Dear Investors and Partners,
This is the last update I will send before the High Holidays and end of the Jewish Year 5784. More than any other year our thoughts are filled with the words of the prayer "May the year end with its woes," and may the incoming new year 5785 be a smoother and better one for us all, especially given difficult and complex year we've endured, filled with brotherhood, mutual responsibility, with our hostages back home and the injured fully recovered.
In the previous update, which we sent just after the latest tepid Jobs report was released, it was clear to us that an announcement of the first interest rate cut since March 2020 was imminent. Since then, we received another CPI reading indicating that annual inflation in the U.S. has decreased to an annual rate of 2.5%. These statistics gave the final push for the Federal Reserve to announce a significant interest rate cut of 0.5%. Many were surprised that the Fed began this process with such a steep cut, and it signals that the woes of record-breaking inflation are behind us, and that the facet of the economy which needs most tending to is maintaining the jobs market (despite the low unemployment rate of 4.2%). The Board of Governors of the Federal Reserve also announced its forecast for the coming two years, and their goal of lowering the interest rate to 4.4% (an additional 60 basis points) by the end of this year, and to further cut it to 3.4% over the course of 2025. Our assessment is that just as the increase in interest rates took time to impact the market, the anticipated rate cuts will not be felt immediately across all sectors. This is partly due to the fact that Fed officials have expressed concern in recent months that loosening their tight grip on the economy too quickly (i.e., aggressive rate cuts) could lead to inflation re-emerging. We will continue to monitor and write in upcoming reviews about the impact of interest rate cuts on the real estate market in general and the New York area in particular, but it is likely that these cuts will breathe new life into the real estate market.
The early fruits of the rate cut could be seen in the US Mortgage Rates even prior to the Fed's announcement, as the market's anticipation of a Fed Rate cut led mortgage rates to trend downwards (it is worth noting when the Fed announced the interest rate cut, the daily mortgage rate rose slightly proving that it had already priced-in the Fed Rate cut). We have highlighted in previous updates the increase in mortgage demand among first-time homebuyers as mortgage rates began to decline. Recent data provides evidence that the real estate market was merely waiting for a sigh of relief from the Fed, as seen in the heightened demand for refinancing existing mortgages. The number of applications for refinancing existing mortgages has increased by 94% compared to last year. We believe that the echo from the announcement of rate cuts in the U.S. market will further amplify this trend, and the mortgage market is expected to be very active in the coming months.
The U.S. real estate market is at a crossroads. On one hand, rental prices that surged significantly after the pandemic have recently decreased, partly due to an increase in rental inventory as many projects that began construction during the pandemic when interest rates were at their lowest. On the other hand, the high interest rates that have prevailed in the past number of months have diminished developers' appetite to begin new projects and developments under construction have become stalled due to high financing costs as developers struggle to achieve the necessary funding to complete them. For example, July data indicates a 22% year-over—year decrease in new construction projects in the multi-family sector. Now, large investors are betting that downward pressure on rental prices is nearing its end and that the rental market will revert to being a "landlord's market," as supply will decrease increasing the demand for rental housing options in the coming years.
It is worth noting that, similar to the financial crisis in 2008 and during the pandemic, New York's strength, stability, and resilience have also manifested during this period of high interest rates. Rental prices in the city increased after the pandemic, although at a more moderate pace compared to other regions in the U.S. Even when other parts of the U.S. experienced declines in rental prices, New York maintained its rental market throughout.
Zooming in at new construction in our New York market, Brooklyn is catching up to Manhattan in the number of contracts for new construction home sales. In the last month, 98 contracts for newly constructed home sales were signed in Brooklyn, in addition to 9 launches of new boutique buildings on the verge of signing sale contracts. Overall, in New York City, 246 contracts for the sale of new residential properties were signed last month, a slight increase from 236 transactions last year. The median price per square foot has decreased by 11% compared to last year, to $1,550, and the number of days properties are listed for sale in the market has decreased by 4% to 119 days.
The past two months have kept us busy with maturing loans repaying to the Fund. In August alone, 6 loans were fully repaid to the fund, in addition to a partial repayment of an existing loan (this month we provided an example of one of the repaid loans below). The high repayment rate is, of course, a positive sign indicating that the market is active and optimistic as our borrowers successfully repaid the fund after the sale of properties or refinancing our loan by another bank, leaving us with high cash reserves in August, which slightly impacted the fund's monthly return, but the month still ended with a high yield of 0.69%.
While the war in Israel does not affect the performance of the American real estate market or Golden Bridge Fund regular business, the foreign exchange market has experienced significant fluctuations since October 7th, and the high hedging costs have also impacted this month’s performance of the fund’s shekel-denominated assets. We all hope that the coming year will be much calmer and will allow the entire region (along with its financial markets) to operate in a more peaceful and stable manner.
Wishing you and your families a good, peaceful, and calm year, strong health, quality time with your loved ones, and that all your other wishes come true!
Shana Tova U'Metuka!
Erez Britt, Founder and CEO
See below links to Golden Bridge and to our new fund fact sheets:
- Example of loan which was recently repaid to the Fund:
Address: 263 Skillman Street Brooklyn, NY
In February of this year, Golden bridge originated a $14,100,000 loan secured by a first lien collateral to refinance a five-story mixed-use property in the Bed-Stuy section of Brooklyn. This property, consisting of 16 residential units as well as commercial space and parking lots, was in the early stages of becoming stabilized (leasing out the units) and the developers approached us for a bridge loan until they could approach a commercial bank to successfully refinance with them. The loan was signed for a term of one year, but in just 6 months from signing with us, our borrowers successfully occupied the units and obtained financing, returning their loan in full to Golden Bridge. The short duration of this loan and the way we structured it with its origination fee, provided us with a handsome IRR of 20% for Golden Bridge's investors.
Loan Amount: $ 14,100,000
Project Value: $ 23,500,000
LTV (loan to property value ratio): 60%
Loan Maturity: 12 Months
Duration of Loan at exit: 6 Months
IRR at Exit: 20%
Type of Securitization: Full First Lien + Borrowers' Personal Guarantee
Reminder that it is possible to see the fund's loans on New York City's website:
https://a836-acris.nyc.gov/DS/DocumentsSearch/PartyName
(Business party name: Golden Bridge)
For additional information, don't hesitate to contact us.