CIARAN RYAN: This is Ciaran Ryan for Moneyweb, and I’m talking to Justin Clarke, who is the chief operating officer of OrbVest. OrbVest is an interesting company. It’s a global real estate company that is focused on medical real estate in the United States. It originated in South Africa but is casting its net quite wide. It’s not just looking for South African investors. It’s looking for investors around the globe.
We have spoken to Justin before about how OrbVest came to be, and who’s behind it. But I think we need to take this a little further. Justin, welcome again.
JUSTIN CLARKE: Thank you, Ciaran. Good to be with you again.
CIARAN RYAN: One of the questions that came up after our last discussion was your focus on medical real estate in the United States – and not just in the United States. You are focused on certain states in particular. Historically your return has been 2% per quarter, which works out at about 8% per year. That is the historical return, but of course, that’s not fixed. So there could be a bonus on top of that.
That’s quite interesting because you’ve got a good track record that’s a dollar return. That’s something that people would be fairly interested in. But one of the questions that came up is what happens – what is the state, first of all, of the medical real estate market, or the property market generally in the United States, and what happens if the property market drops.
JUSTIN CLARKE: Ciaran, you are asking me for crystal-ball stuff here. I think we can talk a lot about medical because that’s something that we always build into our modelling. The big question that everyone is asking is, is there a recession that is likely to happen. I think before we try and answer that question, let’s just look at what’s happened in the last three years or so.
There was an interest rate upcycle around 2017, early 2018, and what we saw is cap rates on our medical buildings just starting to edge up a little. I think that was just because the cost of capital increases, so there is slightly less demand for the actual buildings.
We’ve had three drops in interest rates in the US since mid-2018. And after the drops, what effectively happened – I’ll give you an idea – we were borrowing at the beginning of 2018 at 5.15%, and that’s at a fixed rate for the period of the loans, which is three to seven years. This year we are currently borrowing at 4.5% over the period of the loan. So it gives you an idea of what has happened with interest rates. How does that affect our buildings? I think that is what is most interesting. If interest rates come down there is obviously more capital that is floating around, and that means that there is more demand for the buildings and cap rates tend to drop; in other words, the buildings become more expensive. So that is the basic scenario where we are at, at the moment.
But the big question is the recession. I guess you want to go into that a little?
CIARAN RYAN: Well, is a recession forecast?
JUSTIN CLARKE: Well, I think that’s the crystal ball that we all have an addiction to. But the fundamentals are there. I think everybody is anticipating a recession that’s going to happen, and this really why we are super-excited about this particular asset class.
If a recession happens, effectively what happens is, first of all, there is capital looking for a safe haven.
This particular category of real estate is considered a safe haven, and that increases the demand for buildings. So on the demand side – yes, there will be increased demand.
Also on the interest rate side, there are two things that happen. If we need to control inflation, which is what would happen if there was no recession, then interest rates would climb up in order to control the rising inflation. But if there is a recession, then they would need to stimulate the economy and interest rates would probably drop.
If interest rates drop, once again – pressure on demand.
CIARAN RYAN: Just to recap for people who may not have heard the earlier podcast that we did – you obviously are locking your tenants in these medical buildings with fairly long-term leases, with escalations built-in. They are secure tenants. These are not people who are there for a few months and then move out. So you really do have an underpinning of very, very good tenants with rental escalations built in there.
But now the question is, from an investor’s point of view, how long is a person locked in? How do they exit their investment, and can they roll it over? Just explain that again.
JUSTIN CLARKE: The period is a fixed period. We normally have between three and five years; most of them are five-year periods. It’s very important for most investors to know that they are going to be able to exit at the end of the period. But we don’t float that stock. That means that even though it’s on a public exchange, you can’t buy and sell on that exchange in an open market.
I guess you have to look at what has happened over the last couple of years. Over the last five years, anybody who has put their stock up for sale would notify us; we would float it on the market, and we would notify our community. So far there has been a 100% success rate. Everybody who has wanted to sell and get out early for reasons of family emergency or family incidents has been able to exit.
CIARAN RYAN: Of course, there is a capital gain element to this as well. Not only are you earning quarterly returns, but you are also getting a capital gain, presumably, at the end of it. Or have there been instances where there’s been a capital loss?
JUSTIN CLARKE: In our medical portfolio so far, not, and we have started to exit. We’ve exited our very first portfolios. Medical 2 and Medical 1 are still in the process. We’ll be exiting by the end of the year. For both of those, the final RoR [rate of return] is well over 10%. So we’ve ended well on those two. And everything else is looking good. The rest of the portfolio is looking very strong.
CIARAN RYAN: Just explain to people who have not come across OrbVest before – are you looking only at South African investors or are you casting your net internationally?
JUSTIN CLARKE: As you discussed in the first programme, originally we were looking after South African investors – initially ourselves and our friends and family. And then we extended the net and it became predominantly South African members. But we realised very soon that there were people from all over the world, particularly other emerging markets. Our second-biggest investor in China. We had investors from China in Medical 25, Old Milton, the one that we closed about four months ago – they made up about 40% of our investors alone. So significant interest from China.
Then the third one is Brazil, which I guess is in a fairly similar situation to South Africa.
CIARAN RYAN: These are all emerging markets, so presumably there are currency issues that investors there are trying to hedge against – would that be correct?
JUSTIN CLARKE: Yes, I think everyone has different reasons for doing so. One of the fundamental reasons is the lack of trust in the government. That’s the Brazilians and Chinese, and certainly some of the South Africans that are looking to invest in these products.
CIARAN RYAN: Okay, we are going to leave it there for the moment, Justin. Thanks very much.
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