May 30, 2016
In addition to our highly targeted buying strategy, another key component of Sentinel’s success is our approach to financing, and in particular interest rates.
We have received an avalanche of advice in recent years to lock in rates because of anticipated increases. As 2015 progressed, this advice from well-meaning investors, accountants and advisors, became more intense.
Sentinel’s property finance expert Jim Cossart and I have regular discussions on interest rates. At no stage did we see a benefit to our investors in locking in rates, as the spread between the cost of short-term debt and long-term money was too great. With 10-year US bonds compressing significantly since the start of 2016 and most of Europe and Japan (representing 25% of the world’s GDP) now well in to negative rates, there is absolutely no chance of rates increasing this year. Without being smug, Sentinel made an educated market decision with circa $500 million in debt and circa $400 million of investors’ equity, and we are proud to say that we got it 100% right.
We know that interest rates will increase, there is no argument there. The unknown is when and by how much. We set aside money every month for each of our properties for this reason. This money remains an asset of our investors. Our returns are higher because we are prepared to work with higher Loan to Valuation Ratios (LVRs) and we have not destroyed investors’ equity by locking in higher interest rates. There is a lot more to the reasons and strategy behind this and I am happy to discuss in detail for those interested. It is appropriate to extend a big thank-you to Jim Cossart for his continued work in this area and valuable input.