team has spent a lot of time laying the groundwork for the new mortgage strategy. The team already understood the mortgage financing process from the other side of the table, having taken out many loans while operating in the real estate investment market. After a long search for someone with the right credentials and who would be the right fit, the team added a seasoned commercial mortgage investor to provide it with the experience and expertise to invest in this market.
What makes the difference?
Our real estate investment management team’s investment philosophy is to deliver consistently added value—focusing on hitting its return threshold with the minimum risk possible. With this in mind, the team feels that commercial mortgage lenders are often not as informed about the market as they should be. This can include not fully understanding the properties they are issuing loans for and the underwriting involved, and typically they may not have all the information needed to assess certain lending situations properly.
Recognizing this is a problem to be avoided, everyone in our real estate investment management team—those who work on real estate investment and those on commercial mortgages—collaborate closely, constantly sharing information. This means when it comes to lending, the team has the necessary underlying market knowledge from the industrial sector to office, retail and residential. It also has its finger on the pulse of tenant behaviour and leasing activity. These are all complementary inputs to its commercial mortgage strategy and enable the team to better evaluate the capital risks involved and determine how to mitigate them.
What this means, in practice, is that the team has been able to turn away lending opportunities where it believes the market has not correctly understood the value and has been more competitive on opportunities where it has seen the value more clearly than the market. The team values this competitive advantage, enabling it to secure what it believes are good quality deals with improved risk and return profiles.
The long-term benefits of Canadian commercial mortgages
We think clients will benefit from a modest allocation to commercial mortgages in their portfolios for several reasons.
First, our team aims to capture a consistent illiquidity premium on private-market commercial mortgages compared to public-market credit. An illiquidity premium is an extra return to compensate for making an investment (in this case, a loan) that is not easy to convert to cash at short notice.
Second, unlike corporate bonds, where investors are typically at the back of the line in terms of recovery should the company issuing the bonds get into trouble, our team’s commercial mortgages are secured against tangible real estate equity and often backed by full recourse to sizable entities—effectively overcollateralizing the loans. Note that the team’s strategy is interested only in making loans on assets that have income potential or current income in place. That means steering clear of lending on assets such as unserviced land during periods of uncertain valuations, which might have an apparently attractive return potential, but will certainly come with a higher risk of principal loss if values move quickly against a lender. Further, the team has the real estate expertise to accurately assess the value of the properties and associated future cash flows that secure the mortgages, making the strategy appealing from a risk perspective.
Finally, because the commercial mortgage strategy invests in the private market and its investments are secured against real assets, it can achieve a low volatility experience. Together with the strategy’s dislocation from public markets, it has the characteristics to help diversification in our clients’ fixed-income allocations.
The opportunity today is strong
Over the past year and a half, yields have risen significantly across all fixed-income investments. In addition, banks have pulled back on lending in 2023 as the economy has slowed and commercial real estate experiences some headwinds. It means less competition for our team when lending, which is expected to translate into high yields, making it an opportune time to be a lender in this space. Our team's commercial mortgage strategy yields over 8.5%, which is attractive compared to the 4.6% investment-grade bond yield (as at August 2023). Further, our team has recourse against other company assets when making loans, which reduces risk, and it has focused investments in the industrial and multifamily sectors, which can perform well in the face of some economic uncertainty.
Our Wealth Advisors across the country are always ready to answer your questions. Whether you are a valued client or interested in discovering more about how CC&L Private Capital can steward your wealth with confidence, please feel free to call or email us anytime.